UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
Commission offices and Registrant's Telephone Number, IRS Employer
File Number including area code Identification No.
----------- ------------------------------ ------------------
1-12927 NEW CENTURY ENERGIES, INC. 84-1334327
(a Delaware Corporation)
1225 17th Street
Denver, Colorado 80202
Telephone (303) 571-7511
1-3280 PUBLIC SERVICE COMPANY OF COLORADO 84-0296600
(a Colorado Corporation)
1225 17th Street
Denver, Colorado 80202
Telephone (303) 571-7511
1-3789 SOUTHWESTERN PUBLIC SERVICE COMPANY 75-0575400
(a New Mexico Corporation)
Tyler at Sixth
Amarillo, Texas 79101
Telephone (303) 571-7511
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
On August 1, 2000, 116,766,809 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 $4,130,625,868.
Public Service Company of Colorado and Southwestern Public Service Company meet
the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and
are therefore filing this Form 10-Q with the reduced disclosure format specified
in General Instruction H (2) to such Form 10-Q.
<PAGE>
Table of Contents
PART I - FINANCIAL INFORMATION
Item l. Financial Statements ......................................... 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 39
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 57
Item 6. Exhibits and Reports on Form 8-K............................... 57
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
PSCCC........................Public Service Company Credit Corporation
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
June 30, December 31,
2000 1999
---- ----
Property, plant and equipment, at cost:
Electric .......................................... $7,695,165 $7,496,942
Gas................................................ 1,362,575 1,327,048
Steam and other.................................... 116,019 113,050
Common to all departments.......................... 483,364 464,059
Construction in progress........................... 360,845 400,439
------- -------
10,017,968 9,801,538
Less: accumulated depreciation .................... 3,687,879 3,540,516
--------- ---------
Total property, plant and equipment.............. 6,330,089 6,261,022
--------- ---------
Investments, at cost:
Investment in Yorkshire Power and other
unconsolidated subsidiaries (Note 3) ............ 402,793 391,754
Other.............................................. 131,664 89,404
------- -------
Total investments................................. 534,457 481,158
------- -------
Current assets:
Cash and temporary cash investments................ 36,109 83,763
Accounts receivable, less reserve for uncollectible
accounts ($4,696 at June 30, 2000; $4,601 at
December 31, 1999)...... ........................ 368,398 371,116
Accrued unbilled revenues.......................... 254,090 266,537
Recoverable purchased gas and electric energy costs 58,122 46,863
Materials and supplies, at average cost............ 73,191 75,021
Fuel inventory, at average cost.................... 29,979 29,618
Gas in underground storage, at cost (LIFO)......... 28,916 63,656
Prepaid expenses................................... 82,789 74,905
Other.............................................. 4,947 15,659
------- -------
Total current assets.............................. 936,541 1,027,138
------- ---------
Deferred charges:
Regulatory assets (Note 1)......................... 295,887 337,965
Unamortized debt expense........................... 29,436 29,775
Other.............................................. 241,619 184,934
------- -------
Total deferred charges............................ 566,942 552,674
------- -------
$8,368,029 $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
June 30, December 31,
2000 1999
---- ----
Common stock.......................................... $1,944,007 $1,916,088
Retained earnings..................................... 870,420 819,553
Accumulated other comprehensive income (Note 1) ...... (24,879) (2,951)
------- ------
Total common equity............................... 2,789,548 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........................ 2,248,618 2,374,121
--------- ---------
5,332,166 5,400,811
Noncurrent liabilities:
Employees' postretirement benefits other than pensions 54,168 57,596
Employees' postemployment benefits................. 32,566 32,823
------ ------
Total noncurrent liabilities...................... 86,734 90,419
------ ------
Current liabilities:
Notes payable and commercial paper................. 791,250 633,527
Long-term debt due within one year................. 176,634 136,218
Accounts payable................................... 440,734 471,757
Dividends payable.................................. 69,874 70,045
Recovered electric energy costs.................... 15,481 11,873
Customers' deposits................................ 31,300 30,810
Accrued taxes...................................... 50,812 88,617
Accrued interest................................... 59,859 61,701
Other.............................................. 154,765 152,535
------- -------
Total current liabilities......................... 1,790,709 1,657,083
--------- ---------
Deferred credits:
Customers' advances for construction............... 64,614 56,259
Unamortized investment tax credits................. 93,017 95,426
Accumulated deferred income taxes.................. 957,663 967,408
Other.............................................. 43,126 54,586
------- ------
Total deferred credits............................ 1,158,420 1,173,679
--------- ---------
Commitments and contingencies (Notes 4 and 5)......... ---------- ----------
$8,368,029 $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
June 30,
2000 1999
---- ----
Operating revenues:
Electric........................................... $715,104 $607,277
Gas................................................ 139,359 173,172
Other.............................................. 22,389 20,385
------- ------
876,852 800,834
Operating expenses:
Fuel used in generation............................ 167,801 152,857
Purchased power.................................... 179,770 130,635
Cost of gas sold................................... 82,560 114,502
Other operating and maintenance expenses-regulated. 132,959 137,040
Other operating and maintenance expenses-nonregulated 22,589 28,308
Depreciation and amortization...................... 73,805 69,895
Taxes (other than income taxes) ................... 32,789 37,477
------- ------
692,273 670,714
Operating income...................................... 184,579 130,120
Other income and deductions:
Equity in earnings of Yorkshire Power and other
unconsolidated subsidiaries (Note 3) 9,499 (2,787)
Miscellaneous income and deductions - net.......... 2,414 (2,609)
------- -------
11,913 (5,396)
Interest charges and preferred dividends of subsidiaries:
Interest on long-term debt......................... 43,467 43,942
Other interest..................................... 12,571 7,362
Allowance for borrowed funds used during construction (3,491) (2,611)
Dividends on PSCo and SPS obligated mandatorily
redeemable preferred securities of subsidiary
trusts holding solely subordinated debentures of
PSCo and SPS...................................... 5,762 5,762
----- -----
58,309 54,455
Income before income taxes and extraordinary item..... 138,183 70,269
Income taxes.......................................... 43,602 21,034
------- ------
Income before extraordinary item...................... 94,581 49,235
Extraordinary item (Notes 1 and 4).................... (13,658) -
------- ------
Net income............................................ $80,923 $49,235
======= =======
Weighted average common shares outstanding:
Basic.............................................. 116,611 115,080
Diluted............................................ 116,649 115,103
Basic and diluted earnings per share of common stock
outstanding:
Income before extraordinary item................... $ 0.81 $ 0.43
Extraordinary item (Notes 1 and 4)................. (0.12) -
-------- ------
Net income......................................... $ 0.69 $ 0.43
======= ======
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
3
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Six Months Ended
June 30,
2000 1999
---- ----
Operating revenues:
Electric........................................... $1,348,226 $1,201,808
Gas................................................ 423,394 478,307
Other.............................................. 43,902 35,414
------- ------
1,815,522 1,715,529
Operating expenses:
Fuel used in generation............................ 310,696 286,706
Purchased power.................................... 342,399 257,879
Cost of gas sold................................... 269,313 333,581
Other operating and maintenance expenses-regulated. 266,865 266,466
Other operating and maintenance expenses-nonregulated 45,839 48,991
Depreciation and amortization...................... 145,995 139,397
Taxes (other than income taxes) ................... 67,013 75,097
------- ------
1,448,120 1,408,117
Operating income...................................... 367,402 307,412
Other income and deductions:
Equity in earnings of Yorkshire Power and other
unconsolidated subsidiaries (Note 3)............. 32,640 13,024
Miscellaneous income and deductions - net.......... 1,428 (6,151)
------- ------
34,068 6,873
Interest charges and preferred dividends of subsidiaries:
Interest on long-term debt......................... 87,002 85,352
Other interest..................................... 23,494 14,251
Allowance for borrowed funds used during construction (6,536) (5,527)
Dividends on PSCo and SPS obligated mandatorily
redeemable preferred securities of subsidiary
trusts holding solely subordinated debentures of
PSCo and SPS..................................... 11,525 11,525
------ ------
115,485 105,601
Income before income taxes and extraordinary item..... 285,985 208,684
Income taxes.......................................... 86,076 58,149
------- ------
Income before extraordinary item...................... 199,909 150,535
Extraordinary item (Notes 1 and 4).................... (13,658) -
------- ------
Net income............................................ $186,251 $150,535
======== ========
Weighted average common shares outstanding:
Basic.............................................. 116,360 114,881
Diluted............................................ 116,398 114,916
Basic and diluted earnings per share of common stock
outstanding:
Income before extraordinary item................... $ 1.72 $ 1.31
Extraordinary item (Notes 1 and 4)................. (0.12) -
-------- ------
Net income......................................... $ 1.60 $ 1.31
======= ======
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
4
<PAGE>
NEW CENTURY ENERGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Six Months Ended
June 30,
2000 1999
---- ----
Operating activities:
Net income......................................... $186,251 $150,535
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary item (Notes 1 and 4)............... 13,658 -
Depreciation and amortization.................... 152,809 145,934
Amortization of investment tax credits........... (2,409) (2,551)
Deferred income taxes............................ 21,564 15,003
Equity in earnings of Yorkshire Power and other
unconsolidated subsidiaries, net................ (32,640) (13,024)
Allowance for equity funds used during construction - (827)
Change in accounts receivable.................... 2,859 7,089
Change in inventories............................ 36,209 18,420
Change in other current assets................... (978) 82,069
Change in accounts payable....................... (29,875) (15,928)
Change in other current liabilities.............. (27,118) (52,103)
Change in deferred amounts....................... (67,027) (22,186)
Change in noncurrent liabilities................. (3,685) 2,124
Other............................................ (967) 84
------- -------
Net cash provided by operating activities...... 248,651 314,639
Investing activities:
Construction expenditures.......................... (211,180) (287,650)
Allowance for equity funds used during construction - 827
Proceeds from disposition of property, plant
and equipment.................................... 2,747 512
Purchase of other investments...................... (51,326) (11,809)
Sale of other investments.......................... 7,498 2,402
------- -------
Net cash used in investing activities.......... (252,261) (295,718)
Financing activities:
Proceeds from sale of common stock................. 20,683 20,532
Proceeds from sale of long-term debt............... 100,725 156,488
Redemption of long-term debt....................... (187,621) (66,774)
Short-term borrowings - net........................ 157,723 19,702
Dividends on common stock.......................... (135,554) (133,379)
-------- --------
Net cash used in financing activities.......... (44,044) (3,431)
------- -------
Net (decrease) increase in cash and temporary
cash investments.............................. (47,654) 15,490
Cash and temporary cash investments at
beginning of period.......................... 83,763 56,667
------ ------
Cash and temporary cash investments at end of
period....................................... $ 36,109 $ 72,157
======== ========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements
5
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Months Ended June 30, 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 March 31, 1999 114,924,982 $ 114,925 $1,769,762 $ 775,016 $ (2,856) $2,656,847
Comprehensive income (Note 1):
Net income................ - - - 49,235 - 49,235
Foreign currency translation
adjustment............... - - - - (6,554) (6,554)
------
Comprehensive income 42,681
Dividends declared on common
stock ..................... - - - (66,855) - (66,855)
Issuance of common stock 317,286 317 11,511 - - 11,828
------- ------- ------- ------- ------- ------
Balance at June 30, 1999 ... 115,242,268 $ 115,242 $1,781,273 $757,396 $ (9,410) $2,644,501
=========== ========= ========== ======== ======== ==========
Balance at March 31, 2000 116,466,495 $ 116,466 $1,817,848 $857,225 $ (6,483) $2,785,056
Comprehensive income (Note 1):
Net income................ - - - 80,923 - 80,923
Foreign currency translation
adjustment............... - - - - (18,396) (18,396)
-------
Comprehensive income.. 62,527
Dividends declared on common
stock ..................... - - - (67,728) - (67,728)
Issuance of common stock 288,639 289 9,404 - - 9,693
------- --- ----- ------ ------- -------
Balance at June 30, 2000 116,755,134 $ 116,755 $1,827,252 $870,420 $(24,879) $2,789,548
=========== ========= ========== ======== ======== ==========
</TABLE>
Authorized shares of common stock were 260 million at June 30, 2000 and 1999.
The accompanying notes to consolidated condensed financial statements
statements are an integral part of these financial statements.
