UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
X TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from September 1, 1996 to December 31, 1996
Commission file number 1-3789
SOUTHWESTERN PUBLIC SERVICE COMPANY
(Exact name of registrant as specified in its charter)
New Mexico 75-0575400
(State or other jurisdiction (I.R.S. Employer incorporation or
of organization) Identification No.)
Tyler at Sixth, Amarillo, Texas 79101
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code (806) 378-2121
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each Class on which registered
Common Stock New York, Chicago and Pacific
Common Stock Purchase Rights New York, Chicago and Pacific
7.85% Trust Preferred Securities, Series A New York
Securities Registered Pursuant to Section 12(g) of the Act:
Not Applicable
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
As of June 30, 1997, 40,917,908 shares of the Company'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 $1,608,585,000.
The definitive proxy statement relating to the Annual Meeting of
Stockholders held on January 8, 1997, is incorporated by reference in Item 10,
Item 11, Item 12 and Item 13 of Part III of this Form 10-K.
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
FORM 10-K
For the Transition Period Ended December 31, 1996
TABLE OF CONTENTS
Item Description Page
- ---- ----------- ----
PART I
1 Business
General ......................................................... 1
Construction Program ............................................ 3
Peak Load and Capability ........................................ 4
Interconnections ................................................ 5
Fuel Supply and Purchased Power ................................. 6
Regulation ...................................................... 8
Environmental Matters ........................................... 8
Employee Relations .............................................. 9
Nonutility Businesses ........................................... 9
Other ........................................................... 11
Statistical Summary ............................................. 11
Executive Officers of the Registrant ............................ 13
2 Properties
Electric Generating Stations .................................... 14
Water Supply .................................................... 15
3 Legal Proceedings .................................................. 15
4 Submission of Matters to a Vote of Security Holders ................ 15
PART II
5 Market for Registrant's Common Equity and Related Stockholder Matters 15
6 Selected Financial Data ............................................ 16
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 16
8 Financial Statements and Supplementary Data ........................ 21
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ......................................... 46
PART III
10 Directors and Executive Officers of the Registrant ................. 46
11 Executive Compensation ............................................. 48
12 Security Ownership of Certain Beneficial Owners and Management ..... 50
13 Certain Relationships and Related Transactions ..................... 52
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ... 52
Signatures ............................................................... 55
Exhibit 12. Statements re Computation of Ratio of Earnings ............... 56
Exhibit 99. Unaudited Pro Forma Information .............................. 57
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
DEFINITIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ARCO ........ Atlantic Richfield Company MWH ..... megawatt-hour
Articles .... the Company's Restated Articles
of Incorporation NCE ..... New Century Energies, Inc.
BCH ......... BCH Energy Limited Partnership NMPUC ... New Mexico Public Utility Commission
CAAA ........ Clean Air Act Amendments of 1990 NOI ..... Notice of Intent
CCN ......... Certificate of Convenience & Necessity NOPR .... notice of proposed rulemaking
CP&L ........ Carolina Power & Light Company NOX ..... oxides of nitrogen
CRMWA ....... Canadian River Municipal Water Authority OCC ..... Oklahoma Corporation Commission
Cap Rock .... Cap Rock Electric Cooperative, Inc. OPUC .... Office of Public Utilities Council
Carolina .... Carolina Energy Limited Partnership PNM ..... Public Service Company of New Mexico
Company ..... Southwestern Public Service Company PSCo .... Public Service Company of Colorado
EDE ......... Empire District Electric Company PSO ..... Public Service Company of Oklahoma
EPA ......... Environmental Protection Agency PUCT .... Public Utility Commission of Texas
EPACT ....... Energy Policy Act of 1992 PUHCA ... Public Utility Holding Company Act of 1935
EPE ......... El Paso Electric Company QF ...... qualifying facility
EWG ......... exempt wholesale generator QPS ..... Quixx Power Services, Inc., a wholly owned
FERC ........ Federal Energy Regulatory Commission subsidiary of Quixx
Golden Spread Golden Spread Electric Cooperative, Inc. Quixx ... Quixx Corporation and its subsidiaries
HSR Act ..... Hart-Scott-Rodino Antitrust Improvements Act of 1976 RECs .... rural electric cooperatives
HVDC ........ high voltage direct current RFP request for proposals
KCC ......... Kansas Corporation Commission SAGE .... S. A. Garza Engineers
kwh ......... kilowatt-hour SEC ..... Securities and Exchange Commission
LSP ......... LS Power, L.L.C. SO2 ..... sulfur dioxide
Merger ...... business combination between the Company SPP ..... Southwest Power Pool
and PSCo to form a registered public TNP ..... Texas-New Mexico Power Company
utility holding company Transition Period Four month period September 1, 1996
Mortgage .... Indenture of Mortgage and Deed of Trust, through December 31, 1996
dated August 1, 1946, as supplemented TUCO .... TUCO, INC.
and amended, of the Company UE ...... Utility Engineering Corporation and its
subsidiaries
MW .......... megawatts WSPP .... Western Systems Power Pool
</TABLE>
FORWARD LOOKING INFORMATION
Certain matters discussed in this 10-K are "forward-looking statements"
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as the Company "believes," "anticipates,"
"expects" or words of similar import. Similarly, statements that describe the
Company's future plans, objectives or goals are also forward-looking statements.
Such statements address future events and conditions concerning capital
expenditures, earnings, litigation, rate and other regulatory matters, the
pending Merger, liquidity and capital resources, and accounting matters. Actual
results in each case could differ materially from those currently anticipated in
such statements, by reason of factors such as electric utility restructuring,
including the ongoing state and federal activities; the timing and impact of the
Merger; future economic conditions; developments in the legislative, regulatory
and competitive markets in which the Company operates; and other circumstances
affecting anticipated revenues and costs.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
The Company
Southwestern Public Service Company was incorporated in New Mexico in 1921.
The Company's principal business is the generation, transmission, distribution
and sale of electric energy. Substantially all of its operating revenues were so
derived during the Transition Period and each of the fiscal years ended August
31, 1996, 1995 and 1994. The Company has two wholly owned subsidiaries, UE and
Quixx. See NONUTILITY BUSINESSES and Note (1) of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
On April 22, 1997, the Board of Directors of the Company approved a change
in the Company's fiscal year. Effective January 1, 1997, the Company's new
fiscal year will be the twelve-month period ending December 31. Previously, the
Company's fiscal year was a twelve-month period ending August 31. The four-month
transition period of September 1, 1996 through December 31, 1996 precedes the
start of the new fiscal year. References throughout this document to a fiscal
year are to the fiscal year ended August 31, unless otherwise stated.