6
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
Six Months Ended June 30, 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................. - - - 150,535 - 150,535
Foreign currency translation
adjustment................. - - - - (17,174) (17,174)
-------
Comprehensive income 133,361
Dividends declared on common
stock ....................... - - - (133,816) - (133,816)
Issuance of common stock 751,496 751 29,378 - - 30,129
------- ------- ------- ------- ------- -------
Balance at June 30, 1999 .....115,242,268 $ 115,242 $1,781,273 $ 757,396 $(9,410) $2,644,501
=========== ========== ========== ========= ======= ==========
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................ - - - 186,251 - 186,251
Foreign currency translation
adjustment............... - - - - (21,928) (21,928)
--------
Comprehensive income 164,323
Dividends declared on common
stock ..................... - - - (135,384) - (135,384)
Issuance of common stock 917,935 918 27,001 - - 27,919
------- ----- ------- ------- ------- ------
Balance at June 30, 2000 116,755,134 $ 116,755 $1,827,252 $ 870,420 $(24,879) $2,789,548
=========== ========== ========== ========= ======== ==========
</TABLE>
Authorized shares of common stock were 260 million at June 30, 2000 and 1999.
The accompanying notes to consolidated condensed financial statements
statements are an integral part of these financial statements.
7
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
ASSETS
June 30, December 31,
2000 1999
---- ----
Property, plant and equipment, at cost:
Electric .......................................... $4,779,154 $4,629,092
Gas................................................ 1,324,487 1,289,995
Steam and other.................................... 68,305 68,109
Common to all departments.......................... 478,245 458,940
Construction in progress........................... 259,563 300,224
-------- --------
6,909,754 6,746,360
Less: accumulated depreciation .................... 2,480,792 2,373,824
--------- ---------
Total property, plant and equipment.............. 4,428,962 4,372,536
--------- ---------
Investments, at cost:
Note receivable from affiliate..................... 192,620 192,620
Other.............................................. 13,764 12,679
-------- --------
Total investments................................. 206,384 205,299
-------- --------
Current assets:
Cash and temporary cash investments................ 15,095 51,731
Accounts receivable, less reserve for uncollectible
accounts ($3,733 at June 30, 2000; $2,533 at
December 31, 1999) .............................. 150,967 199,304
Accrued unbilled revenues ......................... 172,196 220,330
Recoverable purchased gas and electric energy costs 21,612 42,697
Materials and supplies, at average cost............ 54,058 53,984
Fuel inventory, at average cost.................... 27,689 27,326
Gas in underground storage, at cost (LIFO)......... 28,265 62,487
Current portion of deferred income taxes........... 4,869 3,532
Prepaid expenses and other......................... 27,548 42,760
-------- --------
Total current assets.............................. 502,299 704,151
-------- --------
Deferred charges:
Regulatory assets (Note 1)......................... 224,942 236,251
Unamortized debt expense .......................... 18,179 18,892
Other.............................................. 58,901 51,813
-------- --------
Total deferred charges............................ 302,022 306,956
-------- --------
$5,439,667 $5,588,942
The accompanying notes to consolidated condensed financial statements
statements are an integral part of these financial statements.
8
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
CAPITAL AND LIABILITIES
June 30, December 31,
2000 1999
---- ----
Common stock.......................................... $1,414,835 $1,414,835
Retained earnings..................................... 428,039 346,050
-------- -------
Total common equity............................... 1,842,874 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........................................ 1,681,527 1,721,959
--------- ---------
3,718,401 3,676,844
Noncurrent liabilities:
Employees' postretirement benefits other than pensions 46,974 51,080
Employees' postemployment benefits................. 26,229 26,229
-------- -------
Total noncurrent liabilities...................... 73,203 77,309
-------- -------
Current liabilities:
Notes payable and commercial paper................. 295,300 356,192
Long-term debt due within one year................. 171,988 132,823
Accounts payable................................... 233,752 336,891
Dividends payable.................................. - 44,575
Recovered electric energy costs.................... 15,481 11,873
Customers' deposits................................ 24,984 24,370
Accrued taxes...................................... 54,499 67,030
Accrued interest................................... 42,074 44,034
Other.............................................. 81,814 91,067
-------- -------
Total current liabilities......................... 919,892 1,108,855
-------- ---------
Deferred credits:
Customers' advances for construction............... 63,280 54,826
Unamortized investment tax credits ................ 87,039 89,286
Accumulated deferred income taxes.................. 557,850 555,829
Other.............................................. 20,002 25,993
-------- -------
Total deferred credits............................ 728,171 725,934
-------- -------
Commitments and contingencies (Notes 4 and 5)......... ---------- ----------
$5,439,667 $5,588,942
========== ==========
The accompanying notes to consolidated condensed financial statements
statements are an integral part of these financial statements.
9
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Three Months Ended
June 30,
2000 1999
Operating revenues:
Electric........................................... $449,230 $373,690
Gas................................................ 138,861 140,895
Other.............................................. 1,988 1,580
------- -------
590,079 516,165
Operating expenses:
Fuel used in generation............................ 69,907 54,882
Purchased power.................................... 143,459 111,963
Gas purchased for resale........................... 84,642 87,721
Other operating and maintenance expenses........... 93,318 102,037
Depreciation and amortization...................... 51,886 48,822
Taxes (other than income taxes) ................... 20,462 23,595
Income taxes ..................................... 29,656 14,768
------- -------
493,330 443,788
Operating income...................................... 96,749 72,377
Other income and deductions-net....................... 4,307 831
Interest charges:
Interest on long-term debt......................... 32,798 29,908
Other interest..................................... 6,104 6,741
Allowance for borrowed funds used during construction (2,567) (2,061)
Dividends on PSCo obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of PSCo .......... 3,800 3,800
------- -----
40,135 38,388
------ ------
Net income............................................ $60,921 $34,820
======= =======
The accompanying notes to consolidated condensed financial statements
statements are an integral part of these financial statements.
10
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Six Months Ended
June 30,
2000 1999
---- ----
Operating revenues:
Electric........................................... $ 855,325 $ 755,012
Gas................................................ 409,582 395,066
Other.............................................. 5,722 4,957
------- -------
1,270,629 1,155,035
Operating expenses:
Fuel used in generation............................ 126,109 106,747
Purchased power.................................... 276,615 226,190
Gas purchased for resale........................... 260,991 260,562
Other operating and maintenance expenses........... 190,984 196,548
Depreciation and amortization...................... 102,250 97,362
Taxes (other than income taxes) ................... 41,808 47,082
Income taxes ..................................... 65,453 43,982
------- -------
1,064,210 978,473
--------- -------
Operating income...................................... 206,419 176,562
Other income and deductions-net....................... 3,869 (735)
Interest charges:
Interest on long-term debt......................... 65,320 59,791
Other interest..................................... 12,250 11,961
Allowance for borrowed funds used during construction (4,562) (4,284)
Dividends on PSCo obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of PSCo .......... 7,600 7,600
----- -----
80,608 75,068
Net income............................................ $ 129,680 $ 100,759
========= =========
The accompanying notes to consolidated condensed financial statements
statements are an integral part of these financial statements.
11
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Six Months Ended
June 30,
2000 1999
---- ----
Operating activities:
Net income......................................... $129,680 $100,759
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................... 105,373 100,369
Amortization of investment tax credits........... (2,247) (2,388)
Deferred income taxes............................ 7,238 4,735
Change in accounts receivable.................... 48,337 17,210
Change in inventories............................ 33,785 18,729
Change in other current assets................... 84,431 102,519
Change in accounts payable....................... (103,139) (30,778)
Change in other current liabilities.............. (19,522) (28,353)
Change in deferred amounts....................... (8,653) (6,977)
Change in noncurrent liabilities................. (4,106) 974
------- -------
Net cash provided by operating activities...... 271,177 276,799
Investing activities:
Construction expenditures.......................... (155,516) (215,940)
Proceeds from disposition of property, plant
and equipment ................................... 3,446 12,467
Purchase of other investments...................... (5,773) (2,481)
Sale of other investments.......................... 5,073 2,361
------- -------
Net cash used in investing activities.......... (152,770) (203,593)
Financing activities:
Proceeds from the sale of long-term debt........... 99,750 47,666
Redemption of long-term debt....................... (101,636) (66,482)
Short-term borrowings - net........................ (60,892) 57,230
Dividends on common stock.......................... (92,265) (92,976)
------- -------
Net cash used in financing activities.......... (155,043) (54,562)
-------- -------
Net (decrease) increase in cash and temporary
cash investments ............................. (36,636) 18,644
Cash and temporary cash investments at
beginning of period .......................... 51,731 19,926
------ ------
Cash and temporary cash investments at
end of period ................................ $ 15,095 $ 38,570
======== ========
The accompanying notes to consolidated condensed financial statements
statements are an integral part of these financial statements.
12
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
ASSETS
June 30, December 31,
2000 1999
---- ----
Property, plant and equipment, at cost:
Electric........................................... $2,848,861 $2,802,077
Construction in progress........................... 95,562 95,477
------- -------
2,944,423 2,897,554
Less: accumulated depreciation..................... 1,160,806 1,123,739
--------- ---------
Total property, plant and equipment............... 1,783,617 1,773,815
--------- ---------
Investments, at cost:
Notes receivable from affiliate.................... 119,036 119,036
Other.............................................. 6,012 5,946
------- -------
Total investments................................. 125,048 124,982
------- -------
Current assets:
Cash and temporary cash investments................ 9,671 1,532
Accounts receivable, less reserve for uncollectible
accounts ($333 at June 30, 2000; $682 at
December 31, 1999)................................ 62,283 83,928
Accrued unbilled revenues.......................... 81,048 44,631
Recoverable electric energy cost (Note 4).......... 34,901 1,948
Materials and supplies, at average cost............ 16,027 18,035
Fuel inventory, at average cost.................... 2,290 2,292
Prepaid expenses and other......................... 21,991 4,324
------- -------
Total current assets.............................. 228,211 156,690
------- -------
Deferred charges:
Regulatory assets (Note 1)......................... 70,759 101,419
Prepaid pension asset.............................. 50,763 40,087
Unamortized debt expense........................... 9,488 9,605
Other.............................................. 12,211 12,778
------- -------
Total deferred charges............................ 143,221 163,889
------- -------
$2,280,097 $2,219,376
========== ==========
The accompanying notes to consolidated condensed financial statements
statements are an integral part of these financial statements.
13
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
CAPITAL AND LIABILITIES
June 30, December 31,
2000 1999
---- ----
Common stock.......................................... $353,099 $ 353,099
Retained earnings..................................... 421,854 408,284
------- -------
Total common equity............................... 774,953 761,383
SPS obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures of SPS (Note 6) ............. 100,000 100,000
Long-term debt (Notes 1 and 4)........................ 520,590 605,875
------- -------
1,395,543 1,467,258
Noncurrent liabilities:
Employees' postretirement benefits other than pensions 6,504 6,086
Employees' postemployment benefits................. 4,683 4,940
------- -------
Total noncurrent liabilities...................... 11,187 11,026
------- -------
Current liabilities:
Notes payable and commercial paper................. 311,350 177,746
Accounts payable................................... 98,554 76,560
Dividends payable.................................. - 20,963
Customers' deposits................................ 5,642 5,833
Accrued taxes...................................... 17,893 23,486
Accrued interest................................... 14,685 17,223
Current portion of accumulated deferred income taxes 6,327 -
Other.............................................. 41,764 26,857
------- -------
Total current liabilities......................... 496,215 348,668
------- -------
Deferred credits:
Unamortized investment tax credits................. 4,844 4,969
Accumulated deferred income taxes.................. 366,087 376,245
Other.............................................. 6,221 11,210
------- -------
Total deferred credits............................ 377,152 392,424
------- -------
Commitments and contingencies (Notes 4 and 5)......... ---------- ----------
$2,280,097 $2,219,376
========== ==========
The accompanying notes to consolidated condensed financial statements
statements are an integral part of these financial statements.
14
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Three Months Ended
June 30,
2000 1999
---- ----
Operating revenues.................................... $256,643 $224,114
Operating expenses:
Fuel used in generation............................ 97,894 97,975
Purchased power.................................... 28,579 11,404
Other operating and maintenance expenses........... 40,989 33,858
Depreciation and amortization...................... 19,365 18,435
Taxes (other than income taxes).................... 11,774 12,487
Income taxes....................................... 16,516 13,483
------- -------
215,117 187,642
Operating income...................................... 41,526 36,472
Other income and deductions - net..................... 2,826 2,380
Interest charges:
Interest on long-term debt......................... 10,159 13,639
Other interest..................................... 4,504 960
Allowance for borrowed funds used during construction (919) (544)
Dividends on SPS obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of SPS ........... 1,962 1,962
----- -----
15,706 16,017
Income before extraordinary item...................... 28,646 22,835
Extraordinary item (Notes 1 and 4).................... (13,658) -
------- -------
Net income............................................ $14,988 $22,835
======= =======
The accompanying notes to consolidated condensed financial statements
statements are an integral part of these financial statements.