Electric service is provided through an interconnected system to a
population of about one million in a 52,000-square-mile area of the Panhandle
and south plains of Texas, eastern and southeastern New Mexico, the Oklahoma
Panhandle and southwestern Kansas. The Company provides electric energy to
forty-eight communities with a population of 2,000 or more, thirty-seven in
Texas, nine in New Mexico, and one each in Oklahoma and Kansas. Approximately
54% of the Company's operating revenues, excluding sales to other utilities,
during the Transition Period and fiscal 1996 were derived from operations in
Texas.
The Company's sales are made to retail and wholesale customers. Retail
sales to ultimate consumers include residential, commercial and industrial
customers. Wholesale sales include sales for resale to RECs, and firm and
non-firm sales to other utilities. These non-firm, or economy, wholesale sales
to other utilities also include sales of interruptible power made under FERC
approved contracts. Firm sales are made under contract with other adjoining
utilities while non-firm sales are negotiated on the spot market or sold under
the WSPP agreement. See INTERCONNECTIONS. Non-firm sales are made to adjoining
and other utilities.
The production, transportation and processing of oil and natural gas, and
chemical, mineral and light manufacturing industries are of prime importance in
the area served. Agriculture and the processing of agricultural products,
including wheat, cotton, corn, sugar beets and vegetables, and livestock raising
and meat processing are industries of economic significance. The area also
contains many other diversified industries and commercial enterprises.
The Company's largest sales of electric energy are during the summer months
when demand reaches a peak. The Company's 1996 (including the Transition Period)
maximum hourly net peak system demand of 3,876 MW occurred on August 6, 1996.
The record net peak of 3,952 MW occurred on July 28, 1995. See PEAK LOAD AND
CAPABILITY.
The information set forth herein, unless otherwise indicated, does not take
into account changes that will result from the Merger.
The Merger
On August 22, 1995, the Company, PSCo, a Colorado corporation, and NCE, a
Delaware corporation, entered into a merger agreement which provided for a
"merger of equals" of the Company and PSCo. As part of the Merger process, NCE
will register as a public utility holding company under the PUHCA. NCE's
business will consist of utility operations and various non-utility enterprises.
NCE will become the parent company of both the Company and PSCo. The corporate
offices of NCE will be located in Denver, Colorado, with significant operating
offices being located in Amarillo, Texas. The Company will remain headquartered
in Amarillo, Texas.
On January 31, 1996, the shareholders of the Company and PSCo voted to
approve the Merger. See Note (2) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
The Merger is subject to various other closing conditions, including the receipt
of all necessary governmental approvals. All required state and federal
regulatory agency authorizations have been received, except for the approval by
the SEC. Application seeking the approval of the SEC for the Merger is pending.
Set forth below is a summary of the results of various regulatory approval
proceedings.
1
<PAGE>
PUCT. On February 19, 1997, the PUCT issued an order finding the Merger to
be in the public interest and approving a settlement agreement with respect to
the Merger with intervenors, including the PUCT staff. The settlement provided
for a finding of the Merger being consistent with the public interest and for a
regulatory plan which, as modified by the stipulation, generally provides for an
automatic annual credit for Texas ratepayers of 50% of the merger-related
operation and maintenance (O&M) expense savings with a guaranteed annual credit
of at least $3 million for the first five years after the Merger closes. The
Plan also allows for recovery of merger-related and business integration costs
over the same period. The PUCT order provides intervenors with 15 days from the
date of the last federal or state regulatory approval to seek to reopen the
proceeding in Texas if they can demonstrate that one or more of the orders
issued by other regulatory authorities materially and detrimentally denies the
Company's retail ratepayers the benefits of the PUCT order. Any additional
inquiry will be limited to the effect, if any, of the impact of the later
regulatory orders.
NMPUC. On February 7, 1997, the NMPUC issued an order approving the Merger.
The order provides for an automatic annual credit for 50% of the merger-related
operation and maintenance expense savings with a guaranteed annual credit for
New Mexico rate payers of at least $1.2 million for the first five years after
the Merger closes, and allows for recovery of merger-related and business
integration costs over the same period.
OCC. On September 23 1996, the OCC approved a rate agreement entered into
by the Company with the OCC staff and the Oklahoma Attorney General's office
providing for rate treatment similar to the Texas stipulation and providing
Oklahoma ratepayers with a guaranteed annual credit of at least $100,000 for the
first five years after the Merger closes.
KCC. The KCC issued its order on November 28, 1995, granting the Company
the authority to issue stock certificates to NCE and on December 3, 1996, the
KCC issued an order similar to the Texas stipulation, approving a rate agreement
which provides for a guaranteed annual credit for Kansas ratepayers of at least
$10,000 for the first five years after the Merger closes.
The future operations and financial position of the Company will be
significantly affected by the Merger. Unaudited pro forma combined financial
information for NCE at March 31, 1997 and December 31, 1996, and for the three
months ended March 31, 1997, and the twelve months ended December 31, 1996, is
included in this report as Exhibit 99. Unaudited Pro Forma Information.
Additional information may be found in Item 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and in Note (2) of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Competition
The EPACT significantly changed the U.S. energy policy and, together with
other changes in regulation, including integrated resource planning, and
developing technology, is effecting substantial changes to the electric utility
industry. As permitted by the EPACT, the Company is providing wholesale
transmission service to others. However, the EPACT specifically prohibits FERC
mandating transmission service to retail customers.
The EPACT has stimulated competition in the wholesale electric markets by
creating a new class of independent power producers in addition to QFs.
Revisions to the PUHCA have allowed both utilities and non-utilities to form
independent power production companies called EWGs, which operate without the
restrictions of the PUHCA. EWGs offer alternative sources of power supply to
electric utilities across the country. Utilities are often required by state
regulation to solicit to purchase power from EWGs, QFs and other utilities
before seeking approval to construct new generation of their own. See
CONSTRUCTION PROGRAM.
Operating in this competitive environment will place pressure on utility
profit margins and credit quality. However, since the Company is a low-cost
producer, competition for wholesale markets and large industrial customers will
create opportunities for the Company to compete for new customers and revenues.
Increasing competition has recently resulted in credit rating agencies applying
more stringent guidelines when making utility credit rating determinations.