15
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Six Months Ended
June 30,
2000 1999
---- ----
Operating revenues.................................... $472,875 $426,666
Operating expenses:
Fuel used in generation............................ 184,587 180,028
Purchased power.................................... 49,740 16,509
Other operating and maintenance expenses........... 76,850 67,662
Depreciation and amortization...................... 38,719 36,907
Taxes (other than income taxes).................... 23,856 25,871
Income taxes....................................... 27,446 27,848
------- -------
401,198 354,825
Operating income...................................... 71,677 71,841
Other income and deductions - net..................... 6,236 4,460
Interest charges:
Interest on long-term debt......................... 20,816 24,834
Other interest..................................... 8,235 2,549
Allowance for borrowed funds used during construction (1,965) (1,233)
Dividends on SPS obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of SPS 3,925 3,925
----- -----
31,011 30,075
Income before extraordinary items..................... 46,902 46,226
Extraordinary item (Notes 1 and 4)................... (13,658) -
------- -------
Net income............................................ $33,244 $46,226
======= =======
The accompanying notes to consolidated condensed financial statements
statements are an integral part of these financial statements.
16
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Six Months Ended
June 30,
2000 1999
---- ----
Operating activities:
Net income......................................... $ 33,244 $ 46,226
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary item (Notes 1 and 4)............... 13,658 -
Depreciation and amortization.................... 40,483 38,713
Amortization of investment tax credits........... (125) (125)
Deferred income taxes............................ 13,535 6,102
Change in accounts receivable.................... 21,645 1,877
Change in inventories............................ 2,010 (573)
Change in other current assets................... (83,897) (22,026)
Change in accounts payable....................... 21,994 12,968
Change in other current liabilities.............. 6,585 (24,566)
Change in deferred amounts....................... (19,131) (14,291)
Change in noncurrent liabilities................. 161 1,001
------- -------
Net cash provided by operating activities...... 50,162 45,306
Investing activities:
Construction expenditures.......................... (47,647) (61,840)
Cost of disposition of property, plant and equipment (1,927) (2,162)
Purchase and sale of other investments............. (66) (109)
------- -------
Net cash used in investing activities.......... (49,640) (64,111)
Financing activities:
Proceeds from sale of long-term debt............... - 99,846
Redemption of long-term debt....................... (85,350) -
Short-term borrowings - net........................ 133,604 (35,465)
Dividends on common stock.......................... (40,637) (40,031)
------- -------
Net cash provided by financing activities...... 7,617 24,350
------- -------
Net increase in cash and temporary
cash investments ............................. 8,139 5,545
Cash and temporary cash investments at beginning
of period ................................... 1,532 1,350
----- -----
Cash and temporary cash investments at end
of period ................................... $ 9,671 $ 6,895
======== =======
The accompanying notes to consolidated condensed financial statements
statements are an integral part of these financial statements.
17
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies (NCE, PSCo and SPS)
Business, Utility Operations and Regulation
NCE is a registered holding company under 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 (see Note 4. Regulatory Matters for further discussion).
Regulatory Assets and Liabilities
The Company's regulated subsidiaries, except as discussed below for SPS,
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 June 30, 2000, the requirements to apply
SFAS 71 continue to be met by all utility operations, except for SPS' generation
operations.
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 subsidiary 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 flow.
With the issuance of a final written order by the PUCT addressing the
implementation of electric utility restructuring for SPS, management believes
that sufficient details of a transition plan to competition now exist allowing
for a reasonable determination of the impacts of the deregulation of SPS'
generation business. Accordingly, SPS discontinued the application of SFAS 71
for the generation portion of its business during the second quarter of 2000.
SPS applied the provisions of SFAS No. 101, "Regulated Enterprises - Accounting
for the Discontinuation of SFAS 71" and Emerging Issues Task Force Consensus No.
97-4, "Deregulation of the Pricing of Electricity - Issues Related to the
Application of FASB Statements No. 71 and 101" to SPS' electric generation
business. While the PUCT rate order only addresses Texas operations, SPS plans
to pursue a similar strategy to implement the restructuring legislation enacted
in New Mexico and believes that all of its generation will ultimately be
deregulated. Accordingly, SPS has applied SFAS 101 to all jurisdictions of its
generation business. SPS' transmission and distribution business continues to
meet the requirements of SFAS 71, as that business is expected to remain
regulated. During the second quarter of 2000, SPS wrote-off its generation
related regulatory assets and other deferred costs totaling approximately $19
million. This resulted in an after-tax extraordinary charge of approximately
$13.7 million against the earnings of SPS and NCE. The total impacts of
deregulation
18
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
may be affected by the results of future state and Federal regulatory
proceedings prior to actual implementation of full competition, currently
anticipated to begin on January 1, 2002 (see Note 4. Regulatory Matters for
further discussion).
The following regulatory assets are reflected in the Company's
consolidated balance sheets (in thousands):
June 30, 2000 NCE PSCo SPS
------- ------- ------
Income taxes........................ $ 98,291 $52,457 $ 46,452
Nuclear decommissioning costs....... 58,906 58,906 -
Employees' postretirement benefits
other than pensions............... 48,775 48,625 150
Employees' postemployment benefits.. 23,297 23,018 -
Demand-side management costs........ 36,557 22,840 13,717
Unamortized debt reacquisition costs 24,014 13,237 10,252
Other............................... 6,047 5,859 188
-------- ------- --------
Total............................. $295,887 $224,942 $ 70,759
======== ======== ========
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 June 30, 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 $125 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. 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. PSCo appealed the District Court decision to
the Colorado Supreme Court on January 31, 2000, and filed its opening brief on
June 23, 2000. The Company expects a final decision on this matter in late 2000
or early 2001. 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.
19
<PAGE>
NOTES TO CONSOLIDATED CONDENSED 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 and six month periods ended June 30, 2000,
NCE recognized a net gain of $2,223,000 and $1,948,000, respectively, and PSCo
recognized a net gain of $1,083,000 and $959,000, respectively, for market value
changes on energy trading contracts. For the three and six month periods ended
June 30, 1999, NCE recognized net gains/(losses) of $688,000 and ($551,000),
respectively, and PSCo recognized net gains of $261,000 and $78,000,
respectively, for market value changes on energy trading contracts. SPS does not
currently have any trading activities.
Revenues and purchased energy costs associated with trading activities are
presented net on the income statement in electric and gas revenues.
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 and six month periods
ended June 30, 2000 and 1999. Other comprehensive income consists solely of
foreign currency translation adjustments related to the investment in Yorkshire
Power.
For the three and six month periods ending June 30, 2000 and 1999, PSCo
and SPS had no comprehensive income items, therefore, comprehensive income
equals net income.
20
<PAGE>
NOTES TO CONSOLIDATED CONDENSED 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 38,000 shares for both the three and six
month periods ended June 30, 2000 and were 23,000 and 35,000 shares for the
three and six month periods ended June 30, 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 June 30, 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
$10 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 June 30, 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
21
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
stock-for-stock exchange for shareholders of both companies and to be accounted
for as a pooling-of-interests.
It is anticipated that Xcel Energy will initially adopt the NCE dividend
payment level, adjusted for the exchange ratio, resulting in a pro forma
dividend of $1.50 per share on an annual basis, following completion of the
NCE/NSP Merger. The actual dividend level will be dependent upon the combined
company's results of operations, financial position, cash flows and other
factors, and will be evaluated by the Board of Directors of Xcel Energy.
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").
The required applications or submissions to the state utility regulators
and the FERC were completed in July 1999. In general, the filings to the state
regulators proposed the sharing of cost savings among customers and shareholders
for up to five years. All state regulatory approvals have been received. 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. Final approvals by the SEC are pending. 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 during the third quarter of 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 June 30, 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 $33 million each
respectively, of deferred nonrecurring merger costs as of June 30, 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 pro forma
balance sheet information has been adjusted to reflect a write-off of the
deferred costs and a related reduction of retained earnings.
22
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
The unaudited summarized pro forma financial information has been prepared
using information provided by NSP. This information does not necessarily
indicate what the combined company's financial position or operating results
would have been if the merger had been completed on the assumed completion dates
and does not necessarily indicate future operating results of the combined
company.
Unaudited Summarized Pro Forma Balance Sheet information as of June 30, 2000 (in
millions):
NSP NCE Adjustments Pro Forma
--- --- ----------- ---------
Property, plant &
equipment- net $ 4,468 $6,330 $3,904 $14,702
Current assets.......... 1,286 937 - 2,223
Other assets............ 6,172 1,101 (3,970) 3,303
------- ------ ------ -------
Total assets.......... $11,926 $8,368 $ (66) $20,228
======= ====== ====== =======
Common equity........... $ 2,761 $2,789 $ (66) $ 5,484
Preferred securities.... 305 294 - 599
Long-term debt.......... 4,839 2,249 - 7,088
------ ------ ------ ------
Total capitalization.. 7,905 5,332 (66) 13,171
Current liabilities..... 1,953 1,791 - 3,744
Other liabilities....... 2,068 1,245 - 3,313
------ ------ ------ ------
Total equity and
liabilities $11,926 $8,368 $ (66) $20,228
======= ====== ====== =======
The unaudited pro forma balance sheet information at June 30, 2000
reflects reporting adjustments to conform the presentation of non-regulated
property (in property, plant and equipment).
Unaudited Summarized Pro Forma Income Statement information for the six months
ended June 30, 2000 and 1999 (in millions, except per share data):
NSP NCE Adjustments Pro Forma
--- --- ----------- ---------
2000
Revenues................ $1,472 $1,816 $ 921 $4,209
Operating income........ 157 367 276 800
Net income*............. 110 186 - 296
Earnings available for
common* ............... 108 186 - 294
Basic & diluted earnings
per share*......... $0.69 $1.60 - $0.87
1999
Revenues................ $1,402 $1,716 $ 167 $3,285
Operating income........ 154 307 56 517
Net income.............. 63 151 - 214
Earnings available for
common ................ 60 151 - 211
Basic & diluted earnings
per share.......... $0.40 $1.31 - $0.64
*During the second quarter 2000, SPS, a subsidiary of NCE, recognized an
extraordinary charge of $13.7 million, net of tax ($0.12 per share for NCE;
$0.04 per share for pro forma), related to the discontinued application of
regulatory accounting under SFAS 71 for the generation portion of its business
(see Note 1. Summary of Significant Accounting Policies and Note 4. Regulatory
Matters).
The unaudited pro forma income statement information for the six months
ended June 30, 2000 and 1999 reflect reporting adjustments to conform the
presentation of nonregulated revenues and earnings from equity investments in
operating revenues.
23
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NOTES TO CONSOLIDATED CONDENSED 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 six months ended June 30,
2000 and 1999, respectively, is presented below (in millions):
2000 1999
---- ----
Yorkshire Power:
Operating revenues....................... $1,171.1 $1,156.7
-------- --------
Operating income......................... 186.1 152.0
-------- -----
Net income............................... $ 64.0 $ 30.2
======== ========
NCI's equity in earnings of Yorkshire Power $ 32.0 $ 15.1
======== ========
Yorkshire Power changed its accounting for depreciation, effective January
1, 2000. NCI's equity in earnings for the six months ended June 30, 2000 include
approximately $6.5 million (after-tax) related to this change. Also, lower than
expected electric energy supply costs contributed positively to the increase in
Yorkshire Power's earnings.
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 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.
24
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Additionally, earnings during the latter half of 2000, as compared to the first
half of 2000, are expected to be lower due to an increase in gas prices and
competition with higher marketing and other customer related costs.
4. Regulatory Matters (NCE, PSCo and SPS)
Electric Utility Matters
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 made and continues to make filings with the PUCT and
the NMPRC, as required by each state's legislation, to address critical issues
related to SPS' transition plans to retail competition. 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
legislative and regulatory requirements in developing its transition plans. It
is 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 filings. 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 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. On May 16, 2000, the NMPRC approved: 1) a one-year delay of customer
choice for residential, small commercial and educational customers to January 1,
2002, 2) a six-month delay in customer choice for commercial and industrial
customers to July 1, 2002, 3) a seven month delay for completion of SPS
corporate separation by August 1, 2001 and 4) a utility transition plan filing
date of June 1, 2000.
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.
25
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
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
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 undue 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, 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 has arranged
interim financing, as approved by the NMPRC, to enable SPS to make open market
purchases, and to complete a tender offer and the 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 by
January 1, 2001 (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 to the NCE/NSP Merger docket, 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 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
prohibit the pooling-of-interest accounting for the Merger, the divestitures
would be delayed.
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. On May 30, 2000, the PUCT issued a rate order approving the
26
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Stipulation. SPS has committed, contingent 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 in Texas, 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.
On June 1, 2000, SPS filed its transition plan with the NMPRC. The Company
filed to establish rates for the transmission and distribution business in New
Mexico, requesting approval of its corporate restructuring/separation and other
associated matters. Hearings are anticipated to be held in the fourth quarter of
2000.