On May 31, 1995, the Company filed with the FERC comparable open access
transmission service tariffs to provide other utilities use of the Company's
transmission system for wholesale sales. On August 1, 1995, the FERC accepted
the proposed tariffs for filing, subject to hearing and refund. On December 8,
1995, the Company filed a settlement agreement covering rates for transmission
services. The settlement is pending before the FERC. On April 24, 1996, the FERC
issued its Order No. 888 establishing industry-wide regulations promoting
wholesale competition through open access non-discriminatory transmission
services by public utilities and recovery of the related stranded costs. On the
same day, FERC also issued its Order No. 889 implementing regulations on
standards of conduct and information availability on transmission capacity,
prices, and other information that will enable power competitors to obtain open
access non-discriminatory transmission service. On July 9, 1996, the Company
filed its open access transmission tariff in compliance with Order No. 888. This
transmission tariff is in effect subject to refund and final approval of the
FERC. In January 1997,
2
<PAGE>
the Company implemented its standards of conduct and its computerized open
access same-time information system. The recent FERC requirements will greatly
increase wholesale power competition in regional markets.
On May 31, 1995, the Company also filed with the FERC a tariff to allow the
Company to sell wholesale power at market based rates. On September 1, 1995, the
FERC accepted the Company's market based power sales tariff, subject to refund
and the final resolution of the Company's comparable open access transmission
tariff filing of May 31, 1995. FERC also stated that the Company cannot use the
tariff for sales of power to affiliates.
State regulatory authorities are in the process of changing utility
regulations in response to federal and state statutory changes and evolving
competitive markets. Texas legislation enacted in 1995 recognizes the movement
to a more competitive market-place by requiring the PUCT to issue new
regulations relating to, among other things, allowance of less than fully costed
rates in wholesale and retail markets; recognition of and essentially waiving
all Texas utility regulation of EWGs and power marketers; and implementation of
transmission access comparable to the owning utility's use of its transmission
system for non-FERC regulated utilities (the Company is a FERC regulated
utility). These new regulations are under consideration. The Company believes
that these statutory and conforming regulations may result in increased
wholesale competition. While increased wholesale competition is not expected to
adversely affect the Company in the near term, due to the Company's low cost
structure, and may favorably impact it in the long term, the Company is unable
to predict what financial impact or effect the adoption of any such legislation
would have on its operations.
All of the Company's regulatory jurisdictions continue to evaluate utility
regulations with respect to retail competition ("retail wheeling"). The New
Mexico legislature in 1996 and 1997, rejected retail wheeling proposals;
however, it continues post-session committee investigation of the matter. Texas
introduced legislative proposals relating to retail wheeling in the 1997
session; however, the Texas legislature adjourned without adopting any
legislation on this issue. Although the Company believes it is well positioned
to take advantage of the movement towards deregulation and competition, the
Company is unable to predict what financial impact or effect the adoption of
these proposals would have on its operations. The Company's electric rates are
among the lowest in the nation for investor-owned utilities, and its service
territory is situated at the intersection of the nation's three electrical
grids. These low rates permit the Company to compete effectively with other
utilities, EWGs and QFs for sales to retail and wholesale customers within and
outside the Company's traditional service territory, as well as retain and
develop new retail load.
In the current regulatory and competitive environments, the Company
believes that all of its costs are recoverable through rates. Based on the
Company's cost structure and the potential competitive market, the Company
believes, but can give no assurance, that it does not have significant stranded
cost exposure. See also Notes (1) and (8) of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
CONSTRUCTION PROGRAM
Capital expenditures for the Company's construction program were $66.0
million for the Transition Period and $112.0 million in fiscal 1996. The
following general discussion of the Company's construction program and related
expenditures are for a stand-alone company; that is, without consideration to
the proposed Merger. On that basis, the Company's estimated construction
expenditures for the next three calendar years are as follows:
Estimated for years ending December 31,
1997 1998 1999 Total
---- ---- ---- -----
(In Millions)
Generating facilities ........ $ 57 $ 30 $ 33 $120
Transmission facilities ...... 25 24 28 77
Distribution facilities ...... 27 32 33 92
Other ........................ 11 13 14 38
-- -- -- --
Total cash requirements .... $120 $ 99 $108 $327
==== ==== ==== ====
The costs in 1997 for generating facilities include two 104 MW natural
gas-fueled combustion turbines at Cunningham Station near Hobbs, New Mexico, to
be used for peaking service.
Estimated annual construction expenditures are significantly lower than
previously reported in the August 31, 1996 Form 10-K as several projects are no
longer expected to be undertaken by the Company. A 200 MW cogeneration project
planned for the Phillips Petroleum Refinery originally included in the estimated
1998 expenditures will now be owned and constructed by the Company's
wholly-owned subsidiary, Quixx, and an unaffiliated power producer. Also, three
gas-fueled combustion turbines, which were originally included in the 1998
estimated expenditures for approximately $100 million, have been removed because
of the lower load forecasts resulting from the anticipated construction of the
Golden Spread project, Mustang Station, by Quixx and an unaffiliated independent
3
<PAGE>
power producer. The Company has agreed to provide back-up, and commitment and
dispatch services for this facility should the project be approved. See
NONUTILITY BUSINESSES-QUIXX.
The estimates for transmission facilities in the years 1998 and 1999
include $18 million for a transmission line that will extend from the area of
Amarillo, Texas to Clovis, New Mexico. This line will improve the reliability of
the Company's system.
These estimated expenditures have been prepared for planning purposes as
part of the Company's resource planning process (discussed below), and are
subject to review and revision. Actual expenditures will vary from these
estimates, as they have in the past, due to a number of factors, including
regulatory requirements related to the planning and siting of facilities,
changes in the rate of inflation, construction scheduling, environmental
matters, the cost and availability of funds, the rate of kwh sales growth and
other changes in business conditions, regulation and legislation. See GENERAL-
Competition. The Merger will significantly impact these estimates.
The Company's resource planning process is designed to determine the
optimal mix of resources that will reliably meet its load and reserve
requirements at the least possible cost, while providing flexibility to respond
to uncertainty in the forecasts of load, fuel prices, and financial and other
conditions. The Company typically considers its load forecast, demand-side
management programs, SPP reserve requirements, and new generating unit
alternatives, and after consideration of these and any other relevant factors,
arrives at a resource plan which balances cost and reliable system operations.
See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-Liquidity and Capital Resources for information on the Company's
estimated capital expenditures and financing program. Also see NONUTILITY
BUSINESSES-QUIXX for information on Quixx's investment expenditures.
PEAK LOAD AND CAPABILITY
Plant capability, peak load, capacity margin and load factor for the last
three fiscal years are shown in the table below. As the peak occurs during the
summer months and four month information is not comparable, Transition Period
information is not presented.