On July 24, 2000, SPS commenced a fixed spread tender offer to purchase
for cash the remaining $294.9 million total principal amount of five series of
SPS' First Mortgage Bonds. Under the terms of the offer, SPS will purchase the
remaining bonds of each series at a price [determined by the yield to maturity
for bonds that are not redeemable and to the first redemption date for bonds
that are redeemable], at the time of tender, equal to the sum of the yield on
the applicable referenced U.S. Treasury Note plus a fixed spread. The purchase
offer expired on August 4, 2000 with approximately 92% of the outstanding bonds
purchased. SPS currently intends that all bonds which are not tendered or
otherwise acquired by SPS (approximately 8% of the total outstanding First
Mortgage Bonds) will be defeased by the end of 2000. The bonds will be defeased
by deposting with the trustee cash sufficient to pay the principal amount of the
outstanding First Mortgage Bonds at maturity or the first redemption date, the
applicable redemption date, the applicable redemption premium at the first
redemption date and accrued interest to maturity or the first redemption date.
Upon defeasance, all obligations of SPS under its Indenture and the First
Mortgage Bonds would be discharged.
Financial Reporting Matters
With the issuance of a final written order by the PUCT on May 30, 2000
addressing the implementation of electric utility restructuring for SPS,
management believes that sufficient details of a transition plan to competition
now exist allowing for a reasonable determination of the impacts of the
deregulation of SPS' generation business. Accordingly, SPS discontinued the
application of SFAS 71 for that portion of its business during the second
quarter of 2000. SPS applied the provisions of SFAS No. 101, "Regulated
Enterprises - Accounting for the Discontinuation of SFAS 71" and Emerging Issues
Task Force Consensus No. 97-4, "Deregulation of the Pricing of Electricity -
Issues Related to the Application of FASB Statements No. 71 and 101" for SPS'
electric generation business. While the above rate order only addresses Texas
operations, SPS plans to pursue a similar strategy to implement the
restructuring legislation enacted in New Mexico and believes that all of its
generation will ultimately be deregulated. Accordingly, SPS has applied SFAS 101
to all jurisdictions of its generation business. SPS' transmission and
distribution business continues to meet the requirements of SFAS 71, as that
business remains regulated. During the second quarter 2000, SPS wrote-off its
generation related regulatory assets and other deferred costs totaling
approximately $19 million. This resulted in an after-tax extraordinary charge of
approximately $13.7 million against the earnings of SPS and NCE. The total
impacts of deregulation may be affected by the results of future state and
Federal regulatory proceedings prior to actual implementation of full
competition, estimated to begin on January 1, 2002.
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 $75 million.
27
<PAGE>
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.
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:
- an annual electric department earnings test with the sharing of earnings
in excess of an 11% return on equity for the calendar years 1997-2001;
- a Quality 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
- 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 six months 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. The $15 million refund obligations for 1997 were finalized
and refunded to customers. PSCo has recorded customer refund obligations for its
earnings test of approximately $11 million for 1998 and $16 million for 1999.
During the six months ended June 30, 2000, PSCo has recorded an estimated
customer refund obligation of approximately $6 million (excluding adjustments to
true-up prior year estimates). In June 2000, an Administrative Law Judge ("ALJ")
issued a Recommended Decision on the unresolved issues related to the 1998
earnings test. PSCo filed its brief on exceptions with the CPUC, asking the
Commission to disregard the ALJ's Recommended Decision and to issue an order
adopting the Company's position. Final CPUC decisions related to the refund
obligations for 1998 and 1999 are pending.
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. During the
second quarter of 2000, the CPUC staff reviewed the report for the calendar year
1999 and calculated a refund amount of approximately $4.8 million. A final
decision on the 1999 refund amount 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 this 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 fuel and
purchased power costs, the efficiency of the use of such fuel and purchased
power, fuel acquisition and management policies and purchase
28
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
power commitments. SPS is required to file an application for the PUCT to
retrospectively review, at least every three years, the operations of a
utility's electricity generation and fuel management activities. In June 1998,
SPS filed its reconciliation for the generation and fuel management activities
totaling approximately $690 million, for the period from January 1995 through
December 1997. For this same period, SPS had approximately $21.4 million in
under-recovered fuel costs associated with the Texas retail jurisdiction. In
July 2000, the PUCT approved a settlement agreement between SPS and the General
Counsel of the PUCT, which provided for the recovery of substantially all fuel
costs, including approximately $12.1 million of the Texas retail jurisdictional
portion of the Thunder Basin judgment.
On June 30, 2000, SPS filed an application for the PUCT to retrospectively
review the operations of a utility's electricity generation and fuel management
activities. In this application, SPS filed its reconciliation for the generation
and fuel management activities totaling approximately $419 million, for the
period from January 1998 through December 1999. Final approval is pending.
SPS filed an emergency application on July 21, 2000, seeking to increase
its fixed fuel factor, to be effective September 1, 2000. SPS was approximately
$18 million under-recovered in fuel costs associated with the Texas retail
jurisdiction through May 2000 as a result of recent increases in natural gas
costs. SPS has committed to file an additional application seeking to surcharge
its Texas retail customers the under-recovered amount above including any
related interest.
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.
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.
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 have been received in all
required states, including 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:
- PSCo will reduce its retail electric rates by $11 million annually for the
two-year period from July 1, 2000 through June 30, 2002;
29
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
- PSCo will file a combined electric and gas rate case in early 2002 with
new rates anticipated to be effective January 1, 2003;
- merger costs will be capped at $30 million and amortized for ratemaking
purposes over the period July 1, 2000 to December 31, 2003;
- 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 (effective July 1,
2000) 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 cost 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.
The PUCT issued the final order approving the NCE/NSP Merger on May 30, 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:
- guaranteed merger savings credits of $65,000 per month (totaling
approximately $3.5 million)
- an equal sharing of the net non-fuel operating and maintenance savings
among retail customers and shareholders;
- a 50% recovery of merger-related transaction and transition costs;
- retention of the current fuel cost recovery mechanism to pass along fuel
cost savings to retail customers.
- SPS will not pass to customers any negative rate impacts of the NCE/NSP
Merger.
The NMPRC issued the final order on May 9, 2000 approving the NCE/NSP
Merger.
Gas Utility Matters
PSCo Rate Cases
On July 17, 2000, PSCo filed a retail rate case with the CPUC requesting
an annual increase in its jurisdictional gas department revenues of
approximately $40 million. The request for a rate increase reflects revenues for
additional plant investment, a 12.5% return on equity, new depreciation rates,
and recovery of the dismantlement costs associated with the Leyden Gas Storage
facility, as discussed below. Hearings have not yet been scheduled.
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. On June
8, 1999, the CPUC approved an increase in
30
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
base rates of approximately $15 million with an 11.25% return on equity,
effective July 1, 1999. PSCo was also allowed recovery of prudently incurred
year 2000 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. PSCo filed opening briefs
with the Colorado Supreme Court on June 23, 2000. 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. In June 2000, an ALJ
determined that the notice was adequate and the application was proper. Hearings
and testimony are scheduled for the third quarter of 2000. PSCo has requested
recovery of these costs and its remaining plant investments in the retail rate
case filed in July 2000.
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 related to this matter.
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 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
31
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
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 associated with
certain COLI policies, however, 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
32
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
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 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 energy 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.
33
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
The accounting policies of the segments are the same as those described in
Note 1. Summary of Significant Accounting Policies. NCE evaluates performance by
each legal entity based on profit or loss generated from the product or service
provided. NCE segment information is as follows (in thousands):
<TABLE>
<CAPTION>
Eliminations/
Three months ended: Electric Gas All Unallocated Consolidated
June 30, 2000 Utility Utility International Other Amounts Total
------- ------- ------------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
External customers $715,104 $140,199 $ - $21,549 $ - $ 876,852
Intersegment 122 3,117 - 31,247 - 34,486
Segment profit 64,399 844 5,829 13,621 (3,770) 80,923
June 30, 1999
Revenues:
External customers $607,438 $144,131 $ - $49,265 $ - $ 800,834
Intersegment 107 1,699 - 33,352 - 35,158
Segment profit 53,823 (362) (65) (1,221) (2,940) 49,235
Six months ended: Electric Gas All Unallocated Consolidated
June 30, 2000 Utility Utility International Other Amounts Total
------- ------- ------------- ----- ------- -----
Revenues:
External customers $1,348,226 $415,356 $ - $51,940 $ - $1,815,522
Intersegment 178 5,887 - 43,713 - 49,778
Segment profit 120,369 25,167 27,913 20,591 (7,789) 186,251
June 30, 1999
Revenues:
External customers $1,201,584 $403,514 $ - $110,431 $ - $1,715,529
Intersegment 262 3,658 - 49,994 - 53,914
Segment profit 118,128 17,103 18,075 3,378 (6,149) 150,535
</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):
<TABLE>
<CAPTION>
Eliminations/
Three months ended: Electric Gas All Unallocated Consolidated
June 30, 2000 Utility Utility Other Amounts Total
------- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $ 449,230 $138,861 $ 1,988 $ - $590,079
Segment profit 52,316 783 7,822 - 60,921
June 30, 1999
Revenues from
external customers $ 373,690 $140,895 $ 1,580 $ - $516,165
Segment profit 31,439 (441) 3,822 - 34,820
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Six months ended: Electric Gas All Unallocated Consolidated
June 30, 2000 Utility Utility Other Amounts Total
------- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C>
Revenues from
external customers $855,325 $409,582 $ 5,722 $ - $1,270,629
Segment profit 92,786 24,858 12,036 - 129,680
June 30, 1999
Revenues from
external customers $755,012 $395,066 $ 4,957 $ - $1,155,035
Segment profit 73,391 16,781 10,587 - 100,759
</TABLE>
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 $256.6 million
and $224.1 million for the three months ended June 30, 2000 and 1999,
respectively. Revenues from external customers for this reportable segment were
$472.9 million and $426.7 million for the six months ended June 30, 2000 and
1999, respectively.
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 June 30, 2000 and December 31, 1999 and the results of
operations for the three and six months ended June 30, 2000 and 1999 and cash
flows for the six months ended June 30, 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
1999 combined Annual Report on Form 10-K for NCE, PSCo and SPS.
Because of seasonal and other factors, the results of operations for the
six months ended June 30, 2000 should not be taken as an indication of earnings
for all or part of the balance of the year.
35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO NEW CENTURY ENERGIES, INC.:
We have reviewed the accompanying consolidated condensed balance sheet of New
Century Energies, Inc. (a Delaware corporation) and subsidiaries as of June 30,
2000, and the related consolidated condensed statements of income, and
shareholders' equity for the three and six month periods ended June 30, 2000 and
1999, and the consolidated condensed statements of cash flows for the six month
periods ended June 30, 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,
August 4, 2000.
36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO PUBLIC SERVICE COMPANY OF COLORADO:
We have reviewed the accompanying consolidated condensed balance sheet of Public
Service Company of Colorado (a Colorado corporation) and subsidiaries as of June
30, 2000, and the related consolidated condensed statements of income for the
three and six month periods ended June 30, 2000 and 1999, and the consolidated
condensed statements of cash flows for the six month periods ended June 30, 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,
August 4, 2000.
37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO SOUTHWESTERN PUBLIC SERVICE COMPANY:
We have reviewed the accompanying condensed balance sheet of Southwestern Public
Service Company (a New Mexico corporation) as of June 30, 2000, and the related
condensed statements of income for the three and six month periods ended June
30, 2000 and 1999, and the condensed statements of cash flows for the six month
periods ended June 30, 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,
August 4, 2000.
38
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (NCE, PSCo and SPS)
NCE's Management's Discussion and Analysis of Financial Condition and Results of
Operations
Three Months Ended June 30, 2000 Compared to the Three Months Ended June 30,
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. All required State and
Federal regulatory agency authorizations have been received, except for the
approval by the SEC and Federal Communication Commission. The Company expects
that the SEC will make its ruling on the NCE/NSP Merger in the third quarter of
2000 and it is expected the NCE/NSP Merger will be completed during August 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 3.1 million electricity
customers and 1.6 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 $0.69 ($0.81 per share before
the extraordinary item) for the second quarter of 2000 as compared to $0.43 per
share (basic and diluted) for the second quarter of 1999. The increase is
primarily attributable to higher wholesale electric marketing and trading
activities as the Company successfully marketed excess system power in the
western U.S. at prices substantially higher than normal. Continued customer
growth in Colorado and the on-going cost containment efforts also contributed to
the higher earnings in 2000. Equity in earnings of Yorkshire Power increased as
a result of lower than expected electricity supply prices in the United Kingdom.
However, Yorkshire Power's future contribution to earnings is expected to
decline due to the distribution and supply price reductions which became
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. During the second quarter of
2000, SPS discontinued the application of regulatory accounting under SFAS 71
for the generation portion of its business, and recognized a $13.7 million
extraordinary charge, net of tax. The charge was recorded following a PUCT rate
order addressing the implementation of electric utility restructuring for SPS.
See Note 1. Summary of Significant Accounting Policies and Note 4. Regulatory
Matters in Item 1. FINANCIAL STATEMENTS.
Electric Operations
The following table details the change in electric operating revenues and
energy costs for the second quarter of 2000 as compared to the same period in
1999 (in thousands).
Increase
--------
Electric operating revenues:
Retail................................................ $45,689
Wholesale............................................. 30,780
Other (including unbilled revenues)................... 31,358
-------
Total revenues...................................... 107,827
Fuel used in generation............................... 14,944
Purchased power....................................... 49,135
-------
Net increase in electric margin..................... $43,748
=======
39
<PAGE>
The following table compares electric sales by major customer classes for
the second quarter of 2000 and 1999.
Millions of Kwh Sales
2000 1999 % Change *
---- ---- ----------
Residential................................ 2,359 2,244 5.1%
Commercial and industrial.................. 6,968 6,676 4.4
Public authority........................... 198 203 (2.3)
----- -----
Total retail............................. 9,525 9,123 4.4
Wholesale.................................. 4,041 3,030 33.3
----- -----
Total...................................... 13,566 12,153 11.6
====== ======
Power marketing and trading................ 1,773 2,953 **
===== =====
* Percentages are calculated using unrounded amounts.
** Percentage change is significant, but presentation of the amount is not
meaningful.
Electric margin increased $43.7 million in the second quarter of 2000,
when compared to the second quarter of 1999, primarily due to the favorable
results from the wholesale energy marketing and trading business, which
contributed an additional $21.6 million to electric margin. The increase
resulted from the Company's ability to market excess system power in the western
U.S. at prices substantially higher than normal. The future performance of the
wholesale energy marketing and trading business is dependent upon several
factors including, market conditions, plant operational performance,
availability of electric energy, implementation of deregulation and other
factors. In addition, higher retail sales of 4.4% resulting primarily from
customer growth of approximately 2.5% and the impacts of more normal weather
served to increase margin. Mild, wet weather in the second quarter of 1999
reduced loads for air conditioning and irrigation. Increased fuel and purchased
power costs to serve customer load growth have resulted in higher cost sharing
under PSCo's ICA.
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 $14.9 million or 9.8% during the
second 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 $49.1 million or 37.6% during the second
quarter of 2000, as compared to the same quarter in 1999, primarily due to
increased costs related to wholesale energy marketing activities and purchased
power capacity and energy costs, including option premium charges for stand-by
capacity to serve retail customers.
Gas Operations
The following table details the change in gas revenues and gas purchased
for resale for the second quarter of 2000, as compared to the same period in
1999 (in thousands).
Increase (Decrease)
-------------------
Revenues from gas sales (including unbilled revenues). $(35,667)
Gas purchased for resale.............................. (31,942)
-------
Net decrease in gas sales margin..................... (3,725)
Transportation revenues............................... 1,854
-------
Decrease in net gas margin........................... $(1,871)
=======
40
<PAGE>
The following table compares gas Dth deliveries by major customer classes
for the second quarter of 2000 and 1999.
Millions of Dth Deliveries
2000 1999 % Change *
---- ---- ----------
Residential................................ 17.3 19.1 (9.7)%
Commercial................................. 8.1 9.3 (12.9)
----- -----
Total sales.............................. 25.4 28.4 (10.6)
Transportation............................. 31.5 28.1 12.1
----- -----
Total.................................... 56.9 56.5 0.7
===== ===== ===
Non-regulated gas marketing and trading.... 85.4 40.5 **
===== =====
* Percentages are calculated using unrounded amounts.
** Percentage change is significant, but presentation of the amount is not
meaningful.
Gas sales margin decreased during the second quarter of 2000, when
compared to the second quarter of 1999, primarily due to warmer spring weather
in Colorado during the second quarter of 2000. The decrease in margin was
offset, in part, by higher gas rates, effective July 1, 1999, resulting from
PSCo's 1998 rate case and the favorable impacts of customer growth of
approximately 3.7%. Revenues from gas sales decreased $27.6 million related to
non-regulated gas marketing and trading activities, due in part to the sale of
Texas Ohio Gas in 1999.
Gas transportation revenues increased approximately $1.8 million during
the second quarter of 2000, when compared to the second 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 second 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 $2.0 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 $10.1 million over 1999
primarily due to lower than expected prices for its electric supply costs in the
United Kingdom and operating expenses due to staff reductions resulting from an
aggressive cost reduction program (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 decreased $4.1 million
primarily due to lower costs at PSCo including lower gas distribution operation
costs, lower steam generation maintenance and lower electric distribution
maintenance costs. Other operating and maintenance expense-non-regulated
decreased $5.7 million primarily due to lower energy management and consulting
services, offset, in part, by increased costs in providing engineering, design
and construction management.
Depreciation and amortization increased $3.9 million during the second
quarter of 2000, as compared to the same period of 1999, primarily due to the
depreciation of property additions.
Taxes other than income taxes decreased approximately $4.7 million
primarily due to lower business and utility property tax accruals in Colorado.
41
<PAGE>
Income taxes increased $22.6 million during the second quarter of 2000,
when compared to the same quarter in 1999, primarily due to higher pre-tax
income in the current period and higher Colorado state and foreign tax credits
recognized in 1999.
Interest charges increased $3.9 million during the second 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.
Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999
Earnings Available for Common Stock
Earnings per share (basic and diluted) were $1.60 ($1.72 per share before
the extraordinary item) for the first six months of 2000 as compared to $1.31
per share (basic and diluted) for the first six months of 1999. The increase is
primarily attributable to the Company's ability to successfully market excess
system power in the western U.S. at prices substantially higher than normal.
Continued customer growth in Colorado, the on-going cost containment efforts and
higher equity in earnings of Yorkshire Power also contributed to the higher
earnings in 2000. During the second quarter of 2000, SPS discontinued the
application of regulatory accounting under SFAS 71 for the generation portion of
its business, and recognized a $13.7 million extraordinary charge, net of tax.
The charge was recorded following a PUCT rate order addressing the
implementation of electric utility restructuring for SPS. See Note 1. Summary of
Significant Accounting Policies and Note 4. Regulatory Matters in Item 1.
FINANCIAL STATEMENTS.
Electric Operations
The following table details the change in electric operating revenues and
energy costs for the six months ended June 30, 2000, as compared to the same
period in 1999 (in thousands).
Increase
--------
Electric operating revenues:
Retail....................................... $47,511
Wholesale.................................... 63,657
Other (including unbilled revenues).......... 35,250
-------
Total revenues.............................. 146,418
Fuel used in generation....................... 23,990
Purchased power............................... 84,520
-------
Net increase in electric margin............. $37,908
=======
The following table compares electric Kwh sales by major customer classes for
the six months ended June 30, 2000 and 1999.
Millions of Kwh Sales
2000 1999 % Change *
---- ---- ----------
Residential ..................... 5,112 4,956 3.2%
Commercial and Industrial ....... 13,959 13,336 4.7
Public Authority ................ 400 384 4.1
------ ------
Total Retail................... 19,471 18,676 4.3
Wholesale ....................... 7,858 5,787 35.8
------ ------
Total............................ 27,329 24,463 11.7
====== ======
Power Marketing and Trading...... 8,403 4,434 **
====== ======
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful.
Electric margin increased in the first six months of 2000, when compared
to the same period of 1999, primarily due to the favorable results from the
wholesale energy marketing and trading business, which contributed
42
<PAGE>
an additional $22.6 million to electric margin. The Company was able to market
excess system power in the western U.S. at prices substantially higher than
normal. The future results of the Company's wholesale marketing and trading
business may be impacted by market conditions and other factors. Higher retail
sales of 4.3% resulting primarily from customer growth of approximately 2.5%
favorably impacted margin. Increased fuel and purchased power cost have resulted
in higher cost sharing under PSCo's ICA. 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 $8.4 million and $6.6 million in the first six months
ended June 30, 2000 and 1999, respectively (see Note 4. Regulatory Matters in
Item 1. FINANCIAL STATEMENTS). 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.
Fuel used in generation expense increased approximately $23.9 million of
8.4% during the first six months of 2000, as compared to the same period in
1999, primarily due to increased generation levels at PSCo and SPS and higher
gas costs for generation at Fort St. Vrain generating station and various SPS
plants.
Purchased power expense increased $84.5 million or 32.8% during the first
six months of 2000, as compared to the same period in 1999, primarily due to
increased energy marketing and electric trading activities. In addition, the
increase resulted in part from an extended outage at one of PSCo's generating
stations and increased purchased power capacity and energy costs, including
option premium charges for stand-by capacity. There was an increase at SPS in
capacity costs of $9 million related to new purchased power contracts.
Gas Operations
The following table details the change in revenues from gas sales and gas
purchased for resale for the first six months of 2000, as compared to the same
period in 1999 (in thousands).
Increase (Decrease)
-------------------
Revenues from gas sales (including unbilled revenues) $(57,979)
Gas purchased for resale........................ (64,268)
-------
Net increase in gas sales margin.............. 6,289
Transportation revenues......................... 3,066
------
Increase in net gas margin.................... $9,355
======
The following table compares gas Dth deliveries by major customer classes
for the first six months of 2000 and 1999.
Millions of Dth Deliveries
2000 1999 % Change *
---- ---- ----------
Residential................................ 55.4 58.1 (4.7)%
Commercial................................. 25.2 27.4 (8.1)
----- -----
Total sales.............................. 80.6 83.5 (3.5)
Transportation............................. 65.4 59.6 9.7
----- -----
Total.................................... 146.0 145.1 0.6
===== ===== ===
Non-regulated gas marketing and trading.... 164.5 80.0 **
===== =====
* Percentages are calculated using unrounded amounts.
** Percentage change is significant, but presentation of the amount is not
meaningful.
Gas sales margin increased during the first six months of 2000, when
compared to the first six months of 1999, primarily due to higher base gas rates
effective July 1, 1999, resulting from PSCo's 1998 gas rate case and the
favorable impacts of customer growth of 3.7%. The increase in margin was offset,
in part, by warmer winter/spring weather during the first six months of 2000 as
it was approximately 6% warmer than the first six
43
<PAGE>
months of 1999. Although non-regulated gas marketing and trading sales increased
significantly, the margin on such sales decreased slightly when compared to
prior year.
Gas transportation revenues increased $3.1 million during the first six
months of 2000, compared to the first six months 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 six months of 2000, as compared to the first six months 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.
Other Operating Revenues and Equity in Earnings of Unconsolidated Subsidiaries
Other operating revenues increased approximately $8.5 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 $16.9 million over 1999
primarily due to a stronger performance in the supply business resulting from
lower electricity supply prices and lower operating cost due to an aggressive
cost reduction program, and a change in its accounting for depreciation,
effective January 1, 2000. NCI's equity earnings for the six months ended June
30, 2000, includes approximately $6.5 million (after-tax) related to the change
in accounting (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 was comparable with the
prior year. The Company experienced lower electric and gas distribution
maintenance expenses and lower steam generation maintenance expenses. The
decrease was offset by higher steam generation operation costs and higher
electric transmission costs.
Other operating and maintenance expense-non-regulated decreased $3.2
million during the first six months of 2000, as compared to the same period in
1999, primarily due to lower energy management and consulting services, offset,
in part, by increased costs in providing engineering, design and construction
management.
Depreciation and amortization increased $6.6 million during the first six
months of 2000, as compared to the second quarter 1999, primarily due to the
depreciation of property additions.
Taxes other than income taxes decreased approximately $8.1 million during
the first six months of 2000, as compared to the same period in 1999, primarily
due to lower business and utility property taxes in Colorado.
Income taxes increased approximately $27.9 million during the first six
months of 2000, as compared to the same period in 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 $9.9 million during the first six
months 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. In July 1999, PSCo issued $200 million
of 6 7/8% Series A Senior Notes, due in July 2009.
44
<PAGE>
Other Market Risks
NCE and its subsidiaries are exposed to market risks, including changes in
commodity prices, interest rates and currency exchange rates as fully disclosed
in the NCE, PSCo and SPS 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 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.
In connection with the deregulation of the electricity industry in the
states of Texas and New Mexico, SPS is in the process of refinancing its First
Mortgage Bonds. As a result, SPS will remain exposed to interest rate risk for
its generation business. SPS' fuel adjustment clauses are expected to remain in
effect through December 31, 2001, thereby limiting the short-term exposure to
commodity price risk.
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 second 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 -Six Months Ended June 30
2000 1999 Decrease
----- ---- --------
Net cash provided by operating
activities (in millions) ......... $248.4 $314.6 $(66.2)
Cash provided by operating activities decreased during the first six
months of 2000, when compared to the same period in 1999, primarily due to
NCE/NSP Merger costs and development costs of non-regulated business activities.