Net
---------------------------------------------------------------
Fiscal Capability Peak Load Increase (Decrease) Capacity Load
Year (MW) (MW) Over Prior Year Margin Factor
- ---- ---- ---- --------------- ------ ------
1996 ........ 4,235* 3,876 (1.9)% 8.5% 62.9%
1995 ........ 4,135 3,952** 7.3 4.4 58.4
1994 ........ 4,062 3,682 9.3 9.4 61.7
*Includes 100 MW firm purchase from WestPlains Energy.
**This is an all-time high peak.
As a member of the SPP, the Company's goal is to maintain at least a net
capacity margin of 13%. Through the expansion of an existing interruptible
program for wholesale load, new interruptible programs for retail irrigation and
industrial loads, purchased power, and additional capacity installations on the
system, the Company expects to be within the SPP guideline after 1998. See
CONSTRUCTION PROGRAM.
For the calendar years 1997 through 2001, the Company estimated that its
compound annual growth rate would be approximately 2.4% for retail sales. If the
Golden Spread project delivers energy, as projected in the Company's December
1996 forecast, full requirements wholesale sales would decrease by approximately
11%. However, the overall growth for other wholesale sales would have an
expected annual growth rate of 2.8%. This results in a decrease for total sales
of about one-half of one percent over the same period. The construction of the
Golden Spread project, as discussed below, will have certain effects on
wholesale sales to Golden Spread in future periods. The Company periodically
reviews expected growth patterns in its service area and these growth rate
estimates are subject to change. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
4
<PAGE>
INTERCONNECTIONS
The Company is connected with utilities west of its service territory
through two HVDC interconnections in New Mexico and has four interconnecting
transmission lines with utilities of the SPP. These interconnections are
described in the following table:
<TABLE>
<CAPTION>
Voltage (kilovolts)
The Other In-Service
Location Interconnecting Utility Company Utility Date
-------- ----------------------- ------- ------- ----
<S> <C> <C> <C> <C>
Near Artesia, NM El Paso Electric Company and
Texas-New Mexico Power Company 230* 345 9/84
Near Clovis, NM Public Service Company of New Mexico 230* 345 1/85
Near Oklaunion,TX Public Service Company of Oklahoma 345 345 6/85
Near Elk City, OK Public Service Company of Oklahoma 230 230 5/72
Near Shamrock, TX West Texas Utilities 115 115 7/72
Near Guymon, OK WestPlains Energy 115 115 3/63
</TABLE>
*These are HVDC interconnections owned by the interconnecting utilities.
The Company has scheduling capabilities over these facilities through the
WSPP agreement and pursuant to the agreements with the interconnecting
utilities described below.
Transactions with the SPP are handled through interties near Elk City and
Guymon, Oklahoma, and Shamrock and Oklaunion, Texas. These interties allow the
Company to sell or to purchase energy from the eastern electrical grid. Sales
through eastern interties accounted for approximately 1.0% of calendar 1996
total sales.
HVDC interconnections link the Company with the western electrical grid of
the United States. The Company purchases and sells energy through HVDC interties
near Artesia and Clovis, New Mexico. Sales through these interties accounted for
4.1% of calendar 1996 total sales.
The Company is a participant in the FERC approved WSPP bulk power market.
This arrangement provides for short-term energy and capacity exchanges,
transmission services, flexible pricing, and electronic bulletin board postings
of available power and energy. The WSPP encompasses a wide portion of Canada and
the United States with over 90 members from northwestern Canada to Mississippi.
In calendar 1996, less than 1.0% of total sales were due to WSPP bulk power
sales.
Under an agreement which expired in December 1996, the Company increased
sales to EPE through the HVDC interconnection in Eddy County, New Mexico, from
50 MW in 1995 to 75 MW in 1996. Additional firm power sales through this HVDC
connection to TNP are made under an agreement with an initial term that expires
in 2004. In accordance with this contract, TNP may increase or decrease the
contract amount by up to 10% with one year's notice. TNP purchased 59 MW in
calendar 1996 and plans to reduce the amount to 53 MW in calendar 1997.
The Company has an interconnection agreement with PNM to sell power through
the HVDC interconnection near Clovis, New Mexico. Under this agreement PNM
purchased 100 MW of interruptible power service through April 1995. Beginning in
May 1995, PNM began purchasing 200 MW. The agreement provides that PNM may
continue purchasing 200 MW annually through May 2011 except that it may reduce
purchases in 25 MW increments upon written notice given at least three years in
advance of each incremental reduction. However, the purchase may not be reduced
by more than one 25 MW increment in any twelve-month period. PNM has provided
written notice of intent to reduce its purchases each year under this agreement,
beginning in 1999 with a 25 MW reduction.
Under a firm wholesale power agreement which expires in 2014, the Company
has contracted to serve the West Texas requirements load of Cap Rock. Cap Rock
purchased 100 MW of service in 1996 and sales to it are forecasted to increase
approximately 3% annually in 1997 and beyond.
The Company currently supplies power to Golden Spread under a full
requirements contract approved by the FERC. As discussed under CONSTRUCTION
PROGRAM, Golden Spread has announced its intention to construct generation and
Quixx and an unaffiliated third party have entered preliminary arrangements with
Golden Spread under which a 488 MW power plant would be constructed with
approximately 273 MW being completed in 1998 and 215 MW in 1999. The amount of
power purchased by Golden Spread from the Company would be reduced
correspondingly upon such capacity being placed in service. Recently, the
Company has been informed that the Golden Spread project is expected to be
delayed one year.
The Company entered into an agreement with EDE to sell interruptible
wholesale power through the interconnections near Elk City, Oklahoma and
Oklaunion, Texas. Under this agreement, which expires in 2001, EDE purchased 35
MW in 1996 with such purchases to increase to 45 MW by 1999. PSO provides
transmission service for this power.
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<PAGE>
The Company entered into an agreement with WestPlains Energy to purchase
100 MW of firm power for the summer months of 1996 and 1997.
Interconnection sales for calendar 1996 to the eastern electrical grid
totaled 171,690 MWH, including 117,875 MWH of WSPP sales. Sales to the western
electrical grid totaled 869,095 MWH, consisting of 262,195 MWH of firm sales and
606,900 MWH of non-firm sales, including 5,772 MWH of WSPP sales.
FUEL SUPPLY AND PURCHASED POWER
Fuel Supply
Approximately 53% of the Company's present generating capacity is fueled by
coal, 46% by gas and 1% by inert by-product gases, purchased steam and oil. See
PROPERTIES for information about generating plants.
The Company's actual and anticipated fuel use, as reported in the table
below, is based on MMBtu use for generation of electricity excluding non-firm
sales. The unpredictability of the non-firm sales market precludes its inclusion
as a factor in determining these fuel use projections.