2000 1999 Decrease
---- ---- --------
Net cash used in investing
activities (in millions) ......... $(252.3) $(295.7) $43.4
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 Increase
---- ---- --------
Net cash used in financing
activities (in millions) ......... $ (43.8) $(3.4) $(40.4)
Cash used in financing activities increased during 2000, when compared to
1999, primarily due more long-term debt financing in 1999. During the second
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.
45
<PAGE>
Financing Activities
Long-Term Debt
During the first and second quarters of 2000, SPS repurchased in the open
market approximately $27 million and $58 million, respectively, of its First
Mortgage Bonds. On July 24, 2000, SPS announced the commencement of a tender
offer for all of its outstanding First Mortgage Bonds ($294.9 million).
Settlement of bonds tendered will occur no later than August 9, 2000. Any bonds
not tendered or otherwise acquired by SPS are expected to be defeased in
accordance with SPS' First Mortgage Indenture by the end of 2000 (see Note 4.
Regulatory Matters in Item 1. FINANCIAL STATEMENTS.)
During the first quarter of 1999, PSCo refinanced a portion of its
pollution control bonds in the amount of $48.75 million to take advantage of
lower interest rates. The interest rate on the new bonds is 5.1% compared to 5
7/8% on $21.5 million and 7 3/8% on $27.25 million. In addition, SPS issued $100
million of 6.2% unsecured senior notes due March 1, 2009. The proceeds were used
initially for the repayment of certain short-term debt, pending the retirement
of $90 million of the SPS 6 7/8% First Mortgage Bonds due December 1, 1999 and
for other general corporate purposes.
On June 29, 1999, PSCo filed a registration statement to issue up to $500
million of unsecured debt. On July 16, 1999, PSCo issued $200 million of
unsecured senior notes, at an interest rate of 6 7/8%, due July 15, 2009.
Proceeds were used for general corporate purposes including capital
expenditures, repayment of short-term debt and refunding of long-term debt on
maturity or otherwise.
Bank Lines of Credit
PSCo and its subsidiary, PSCCC, closed on a $600 million credit agreement
on July 20, 2000 which will be used primarily to support the issuance of
commercial paper by PSCo and PSCCC but also provides for direct borrowings
thereunder. This credit agreement which terminates on July 19, 2001 replaces
PSCo's existing $300 million 364 day facility which expired on July 23, 2000 and
PSCo and its subsidiaries $300 million multi-year facility which would have
terminated on November 17, 2000.
SPS closed a credit agreement on February 25, 2000. The commitment under
the credit agreement is $300 million and terminates on February 23, 2001 and
will be used primarily for commercial paper backup but also provides for direct
borrowings thereunder.
On July 20, 2000, SPS closed a $500 million credit agreement which
terminates on January 20, 2002. The funds from this credit agreement will be
used for general corporate purposes including commercial paper backup and costs
resulting from Texas and New Mexico deregulation legislation such as open market
purchases, tender offer and defeasance costs of SPS' outstanding First Mortgage
Bonds and other related restructuring costs. SPS is the initial borrower under
this credit agreement, however, at the time of separation of the generation
assets the obligations under this credit agreement will be assumed by a newly
formed generation company.
Electric Utility Industry Restructuring
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.
46
<PAGE>
Restructuring legislation was passed in Texas and New Mexico during 1999.
The PUCT issued a final order addressing SPS' implementation of electric utility
restructuring in Texas during the second quarter of 2000. SPS plans to pursue a
similar strategy to implement the restructuring legislation enacted in New
Mexico and believes that all of its generation business will ultimately be
deregulated. SPS discontinued the application SFAS 71 related to its generation
business during the second quarter of 2000, recording an extraordinary charge of
$13.7 million. See Note 1. Summary of Significant Accounting Policies and Note
4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS for additional discussion
related to this matter. The total impacts of deregulation may be affected by the
results of future state and Federal regulatory proceedings prior to actual
implementation of full competition, estimated to begin on January 1, 2002.
47
<PAGE>
PSCo's Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended June 30, 2000 Compared to the Three Months Ended June 30,
1999
Earnings Available for Common Stock
Earnings were $60.9 million for the second quarter of 2000, as compared to
$34.8 million for the second quarter of 1999, primarily due to favorable results
from the electric energy marketing and trading activities.
Electric Operations
The following table details the change in electric operating revenues and
energy costs for the three months ended June 30, 2000, as compared to the same
period in 1999 (in thousands).
Increase (Decrease)
-------------------
Electric operating revenues:
Retail....................................... $15,680
Wholesale.................................... 97,285
Other (including unbilled revenues).......... (37,425)
-------
Total revenues.............................. 75,540
Fuel used in generation....................... 15,025
Purchased power............................... 31,496
-------
Net increase in electric margin............. $29,019
=======
The following table compares electric Kwh sales by major customer classes
for the three months ended June 30, 2000 and 1999.
Millions of Kwh Sales
2000 1999 % Change *
---- ---- ----------
Residential ..................... 1,639 1,567 4.6%
Commercial and Industrial ....... 3,942 3,799 3.8
Public Authority ................ 61 60 2.2
------ ------
Total Retail................... 5,642 5,426 4.0
Wholesale ....................... 1,561 1,167 33.7
------ ------
Total............................ 7,203 6,593 9.3
====== ======
Power Marketing and Trading...... 1,773 1,793 1.1
====== ======
* Percentages are calculated using unrounded amounts.
Electric margin increased in the second quarter of 2000, when compared to
the second quarter of 1999, primarily due to the favorable results from the
energy marketing and trading business, which contributed an additional $18.6
million to electric margin. The increase resulted from the Company's ability to
market excess system power in the western U.S. at prices substantially higher
than normal. The future performance of the wholesale energy marketing and
trading business is dependent upon several factors including, market conditions,
plant operational performance, availability of electric energy, implementation
of deregulation and other factors. In addition, higher retail sales of 4.0%
resulting primarily from customer growth of approximately 2.8% served to
increase margin. Increased fuel and purchased power cost to serve customer load
growth have resulted in higher cost sharing under the ICA. 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 $5.9 million and $2.8 million
in the second quarter of 2000 and 1999, respectively (see Note 4. Regulatory
Matters in Item 1. FINANCIAL STATEMENTS).
48
<PAGE>
Fuel used in generation expense increased approximately $15.0 million or
27.4% during the second quarter of 2000, as compared to the same quarter in
1999, primarily due to increased generation levels and higher gas costs for
generation at Fort St. Vrain.
Purchased power expense increased $31.5 million or 28.1% during the second
quarter of 2000, as compared to the same quarter in 1999, primarily due to
increased costs related to wholesale energy marketing activities and purchased
power capacity and energy costs, including option premium charges for stand-by
capacity to serve retail customers.
Gas Operations
The following table details the change in revenues from gas sales and gas
purchased for resale for the second quarter of 2000, as compared to the same
period in 1999 (in thousands).
Increase (Decrease)
------------------
Revenues from gas sales (including unbilled
revenues of $8.6 million) ..................... $ (4,102)
Gas purchased for resale........................ (3,079)
------
Net decrease in gas sales margin.............. (1,023)
Transportation revenues......................... 2,068
------
Increase in net gas margin.................... $1,045
======
The following table compares gas Dth deliveries by major customer classes
for the second quarter of 2000 and 1999.
Millions of Dth Deliveries
2000 1999 % Change *
---- ---- ----------
Residential................... 16.8 19.0 (11.7)%
Commercial.................... 7.6 8.8 (13.0)
------- --------
Total sales................. 24.4 27.8 (12.1)
Transportation................ 27.2 23.6 15.1
------- --------
Total....................... 51.6 51.4 0.4
======= ========
* Percentages are calculated using unrounded amounts
Gas sales margin (excluding transportation) decreased during the second
quarter of 2000, when compared to the second quarter of 1999, primarily due to
warmer spring weather during the second quarter of 2000 as it was approximately
32% warmer than the second quarter of 1999. The decrease in margin was offset,
in part, by the higher base gas rates effective July 1, 1999, resulting from
PSCo's 1998 gas rate case and the favorable impacts of customer growth of 3.8%.
Gas transportation revenues increased $2.1 million during the second
quarter of 2000, compared to the second 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
second quarter of 2000, as compared to the second 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.
49
<PAGE>
Non-Fuel Operating Expenses and Other Income and Deductions
Other operating and maintenance expenses decreased approximately $8.7
million primarily due to lower gas distribution operation costs, lower steam
generation maintenance and lower electric distribution maintenance costs.
Taxes other than income taxes decreased approximately $3.1 million during
the second quarter of 2000, as compared to the second quarter of 1999, primarily
due to lower business and utility property taxes in Colorado.
Income taxes increased approximately $14.9 million during the second
quarter of 2000, as compared to the second quarter of 1999, due to higher pretax
income in the current period.
Other income and deductions-net increased $3.5 million during the second
quarter of 2000, as compared to the second quarter of 1999, primarily due to
increased profits in non-utility activities.
Interest charges increased approximately $1.7 million during the second
quarter of 2000, as compared to the second 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.
Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999
Earnings Available for Common Stock
Earnings were $129.7 million for the second quarter of 2000, as compared
to $100.8 million for the second quarter of 1999, primarily due to the strong
performance and contributions from the electric energy marketing and trading
business.
Electric Operations
The following table details the change in electric operating revenues and
energy costs for the six months ended June 30, 2000, as compared to the same
period in 1999 (in thousands).
Increase (Decrease)
-------------------
Electric operating revenues:
Retail....................................... $17,820
Wholesale.................................... 113,397
Other (including unbilled revenues).......... (30,904)
-------
Total revenues.............................. 100,313
Fuel used in generation....................... 19,362
Purchased power............................... 50,425
-------
Net increase in electric margin............. $30,526
=======
50
<PAGE>
The following table compares electric Kwh sales by major customer classes for
the six months ended June 30, 2000 and 1999.
Millions of Kwh Sales
2000 1999 % Change *
---- ---- ----------
Residential ..................... 3,584 3,499 2.5%
Commercial and Industrial ....... 7,903 7,720 2.4
Public Authority ................ 124 108 14.7
------ ------
Total Retail................... 11,611 11,327 2.5
Wholesale ....................... 3,649 3,019 20.9
------ ------
Total............................ 15,260 14,346 6.4
====== ======
Power Marketing and Trading...... 8,403 2,196 **
====== ======
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful.
Electric margin increased in the first six months of 2000, when compared
to the same period of 1999, primarily due to the favorable results from the
wholesale energy marketing and trading business, which contributed an additional
$19.3 million to electric margin. The increase resulted from the Company's
ability to market excess system power in the western U.S. at prices
substantially higher than normal. The future results of the Company's wholesale
marketing and trading business maybe impacted by market conditions and other
factors. In addition, margin increased due to higher retail sales of 2.5%
resulting primarily from customer growth of approximately 2.7%. Increased fuel
and purchased power costs have resulted in higher cost sharing under the ICA.
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 $8.4
million and $6.6 million in the second quarter of 2000 and 1999, respectively
(see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS).
Fuel used in generation expense increased approximately $19.4 million or
18.1% during the first six months of 2000, as compared to the same period in
1999, primarily due to increased generation levels to serve native retail load
and market wholesale power within and outside PSCo's service territory.
Purchased power expense increased $50.4 million or 22.3% during the first
six months of 2000, as compared to the same period in 1999, primarily due to
increased costs related to wholesale energy marketing activities and increased
purchased power capacity and energy costs, including option premium charges for
stand-by capacity to serve retail customers.
Gas Operations
The following table details the change in revenues from gas sales and gas
purchased for resale for the first six months of 2000, as compared to the same
period in 1999 (in thousands).
Increase
--------
Revenues from gas sales (including unbilled
revenues of $6.8 million) ..................... $10,758
Gas purchased for resale........................ 429
------
Net increase in gas sales margin.............. 10,329
Transportation revenues......................... 3,758
------
Increase in net gas margin.................... $14,087
=======
51
<PAGE>
The following table compares gas Dth deliveries by major customer classes
for the first six months of 2000 and 1999.
Millions of Dth Deliveries
2000 1999 % Change *
---- ---- ----------
Residential................... 53.8 56.8 (5.3)%
Commercial.................... 23.8 25.9 (8.1)
------- --------
Total sales................. 77.6 82.7 (6.2)
Transportation................ 56.0 50.1 11.6
------- --------
Total....................... 133.6 132.8 0.5
======= ========
* Percentages are calculated using unrounded amounts
Gas sales margin increased during the first six months of 2000, when
compared to the first six months of 1999, primarily due to higher base gas rates
effective July 1, 1999, resulting from PSCo's 1998 gas rate case and the
favorable impacts of customer growth of 3.7%. The increase in margin was offset,
in part, by the lower sales resulting from the warmer winter/spring weather
during the first six months of 2000 (approximately 6%), compared to the first
six months of 1999.