Actual Estimated for calendar years ending December 31,
Fuel 1996 1997 1998 1999
- ---- ---- ---- ---- ----
Coal ....... 68.8% 69.3% 68.0% 66.1%
Gas ........ 30.5 29.9 31.3 33.2
Other ...... 0.7 0.8 0.7 0.7
Anticipated fuel use is based upon numerous assumptions with respect to,
among other things, regulatory requirements relating to cogeneration,
environmental protection and competition, load growth, cost and availability of
boiler fuels and the extent to which the Company receives and can utilize
contracted-for gas, renegotiates present gas contracts and enters into new
agreements. The Merger will also impact anticipated fuel use. Actual fuel mix in
future years may vary substantially from these estimates because these
assumptions may not be realized.
Coal
The Company purchases all of its coal requirements for Harrington and Tolk
Stations from TUCO, in the form of crushed, ready-to-burn coal delivered by
coal-handling facilities owned by Wheelabrator Coal Services Co. to the
Company's boiler bunkers located within the Company's coal-fueled stations where
it is processed for burning. The coal is transported for TUCO by rail, primarily
from mines located in Wyoming, to TUCO's stockpiles which are adjacent to the
Company's coal-burning generating stations. At December 31, 1997, TUCO's coal
inventories at the Harrington and Tolk sites were 802,257 tons and 696,662 tons
(approximately 60 days supply), respectively. TUCO has long-term contracts with
ARCO for a supply of coal in sufficient quantities to meet all of the Company's
needs for Tolk Station. TUCO's long-term coal supply with ARCO for the majority
of Harrington's needs expires at the end of calendar 1997. The Company is
evaluating options for both long- and short-term coal supplies beginning January
1998, and believes there are adequate supplies of low sulfur coal available on
either a short- or long-term basis to supply the requirements of this station
for its expected life. Specific coal reserves in the Powder River Basin in
Wyoming have been dedicated by ARCO to meet the contract quantities. The coal is
transported for TUCO by Burlington Northern Railroad to Harrington Station near
Amarillo, Texas, a distance of approximately 896 railroad miles, and by
Burlington Northern Railroad and the Atchison, Topeka and Santa Fe Railway
Company to Tolk Station near Muleshoe, Texas, a distance of approximately 1,032
railroad miles. Transportation charges make up approximately 50% of the total
cost of the coal delivered to the boiler.
The coal purchased from TUCO had an average heat content of 8,702 Btu per
pound at Harrington Station and 8,700 Btu per pound at Tolk Station for the
twelve months ended December 31, 1996. The Company expects that the Btu content
of the coal will vary between 8,200 and 9,000 Btu per pound and average 8,700
Btu per pound.
The low sulfur content of this coal enables the Harrington and Tolk units
to operate without the use of flue gas desulfurization scrubbers and to meet
current state and federal SO2 emissions requirements. Unit No. 1 at Harrington
Station is equipped with an electrostatic precipitator, and Unit Nos. 2 and 3 at
Harrington Station and both units at Tolk Station are equipped with fabric
filtration systems. These units have historically emitted less than one pound of
SO2 per MMBtu of heat input compared to the EPA New Source Performance Standard
applicable to these units of 1.2 pounds of SO2 per MMBtu of heat input. See
ENVIRONMENTAL MATTERS.
6
<PAGE>
Natural Gas
The Company has a number of contracts of short and intermediate terms with
various natural gas suppliers operating in gas fields with long life
expectancies in or near its service area. In fiscal 1996 and the Transition
Period, these gas contracts allowed the Company to maximize competition between
fuel suppliers and helped minimize the Company's fuel cost during volatile
market conditions. During these periods, the Company had under contract
sufficient firm gas to meet all its requirements. However, due to flexible
contract terms, approximately 24% and 12%, respectively, of the Company's gas
requirements were purchased under spot agreements.
Oil
Certain of the Company's generating stations can burn oil in emergency
situations. Oil is stored at these stations in sufficient quantities to meet
anticipated emergency requirements. These stations have an aggregate capability
of 975 MW. Small quantities of oil are also burned for maintenance purposes.
Cost of Fuel and Purchased Power
Details of the Company's cost of fuel and purchased power are presented
below:
<TABLE>
<CAPTION>
Transition Fiscal year ended August 31,
Period 1996 1995 1994
------ ---- ---- ----
<S> <C> <C> <C> <C>
Cost of fuel and purchased
power (000):
Coal ..................... $ 95,041 $277,908 $250,551 $276,825
Natural gas .............. 45,897 136,139 116,481 123,503
Oil (1) .................. 11 97 119 49
Other (2) ................ 947 2,879 2,901 2,830
Purchased power 4,900 18,010 5,241 4,604
----- ------ ----- -----
Total fuel and purchased
power cost ........... $146,796 $435,033 $375,293 $407,811
======== ======== ======== ========
Cost of fuel per MMBtu:
Coal ..................... $1.936 $1.883 $1.814 $1.801
Natural gas .............. 2.620 2.154 1.631 2.015
Oil (1) .................. 3.221 4.194 3.635 3.741
Other (2) ................ 1.766 1.766 1.754 1.806
Average (excluding
purchased power) ...... 2.113 1.963 1.752 1.862
Cost of fuel per net kwh generated:
Coal ..................... 1.905 cents 1.875 cents 1.797 cents 1.788 cents
Natural gas .............. 2.786 cents 2.288 cents 1.687 cents 2.118 cents
Oil (1) .................. 3.792 cents 4.858 cents 3.784 cents 4.160 cents
Other (2) ................ .942 cents .941 cents .934 cents .953 cents
Average cost of fuel
(excluding purchased power) 2.105 cents 1.978 cents 1.749 cents 1.866 cents
Average cost of fuel
(including purchased power) 2.094 cents 1.957 cents 1.745 cents 1.865 cents
Average cost of purchased power
per net kwh purchased .... 1.824 cents 1.569 cents 1.535 cents 1.829 cents
MMBtu of fuel consumed (000) 67,160 212,485 211,202 216,576
</TABLE>
(1) Small quantities of fuel oil are burned for maintenance purposes.
(2) Includes purchased steam used at CZ-2 plant and hot nitrogen used at CZ-1
plant.