Gas transportation revenues increased $3.8 million during the first six
months of 2000, compared to the first six months 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 six months of 2000, as compared to the first six months 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 decreased approximately $5.6
million primarily due to lower electric and gas distribution maintenance expense
and lower steam generation maintenance expense.
Taxes other than income taxes decreased approximately $5.3 million during
the first six months of 2000, as compared to the same period in 1999, primarily
due to lower business and utility property taxes in Colorado.
Income taxes increased approximately $21.5 million during the first six
months of 2000, as compared to the same period in 1999, due to higher pretax
income in the current period and the favorable impact of deducting certain prior
year severance costs in 1999.
Other income and deductions-net increased $4.6 million during the first
six months of 2000, as compared to the same period in 1999, primarily due to
increased profits in non-utility operations and a gain from the sale of a
subsidiary's investment.
Interest charges increased approximately $5.5 million during the first six
months 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. In July 1999, PSCo issued $200 million
of 6 7/8% Series A Senior Notes, due in July 2009.
52
<PAGE>
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.
53
<PAGE>
SPS's Management's Discussion and Analysis of Financial Condition and Results of
Operations
Three Months Ended June 30, 2000 Compared to the Three Months Ended June 30,
1999
Earnings Available for Common Stock
Earnings available for common stock were $15.0 million during the second
quarter of 2000 compared to $22.8 million for the same quarter in 1999. Earnings
decreased primarily due to the extraordinary charge of $13.7 million
(after-tax). During the second quarter of 2000, SPS discontinued the application
of regulatory accounting under SFAS 71 for the generation portion of its
business, and recognized a $13.7 million extraordinary charge, net of tax. The
charge was recorded following a PUCT rate order addressing the implementation of
electric utility restructuring for SPS. See Note 1. Summary of Significant
Accounting Policies and Note 4. Regulatory Matters in Item 1. FINANCIAL
STATEMENTS.
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 second quarter of 2000, as compared
to the same period in 1999 (in thousands).
Increase (Decrease)
-------------------
Electric operating revenues:
Retail.............................. $29,019
Wholesale........................... 28,534
Other (including unbilled revenues). (25,024)
-------
Total revenues.................... 32,529
Fuel used in generation.............. (81)
Purchased power...................... 17,175
-------
Net increase in electric margin... $15,435
=======
The following table compares electric Kwh sales by major customer classes
for the second quarter of 2000 and 1999.
Millions of Kwh Sales
2000 1999 % Change*
----- ---- ---------
Residential ............ 672 629 6.8%
Commercial and Industrial 2,860 2,723 5.0
Public Authority ....... 134 141 (5.0)
----- -----
Total Retail.......... 3,666 3,493 5.0
Wholesale............... 2,480 1,986 24.9
----- -----
Total................... 6,146 5,479 12.2
===== =====
* Percentages are calculated using unrounded amounts.
Electric operating revenues increased $32.5 million or 14.5% during the
second quarter in 2000, when compared to the same period in 1999 primarily due
to weather. Mild, wet weather in the second quarter of 1999, reduced loads for
air conditioning and irrigation. Weather in the second quarter 2000 was closer
to normal. In addition, customer growth of 1.8% favorably impacted margin.
Purchased power increased $17.2 million during the second quarter of 2000,
when compared to the same period in 1999, due to an increase in capacity costs
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
54
<PAGE>
and sells non-firm energy as the market demands. Similarly, SPS will purchase
non-firm energy when available and as needed to meet customer requirements.
SPS has fuel cost adjustment mechanisms which recognize the majority of
the effects of changes in fuel used in generation and purchased power costs and
allow recovery of such costs on a timely basis. As a result, the changes in
revenues associated with these mechanisms during the second quarter of 2000,
when compared to the second 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 $7.1 million or 21.1%
during the second quarter of 2000, as compared to the same period in 1999,
primarily due increases in customer expenses and transmission operations.
Income taxes increased $3.0 million during the second quarter of 2000, as
compared to the same period in 1999, primarily due to the effect of higher
pre-tax income (before extraordinary item). The effective income tax rates for
the quarter ended June 30, 2000 and 1999 were 36.6% and 37.1%, respectively.
Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999
Earnings Available for Common Stock
Earnings available for common stock were $33.2 million ($46.9 million
before the extraordinary item) during the second quarter of 2000 compared to
$46.2 million for the same quarter in 1999. Earnings before the extraordinary
item increased only slightly as the favorable impacts of weather and customer
growth were substantially offset by higher operating and restructuring costs.
During the second quarter of 2000, SPS discontinued the application of
regulatory accounting under SFAS 71 for the generation portion of its business,
and recognized a $13.7 million extraordinary charge, net of tax. The charge was
recorded following a PUCT rate order addressing the implementation of electric
utility restructuring for SPS. See Note 1. Summary of Significant Accounting
Policies and Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS.
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 six months of 2000, as
compared to the same period in 1999 (in thousands).
Increase (Decrease)
-------------------
Electric operating revenues:
Retail.............................. $28,472
Wholesale........................... 39,892
Other (including unbilled revenues). (22,155)
-------
Total revenues.................... 46,209
Fuel used in generation.............. 4,559
Purchased power...................... 33,231
-------
Net increase in electric margin... $ 8,419
=======
55
<PAGE>
The following table compares electric Kwh sales by major customer classes
for the first six months of 2000 and 1999.
Millions of Kwh Sales
2000 1999 % Change*
---- ---- ---------
Residential ............ 1,418 1,346 5.3%
Commercial and Industrial 5,725 5,297 8.1
Public Authority ....... 274 274 -
----- -----
Total Retail.......... 7,417 6,917 7.2
Wholesale............... 4,209 3,319 26.8
----- -----
Total................... 11,626 10,236 13.6
====== ======
* Percentages are calculated using unrounded amounts.
Electric operating revenues increased $46.2 million or 10.8% during the
first six months in 2000, when compared to the same period in 1999 primarily due
to weather. Mild, wet weather in the first six months of 1999 reduced loads for
air conditioning and irrigation. Weather in the first six months of 2000 was
closer to normal. 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.
Purchased power increased $33.2 million during the first six months of
2000, when compared to the same period in 1999, due to an increase in capacity
costs 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 non-firm energy when available and as needed to
meet customer requirements.
SPS has fuel cost adjustment mechanisms which recognize the majority of
the effects of changes in fuel used in generation and purchased power costs and
allow recovery of such costs on a timely basis. As a result, the changes in
revenues associated with these mechanisms during the second quarter of 2000,
when compared to the second 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 $9.2 million or 13.6%
during the first six months 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.
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.
56
<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 60 herein.
12(b) Computation of Ratio of Consolidated Earnings to Consolidated Fixed
Charges for SPS is set forth at page 61 herein.
15(a) Letter from Arthur Andersen LLP regarding unaudited interim
information is set forth at page 62 herein for NCE.
15(b) Letter from Arthur Andersen LLP regarding unaudited interim
information is set forth at page 63 herein for PSCo.
15(c) Letter from Arthur Andersen LLP regarding unaudited interim
information is set forth at page 64 herein for SPS.
27(a) Financial Data Schedule for NCE as of June 30, 2000.
27(b) Financial Data Schedule for PSCo as of June 30, 2000.
27(c) Financial Data Schedule for SPS as of June 30, 2000.
99 Unaudited Pro Forma Combined Condensed Financial Information of
New Century Energies, Inc. and Northern States Power Company
(b) Reports on Form 8-K
The following reports on Form 8-K were filed since the beginning of the second
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.
- A combined report on Form 8-K dated May 30, 2000, was separately filed by NCE
and SPS on June 1, 2000. The items reported were Item 5. Other Events: On May
30, 2000, the PUCT issued a rate order which approved the Stipulation dated
April 18, 2000, that was entered into with the staff of the PUCT and other
significant parties. The Stipulation specifically addressed SPS' implementation
plans to meet the requirements of the Texas restructuring legislation enacted in
June 1999. 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 approximately 64-71% of the generation capacity owned by SPS and
its affiliates.
- A combined report on Form 8-K dated and filed on July 24, 2000, was separately
by NCE and SPS. The items reported were Item 5. Other Events: On July 24, 2000,
SPS announced the commencement of a fixed spread tender offer to purchase for
cash the remaining, approximately $295 million, principal amount of five series
of SPS First Mortgage Bonds.
57
<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 4th
day of August, 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 4th day of August, 2000.
PUBLIC SERVICE COMPANY OF COLORADO
By /s/R. C. Kelly
---------------------------------
R. C. Kelly
Executive Vice President,
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 4th day of August, 2000.
SOUTHWESTERN PUBLIC SERVICE COMPANY
By /s/R. C. Kelly
---------------------------------
R. C. Kelly
Executive Vice President
Chief Financial Officer and Treasurer
58
<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 60 herein.
12(b) Computation of Ratio of Consolidated Earnings to Consolidated Fixed
Charges for SPS is set forth at page 61 herein.
15(a) Letter from Arthur Andersen LLP regarding unaudited interim information is
set forth at page 62 herein for NCE.
15(b) Letter from Arthur Andersen LLP regarding unaudited interim information is
set forth at page 63 herein for PSCo.
15(c) Letter from Arthur Andersen LLP regarding unaudited interim information is
set forth at page 64 herein for SPS.
27(a) Financial Data Schedule for NCE as of June 30, 2000.
27(b) Financial Data Schedule for PSCo as of June 30, 2000.
27(c) Financial Data Schedule for SPS as of June 30, 2000.
99 Unaudited Pro Forma Combined Condensed Financial Information of New
Century Energies, Inc. and Northern States Power Company
* Previously filed as indicated and incorporated herein by reference.
59
<PAGE>
EXHIBIT 12(a)
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS
TO CONSOLIDATED FIXED CHARGES
(not covered by Report of Independent Public Accountants)
Six Months Ended
June 30,
2000 1999
---- ----
(Thousands of Dollars,
except ratios)
Fixed charges:
Interest on long-term debt........................... $62,870 $57,627
Interest on borrowings against corporate-owned
life insurance contracts........................... 31,835 28,268
Other interest....................................... 12,250 11,961
Amortization of debt discount and expense less premium 2,450 2,166
Interest component of rental expense................. 5,305 4,591
Dividends on PSCo obligated mandatorily redeemable
preferred securities.............................. 7,600 7,600
------ ------
Total.............................................. $122,310 $112,213
======== ========
Earnings (before fixed charges and taxes on income):
Net income........................................... $129,680 $100,759
Fixed charges as above............................... 122,310 112,212
Provisions for Federal and state taxes on income,
net of investment tax credit amortization............ 65,453 43,982
------ ------
Total.............................................. $317,443 $256,953
======== ========
Ratio of earnings to fixed charges...................... 2.60 2.29
==== ====
60
<PAGE>
EXHIBIT 12(b)
SOUTHWESTERN PUBLIC SERVICE COMPANY
COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES
(not covered by Report of Independent Public Accountants)
Six Months Ended
June 30,
2000 1999
---- ----
(Thousands of Dollars,
except ratios)
Fixed charges:
Interest on long-term debt........................... $19,797 $23,714
Other interest....................................... 8,235 2,549
Amortization of debt discount and expense less premium 1,019 1,121
Interest component of rental expense................. 367 382
Dividends on SPS obligated mandatorily redeemable
preferred securities.............................. 3,925 3,925
------ ------
Total.............................................. $33,343 $31,691
======= =======
Earnings (before fixed charges and taxes on income):
Net income........................................... $46,902 $46,226
Fixed charges as above............................... 33,343 31,691
Provisions for Federal and state taxes on income,
net of investment tax credit amortization............ 27,446 27,848
------ ------
Total.............................................. $107,691 $105,765
======== ========
Ratio of earnings to fixed charges...................... 3.23 3.34
==== ====
61
<PAGE>
EXHIBIT 15(a)
August 4, 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 June 30, 2000, which includes our report dated August
4, 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
62
<PAGE>
EXHIBIT 15(b)
August 4, 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 June 30, 2000, which
includes our report dated August 4, 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
63
<PAGE>
EXHIBIT 15(c)
August 4, 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 June 30, 2000, which includes
our report dated August 4, 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
64
<PAGE>
EXHIBIT 99
UNAUDITED PROFORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed balance sheet at June
30, 2000 gives effect to the NCE/NSP Merger as if it had occurred at June 30,
2000. The unaudited pro forma combined condensed statements of income for each
of the periods ended June 30, 2000 give effect to the NCE/NSP Merger as if it
had occurred on January 1, 1999. These statements are prepared on the basis of
accounting as required under a pooling of interests and do not reflect any cost
savings anticipated by management as a result of the NCE/NSP Merger.
Accordingly, the pro forma information is not necessarily indicative of the
financial position or results of operations that would have occurred had the
NCE/NSP Merger been consummated for the periods for which it is given effect,
nor is it necessarily indicative of future operating results or financial
condition.
65
<PAGE>
Unaudited Pro Forma Combined Condensed Statement of Income
Reflecting Completion of the NCE/NSP Merger
Six Months Ended June 30, 2000
(Thousands of Dollars, Except per Share Data)
<TABLE>
<CAPTION>
Northern New Century Reporting
States Power Energies Adjustments Pro Forma Pro Forma
(as Reported) (as Reported) (Note 2) Adjustments Combined
------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues:
Electric....................... $1,169,052 $1,348,226 $ 1 $ $2,517,279
Gas............................ 303,004 423,394 (8,038) 718,360
Nonregulated and other revenues - 43,902 858,732 902,634
Earnings from equity investments - - 70,089 70,089
------ ------- ------- ------- ----------
Total operating revenues 1,472,056 1,815,522 920,784 4,208,362
Operating expenses:
Electric fuel and purchased power 367,684 653,095 - 1,020,779
Cost of gas sold and transported 189,631 269,313 (9,330) 449,614
Other operation and maintenance 412,784 266,865 - 679,649
Depreciation and amortization 183,700 145,995 (4,099) 325,596
Taxes other than income taxes 113,700 67,013 (845) 179,868
Income taxes - utility......... 47,631 - (47,631) -
Nonregulated operating expenses - 45,839 707,151 752,990
------ ------- ------- -------- ---------
Total operating expenses..... 1,315,130 1,448,120 645,246 3,408,496
Operating income.................. 156,926 367,402 275,538 799,866
Other income (expense):
Income from nonregulated
businesses before
interest and taxes............ 186,260 - (185,517) 743
Equity earnings from unconsolidated
subsidiaries.................. - 32,640 (32,640) -
Other income (deductions) - net (6,600) 1,428 (9,750) (14,922)
Income taxes on nonregulated
and nonoperating
items - benefit............... (11,272) - 11,272 -
------- ------ ------- ------- ------
Total other income (expense). 168,388 34,068 (216,635) (14,179)
Financing costs:
Interest charges............... 207,276 103,960 - 311,236
Distributions on mandatorily
redeemable preferred securities
of subsidiary trusts.......... 7,875 11,525 - 19,400
----- ------ ------ ------- ------
Total financing costs........ 215,151 115,485 - 330,636
Income before income taxes and
extraordinary item............... 110,163 285,985 58,903 455,051
Income taxes...................... - 86,076 58,903 144,979
Income before Extraordinary item 110,163 199,909 - 310,072
Extraordinary item................ - (13,658) - (13,658)
------- ------- ------- ------- -------
Net income........................ 110,163 186,251 - 296,414
Preferred dividends & redemption
premiums of NSP.................. 2,121 - - 2,121
------ ------ ------- ------- -----
Earnings available for common
shareholders..................... $108,042 $186,251 $ - $ - $ 294,293
======== ======== ====== ======= ==========
Average common shares outstanding
(Note 1)......................... 156,305 116,360 63,998 336,663
Average common and potentially
diluted shares outstanding (Note 1) 156,352 116,398 64,019 336,769
Basic and diluted earnings per share:
Income before extraordinary item $0.69 $1.72 $0.91
Extraordinary item............. - (0.12) (0.04)
----- ----- -----
Earnings available for common
shareholders.................. $0.69 $1.60 $0.87
===== ===== =====
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed
Financial Statements.
66
<PAGE>
Unaudited Pro Forma Combined Condensed Statement of Income
Reflecting Completion of the NCE/NSP Merger
Six Months ended June 30, 1999
(Thousands of Dollars, Except per Share Data)
<TABLE>
<CAPTION>
Northern New Century Reporting
States Power Energies Adjustments Pro Forma Pro Forma
(as Reported) (as Reported) (Note 2) Adjustments Combined
------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues:
Electric....................... $1,145,642 $1,201,808 $ (224) $ $2,347,226
Gas............................ 256,916 478,307 (74,793) 660,430
Nonregulated and other revenues - 35,414 214,743 250,157
Earnings from equity investments - - 27,336 27,336
------ ------- ------- ------
Total operating revenues..... 1,402,558 1,715,529 167,062 3,285,149
Operating expenses:
Electric fuel and purchased power 356,586 544,585 - 901,171
Cost of gas sold and transported 147,300 333,581 (64,657) 416,224
Other operation and maintenance 400,681 266,466 - 667,147
Depreciation and amortization 175,580 139,397 (4,434) 310,543
Taxes other than income taxes 114,993 75,097 (1,157) 188,933
Income taxes - utility......... 53,859 - (53,859) -
Nonregulated operating expenses - 48,991 234,820 283,811
------ ------- ------- ------- ---------
Total operating expenses..... 1,248,999 1,408,117 110,713 2,767,829
Operating income.................. 153,559 307,412 56,349 517,320
Other income (expense):
Income from nonregulated
businesses before
interest and taxes............ (7,213) - 7,213 -
Equity earnings from unconsolidated
subsidiaries.................. - 13,024 (13,024) -
Other income (deductions) - net (41,629) (6,151) 3,321 (44,459)
Income taxes on nonregulated and
nonoperating items - benefit.. 51,986 - (51,986) -
------ ------ ------- ------- ------
Total other income (expense). 3,144 6,873 (54,476) (44,459)
Financing costs:
Interest charges............... 85,017 94,076 - 179,093
Distributions on mandatorily
redeemable preferred securities
of subsidiary trusts.......... 7,874 11,525 - 19,400
Dividends & redemption premiums
on preferred stock of
subsidiaries.................. - - - -
------ ------ ------- ------- ------
Total financing costs........ 92,892 105,601 - 198,493
Income before income taxes........ 63,811 208,684 1,873 274,368
Income taxes...................... - 58,149 1,873 60,022
------ ------ ------- ------- ------
Net income........................ 63,811 150,535 - 214,346
Preferred dividends & redemption
premiums of NSP.................. 3,171 - - 3,171
------ ------ ------- ------- -------
Earnings available for common
shareholders..................... $60,640 $150,535 $ - $ - $ 211,175
======= ======== ====== ======= =========
Average common shares outstanding
(Note 1)......................... 152,704 114,881 63,185 330,770
Average common and potentially
diluted shares outstanding
(Note 1)......................... 152,834 114,916 63,204 330,954
Basic and diluted earnings per share $0.40 $1.31 $0.64
===== ===== =====
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed
Financial Statements.
67
<PAGE>
Unaudited Pro Forma Combined Condensed Balance Sheet
Reflecting Completion of the NCE/NSP Merger
June 30, 2000
(Thousands of Dollars)
<TABLE>
<CAPTION>
Northern New Century Reporting Pro Forma
States Power Energies Adjustments Adjustments Pro Forma
(as Reported) (as Reported) (Note 3) (Note 4) Combined
------------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Property, plant and equipment:
Electric.......................... $7,563,322 $7,695,165 $ (165,987) $ $15,092,500
Gas............................... 971,828 1,362,575 (21,013) 2,313,390
Other............................. 390,644 960,228 4,348,625 5,699,497
-------- ------- --------- ------- ---------
Total property, plant and equipment 8,925,794 10,017,968 4,161,625 23,105,387
Accumulated provision for depreciation (4,554,809) (3,687,879) (257,481) (8,500,169)
Nuclear fuel - net................ 97,314 - - 97,314
-------- ------ ------- ------- ------
Net property, plant and equipment 4,468,299 6,330,089 3,904,144 14,702,532
Current assets:
Cash and cash equivalents......... 120,470 36,109 - 156,579
Accounts receivable - net......... 523,252 368,398 - 891,650
Accrued unbilled utility revenues 109,183 254,090 - 363,273
Fuel and gas inventories.......... 49,343 58,895 - 108,238
Material and supplies inventories 313,883 73,191 - 387,074
Prepayments and other............. 169,729 145,858 - 315,587
-------- ------- ------- ------- -------
Total current assets............. 1,285,860 936,541 - 2,222,401
Other assets:
Equity investments................ 1,039,726 402,793 - 1,442,519
External decommissioning fund and
other investments................ 597,980 131,664 - 729,644
Regulatory assets................. 228,376 295,887 - 524,263
Non-regulated property - net...... 3,904,144 - (3,904,144) -
Other............................. 401,967 271,055 - (66,000) 607,022
------- ------- ------- ------- -------
Total other assets............... 6,172,193 1,101,399 (3,904,144) (66,000) 3,303,448
--------- --------- ---------- ------- ---------
Total assets......................... $11,926,352 $8,368,029 $ - $(66,000) $20,228,381
=========== ========== ======= ======== ===========
LIABILITIES AND EQUITY
Capitalization:
Common stock (Note 1)............. $393,217 $ 116,755 $ - $335,671 $ 845,643
Other stockholders' equity (Note 1) 2,367,682 2,672,793 - (401,671) 4,638,804
--------- --------- ------- -------- ---------
Total common stockholders equity 2,760,899 2,789,548 - (66,000) 5,484,447
Preferred stockholders' equity 105,340 - - 105,340
Mandatorily redeemable preferred
securities of subsidiary trusts.. 200,000 294,000 - 494,000
Long-term debt.................... 4,838,940 2,248,618 - 7,087,558
--------- --------- ------ ------- ----------
Total capitalization............. 7,905,179 5,332,166 - (66,000) 13,171,345
Current liabilities:
Current portion of long-term debt 381,128 176,634 - 557,762
Short-term debt................... 731,849 791,250 - 1,523,099
Accounts payable.................. 379,083 440,734 - 819,817
Taxes accrued..................... 168,203 50,812 - 219,015
Other accrued liabilities......... 293,108 331,279 - 624,387
-------- ------- ------- ------- ---------
Total current liabilities........ 1,953,371 1,790,709 - 3,744,080
Other liabilities:
Deferred income taxes............. 895,703 957,663 - 1,853,366
Deferred investment tax credits... 113,606 93,017 - 206,623
Regulatory liabilities............ 517,764 - - 517,764
Minority interest in NRG.......... 257,477 - - 257,477
Other............................. 283,252 194,474 - 477,726
-------- ------- ------- ------- --------
Total other liabilities.......... 2,067,802 1,245,154 - 3,312,956
--------- --------- ------- ------- ---------
Total liabilities and equity $11,926,352 $8,368,029 $ - $(66,000) $20,228,381
=========== ========== ======= ======== ===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed
Financial Statements.
68
<PAGE>
Notes to Unaudited Pro Forma Combined Condensed Financial Statements
1. The unaudited pro forma combined condensed financial statements reflect the
conversion of each share of NCE common stock, par value $1.00 per share, into
1.55 share of common stock of the combined company and the continuation of
each share of NSP common stock, par value $2.50 per share, as one share of
common stock of the combined company ($2.50 par value), as provided in the
NCE/NSP Merger Agreement. The unaudited pro forma combined condensed
financial statements are presented as if the companies were combined during
all periods included therein.
2. The unaudited pro forma combined condensed income statements reflect certain
reclassifications to conform the presentation of operating results. These
reporting adjustments include: (a) separate presentation of nonregulated
revenues and equity earnings in operating revenues; (b) separate presentation
of all nonregulated expenses, including project write-downs, in operating
expenses; (c) presentation of nonregulated interest and other income,
including gains for project sales, in other income (deductions) - net; and
(d) presentation of all income taxes (regulated and nonregulated) on a single
line before arriving at net income.
3. The unaudited pro forma combined condensed balance sheet at June 30, 2000
reflects reporting adjustments to conform the presentation of: (a)
investments and deferred charges (in other assets); (b) nonregulated property
(in property, plant and equipment); and (c) construction work in progress (in
other property, plant and equipment).
4. The allocation of the estimated costs savings resulting from the merger to
NCE, NSP and their customers, net of the costs incurred to achieve such
savings, will be subject to regulatory review and approval. At the time the
merger agreement was signed, cost savings resulting from the merger were
estimated to be approximately $1.1 billion over a ten-year period, net of
transaction costs (including fees for financial advisors, attorneys,
accountants, filings and printing) and net of costs to achieve the savings.
Nonrecurring costs directly attributable to the NCE/NSP Merger are being
deferred and total approximately $66 million as of June 30, 2000. 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
unaudited pro forma combined condensed statements of income do not reflect
any of these costs. The unaudited pro forma combined condensed balance sheet
has been adjusted to reflect a write-off of the deferred costs and a related
reduction of retained earnings.
5. Intercompany transactions (including purchased and exchanged power
transactions) between NCE and NSP during the periods presented were not
material and, accordingly, no pro forma adjustments were made to eliminate
such transactions.
69