Fuel Cost Recovery
Fuel and purchased power costs are recoverable in Texas through a fixed
fuel factor which is a part of the Company's rates. If it appears that the
factor will materially overrecover or underrecover these costs, the factor may
be revised upon application by the Company or action by the PUCT. The rule
requires refunding and surcharging under/overrecovery amounts including interest
when they exceed 4% of the utility's annual fuel and purchased power cost, as
allowed by the PUCT, if this condition is expected to continue. The PUCT
periodically examines the Company's fuel and purchased power costs. In all other
jurisdictions, the Company currently recovers substantially all increases and
refunds substantially all decreases in fuel and purchased power costs pursuant
to monthly adjustment and clauses. At December 31, 1996, the Company had
approximately $12.9 million in Texas in underrecovered fuel costs,
7
<PAGE>
and is surcharging Texas retail customers for approximately one-half of the
underrecovery. The Company has requested to continue the surcharge to collect
the remaining amount of underrecovered fuel costs. See MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Notes (1) and
(8) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
The Company is crediting certain wholesale customers' fuel cost with 75% of
the margin from coordination energy sales to other utilities and is crediting
its New Mexico retail customers with 75% and Texas retail customers with 100% of
the margin from coordination sales to other utilities and demand charges on
interruptible wholesale sales (as approved by regulatory agencies in those
jurisdictions). See Note (8) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. This
margin is the difference between the revenues from these sales and incremental
costs to generate the power for the sales. Continued coordination and other
non-firm energy sales would act to lower the electric bills of these customers;
however, the Company cannot predict the extent of such sales.
REGULATION
General
In the Transition Period, 53.7% of total revenues were derived from sales
subject to the jurisdiction of the PUCT and the Texas municipalities served by
the Company. The percentages of revenue subject to the jurisdictions of the
FERC, the NMPUC, the OCC and the KCC were 28.4%, 16.4%, 1.3% and 0.2%,
respectively. In fiscal 1996, 54.3% of total revenues were derived from sales
subject to the jurisdiction of the PUCT and the Texas municipalities served by
the Company. The percentages of revenue subject to the jurisdictions of the
FERC, the NMPUC, the OCC and the KCC were 28.1%, 16.2%, 1.2% and 0.2%,
respectively
The PUCT has jurisdiction over the Company's Texas operations as an
electric utility, and original and appellate jurisdiction over its Texas retail
rates and services. The Texas municipalities exercise original jurisdiction over
rates within their respective city limits. The FERC has jurisdiction over the
Company's rates for sales of electricity for resale. The NMPUC, the OCC and the
KCC have jurisdiction with respect to retail rates and services in their
respective states. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS and Notes (1) and (8) of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS. The NMPUC and the KCC also regulate the
Company's issuance of securities. The NMPUC also must approve any capital
investment by the Company in its subsidiaries and has limited the amount the
Company can contribute to Quixx. The Company has been authorized to make
investments in Quixx of up to $90 million at the cumulative rate of $15 million
per year for six years. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. The OCC also regulates the issuance of
securities which are secured by a lien on Company assets located within the
State of Oklahoma. The books of the Company are kept in accordance with the
FERC's Uniform System of Accounts and all of the Company's state jurisdictions
have accepted this system.
On June 26, 1997, the PUCT dismissed the complaint OPUC filed seeking a
rate investigation of the Company's Texas retail jurisdictional rates. OPUC
claimed that the Company was over-earning by $10 to $18 million per year on its
Texas retail jurisdictional operations and requested that the PUCT conduct a
general rate investigation.
ENVIRONMENTAL MATTERS
The Company's facilities are regulated by federal and state environmental
agencies. These agencies have jurisdiction over air emissions, water quality,
wastewater discharges, solid wastes and hazardous substances. Various Company
activities require registrations, permits, licenses, inspections and approvals
from these agencies. The Company has received all necessary authorizations for
the construction and continued operation of its generation, transmission and
distribution systems. Company facilities have been designed and constructed to
operate in compliance with the environmental standards.
The CAAA required the Company to undertake a consolidated permitting
program for its existing fossil-fueled plants. Under this permitting program,
the Company is paying emissions fees of approximately $800,000 annually to the
Texas and New Mexico state air quality agencies. Beginning in the year 2000,
Phase II of the CAAA will require more stringent limits on SO2 emissions at the
Company's existing fossil-fueled plants. However, current regulations permit
compliance with sulfur emissions limitations commencing in the year 2000 by
using SO2 allowances allocated to plants by the EPA, using allowances generated
by reducing emissions at existing plants and by using allowances purchased from
other companies. Based upon information from the Company's fuel suppliers, the
SO2 allowances issued by the EPA approximate the Company's projected SO2
emissions. The Company monitors options to insure that allowances will be
sufficient to economically operate the Company's existing plants without
significant emission reductions. The CAAA also requires the EPA to develop new
NOx emission standards for existing and new plants which may be more stringent
than the current standards. The Company anticipates, but can give no assurance,
that it will be able to comply with Phase II NOx emission standards with no
additional material capital cost. The Company continues to monitor the impact
that the CAAA may have on the Company.
8
<PAGE>
Capital expenditures for environmental protection facilities aggregated
approximately $1.8 million, $2.8 million, $4.1 million, and $11.6 million for
the Transition Period and for fiscal 1996, 1995 and 1994, respectively.
Estimates of future capital expenditures for environmental protection facilities
are subject to change, but the Company has included $3.2 million in its
construction program for these expenditures for calendar 1997.
The Company has not developed any specific site removal and exit plans for
its fossil fuel plants or substation sites. Plant removal and exit plans are
under development. When such plans are developed, the Company intends to treat
removal and exit costs as a cost of retirement in utility plant and include them
in depreciation accruals. An estimated removal cost (based on historical
experience) is currently included in depreciation expense.
EMPLOYEE RELATIONS
The Company had approximately 1,900 utility employees at December 31, 1996.
Of these, approximately 900 operating, maintenance and construction personnel
are represented by Local Union No. 602, International Brotherhood of Electrical
Workers, AFL-CIO. Pursuant to the collective bargaining agreement with this
union which expires October 31, 1999, wages increased 3% effective November 1,
1996. The contract provides for an increase on November 1, 1997 and 1998 of 3%,
plus 80% of the amount by which the Consumer Price Index exceeds 3.5%. The wage
increase effective November 1, 1996, was also provided to employees not
represented by the union. A hiring freeze has been implemented during the Merger
process.
NONUTILITY BUSINESSES
In connection with the Merger, all of the stock of the Company's two
wholly-owned subsidiaries , UE and Quixx, will be sold to a wholly-owned
subsidiary of NCE in exchange for a promissory note of that subsidiary in an
amount equal to the fair market value of UE and Quixx.
Utility Engineering Corporation
UE is a wholly owned subsidiary formed in 1986. It is engaged in
engineering, design, construction management and other miscellaneous services,
employing approximately 120 employees. UE's assets at December 31, 1996, were
approximately $47.8 million and total revenues for the Transition Period and
fiscal 1996 were $7.1 million and $21.2 million, respectively. UE is currently
involved in a broad array of projects for nonaffiliate customers, providing
general engineering and design services. UE also is providing services to the
Company, at cost, as well as working jointly with Quixx on cogeneration and
independent power projects.
Because of the lack of major central station power plant design and
construction in the U.S. electric industry, UE is actively seeking other types
of plant engineering projects and will continue to broaden its base of customers
and diversity of projects. UE has been selected to engineer the Linden project,
in which Quixx is the equity owner. During the past twelve months, UE has
performed engineering and other services for combustion turbine projects in the
Dominican Republic, Kuwait and Columbia, South America. UE also has active
proposals for engineering work on projects in several other international
locations.
UE has two wholly owned subsidiaries - Universal Utility Services Company
(UUC) and Precision Resource Company (PRC). Through UCC, UE provides cooling
tower maintenance and repair, certain other industrial plant improvement
services, and engineered maintenance of high voltage plant electrical equipment.
Through PRC, UE provides contract professional and technical resources for
customers in the energy and industrial sectors. In fiscal 1996, UE wrote off its
investment in SAGE, due to unprofitability of this business. UE also owns a 49%
interest in Vista Environmental Services, LLC, which performs environmental
consulting for energy and industrial customers in both the private and
government sectors, primarily in the southwestern United States.
In June 1997, UE wrote off its net investment of $2.4 million in the
Carolina Project. See Note (6) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Quixx Corporation
Quixx is a wholly owned subsidiary formed in 1986. Its primary business is
investing in and developing cogeneration and energy-related projects. Quixx also
holds water rights and certain other nonutility assets. Quixx employs
approximately 43 employees. Quixx's assets at December 31, 1996, were
approximately $80.6 million and total revenues for the Transition Period and
fiscal 1996 were $6.4 million and $17.7 million, respectively.
In calendar 1996, Quixx invested approximately $8.5 million in independent
power projects and expects to continue to make similar investments in the future
dependent upon suitable investment opportunities and the availability of
capital. The NMPUC has
9
<PAGE>
authorized the Company to make investments in Quixx of up to $90 million at the
cumulative rate of $15 million per year for six years. After completion of the
Merger the Company will no longer make these annual investments.
Quixx holds a 49% limited partnership interest in BCH which owns a
waste-to-energy cogeneration facility located near Fayetteville, North Carolina.
The facility provided steam to a nearby DuPont plant and electric power was sold
to CP&L. Limited commercial operation of the BCH project began in June 1996;
however, the facility did not achieve the expected performance level. An effort
was made to restructure the project but it was not possible to achieve the
required improvements on economically viable terms; therefore, in December 1996,
Quixx wrote off its investment of approximately $16 million, or $0.25 per common
share, after-tax, in this project. See Note (6) of NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
Quixx holds a 32-1/3% limited partnership interest, and through Quixx
Carolina, Inc., a Delaware corporation and a wholly owned subsidiary of Quixx, a
1% general partnership interest in Carolina which was constructing
waste-to-energy cogeneration facilities in Wilson and Lenoir Counties, North
Carolina. The facilities would have provided steam to a DuPont plant located
near Kinston, North Carolina and up to 5 MW of electric power to the CP&L grid.
Construction was originally scheduled to be completed later in 1997 but has been
halted, debt financing has been withheld and it has been determined that it is
unlikely the project will be completed. In June 1997, Quixx wrote off its
investment of approximately $13.6 million, or $0.22 per common share, after-tax,
in this project. See Note (6) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Quixx also holds a 95% interest in Vedco Louisville L.L.C., a Delaware
limited liability company, which owns a facility consisting of two gas-fired
boilers providing steam to a DuPont plant in Louisville, Kentucky. Quixx's
investment of approximately $6.0 million in this facility was funded by a
capital contribution from the Company. Commercial operation began in December
1994.
Quixx Jamaica, Inc., a Delaware corporation and a wholly owned subsidiary
of Quixx, holds a 99% limited partnership interest in KES Jamaica, L.P. which
owns a facility consisting of two oil-fired combustion turbines located in
Montego Bay, Jamaica, W.I. The remaining 1% general partnership interest is
owned by KES Montego, Inc. In June 1997 Quixx Corp. acquired 100% of the stock
of KES Montego, Inc. The facility receives fuel from Jamaica Public Service
Company, Ltd. and returns up to 43 MW of power to their grid. Commercial
operation began in December 1994. Quixx's investment of approximately $10.8
million in this facility was funded by a capital contribution from the Company.
Quixx provided $5.5 million for a 24.67% limited liability partnership
interest and through Quixx WPP94, Inc., a wholly owned subsidiary of Quixx, a
0.33% general partnership interest in Windpower Partners, 1994, L.P. which
constructed a 35 MW wind generation facility in Culberson County, Texas.
Electricity from the facility is being provided to the Lower Colorado River
Authority and the City of Austin. Commercial operation began in September 1995.
Quixx holds a 99% limited partner interest and through Quixlin Corp., a
Nevada corporation and a wholly owned subsidiary, a 1% general partner interest
in Quixx Linden, L.P. which will construct a 23 MW natural gas fired
cogeneration facility located in Linden, New Jersey. This facility, estimated to
be completed in mid-1998, will provide steam, compressed air and electricity to
General Motors. Fifty percent of this ownership interest will be sold to an
unaffiliated party on or prior to completion of this project. UE was selected
through a competitive bidding process to engineer, procure equipment and parts
for, and construct the facility.
In February 1997, Quixx announced it will hold a 50% interest in the
proposed 216 MW cogeneration plant that would be located at the Phillips
Petroleum Refinery Complex near Borger, Texas. Quixx will hold this interest
through a wholly-owned subsidiary, Quixx Borger Cogen, Inc., which will in turn
be a 50% partner of Borger Energy Associates, L.P., the owner of the plant.
Construction is expected to begin in 1997 and the plant is expected to be
operational in the summer of 1998.
Quixx owns a 50% membership interest in Mosbacher Power Group, L.L.C. and
Mosbacher Power International, L.L.C. (together the Mosbacher Companies), which
are independent power development companies with interests in the development
stage in Cambodia, Columbia, Mexico and Brazil.
Quixx has recently entered into a memorandum of understanding with Golden
Spread Electric Cooperative, Inc. and an unaffiliated independent power producer
to construct a 488 MW combined cycle generating facility to be called Mustang
Station which would be completed by 1998. Golden Spread and a limited
partnership called Denver City Energy Associates, L.P. (of which Quixx will be a
general partner and have a 50% interest) would each own a 50% undivided interest
in the station. Quixx will hold its interest in Denver City Energy Associates
through a wholly-owned subsidiary, Quixx Mustang Station, Inc. The power from
the station would be supplied principally to Golden Spread and will be
interconnected with the Company's system.
10
<PAGE>
Quixx operates as a division, Amarillo Railcar Services, a railcar
maintenance facility which provides inspection, light and heavy maintenance and
storage for unit trains. Quixx also finances sales of heat pumps and continues
to market other nonutility goods and services. In addition Quixx has royalty
interests in coal and other minerals produced and to be produced from certain
New Mexico properties owned by the Pittsburgh and Midway Coal Mining Company. In
August 1996 Quixx completed the sale of certain water rights to the CRMWA for
$14.5 million which resulted in an after-tax gain of approximately $7.7 million.
OTHER
City of Las Cruces
The City of Las Cruces (the City) continues to pursue a municipal electric
utility system by purchase or through condemnation of the EPE facilities serving
the City. In August 1994 the Company and the City entered into a fifteen year
contract for the Company to provide all of the wholesale electric power and
energy required by the City during the term of the contract if the City
establishes a municipal system. The City's wholesale requirements are expected
to be approximately 86 MW in 1997, the earliest it is believed service could
commence. The contract becomes effective on the acquisition of (i) a
distribution system by the City; (ii) the necessary transmission delivery and
back-up agreements by the Company; and (iii) the required regulatory approvals
by the City and the Company. If the specified events are not completed by July
1, 1998, either the Company or the City has the right to cancel the contract.
Under the contract, the rates and charges for service to the City are fixed
until January 1, 2001.
The Company and the City also entered into a System Purchase Option and
Rate Agreement in August 1994. That agreement grants the City the option to sell
to the Company the electric utility system serving the City (including
distribution, subtransmission, and transmission facilities) which the City plans
to acquire by purchase or through condemnation proceedings. The agreement has a
three-year term beginning at the time the City acquires the facilities and
ending no later than January 1, 2002. The purchase price that would be paid by
the Company would be equal to the amount required to retire the unamortized
outstanding debt incurred by the City in acquiring the facilities from EPE plus
the City's reasonable costs in acquiring the facilities. The agreement provides
that the Company will charge a total rate that shall be less than the projected
rate to be charged by EPE and the cost of fuel EPE would bill to its customers.
The Company has the right to terminate the agreement if, in the Company's sole
discretion, it deems any proposed condemnation award to be excessive, or upon
the occurrence of certain other events. The agreement further provides, that if
the City abandons or dismisses condemnation proceedings as a consequence of the
Company's termination of the agreement, the Company will reimburse the City for
one-half of its reasonable litigation expenses and for any of EPE's damages and
litigation expenses that the City is obligated to pay by final court order. In
July 1995 the NMPUC ordered the Company to respond to an Order to Show Cause Why
the System Purchase Option and Rate Guarantee is not a security, and if it is a
security, why the Company did not obtain prior NMPUC approval under the New
Mexico Public Utility Act. The Company has responded to the Commission's Order
to Show Cause and does not believe the agreement to be a security or the
guarantee of a security. A hearing has been scheduled for July 1997.
STATISTICAL SUMMARY
Electric Revenues
Operating revenues attributable to commercial and industrial sales of
electric energy accounted for 52% and 50% of total operating revenues in the
Transition Period and fiscal 1996, respectively.
The Company's largest system customer in the Transition Period was Altura
Energy Ltd., which purchased approximately 488 million kwh, resulting in
approximately $17.0 million in revenues. The Company's largest system customer
in fiscal 1996 was Amoco Corporation, which purchased approximately 1.5 billion
kwh, resulting in approximately $30.4 million in revenues.
11
<PAGE>
<TABLE>
<CAPTION>
Electric Operating Statistics Transition Fiscal year ended August 31,
Period 1996 1995 1994
------ ---- ---- ----
<S> <C> <C> <C> <C>
Energy generated and purchased (kwh-000):
Generated - net output ................... 6,741,850 21,082,150 21,159,953 21,609,287
Purchased and other ...................... 332,556 1,226,856 350,183 253,314
Net interchange .......................... 88 120 469 53
Total ................................. 7,074,494 22,309,126 21,510,605 21,862,654
Company use, lost and unaccounted for .... (438,190) (1,420,687) (1,175,029) (1,459,717)
-------- --------- ---------- ----------
Energy generated and purchased, net ... 6,636,304 20,888,439 20,335,576 20,402,937
========= ========== ========== ==========
Sales (kwh-000):
Retail:
Residential ............................. 891,695 2,868,982 2,709,089 2,684,365
Commercial .............................. 989,580 2,886,807 2,809,692 2,692,848
Industrial .............................. 2,661,642 7,813,433 7,685,938 7,635,066
Other ................................... 190,439 571,579 548,012 533,305
Wholesale:
Rural electric cooperatives ............. 1,335,452 5,239,474 4,682,975 4,157,209
Other utilities - firm .................. 147,508 604,860 614,609 768,850
Other utilities - non-firm .............. 419,988 903,304 1,285,261 1,931,294
------- ------- --------- ---------
Total sales ........................... 6,636,304 20,888,439 20,335,576 20,402,937
========= ========== ========== ==========
Electric revenues (000):
Retail:
Residential .............................. $ 55,159 $175,167 $160,908 $163,614
Commercial ............................... 55,177 157,629 147,764 146,901
Industrial ............................... 98,966 281,863 267,842 276,335
Other .................................... 10,305 29,813 27,331 27,531
Wholesale:
Rural electric cooperatives .............. 52,191 189,480 165,930 147,010
Other utilities _ firm ................... 8,293 27,839 29,494 31,644
Other utilities _ non-firm ............... 13,821 33,720 31,351 47,150
Miscellaneous* ............................ 1,912 4,612 4,194 3,956
----- ----- ----- -----
Total electric revenues* ............... $295,824 $900,123 $834,814 $844,141
======== ======== ======== ========
*Includes intercompany revenues.
Customers (end of period):
Retail:
Residential ............................. 310,073 308,554 300,459 297,853
Commercial .............................. 57,502 57,204 54,330 53,489
Industrial .............................. 12,450 12,418 11,896 11,422
Other ................................... 761 750 665 656
Wholesale:
Rural electric cooperatives ............. 17 17 17 17
Other utilities ......................... 192 180 157 128
--- --- --- ---
Total customers ......................... 380,995 379,123 367,524 363,565
======= ======= ======= =======
Cost per net kwh generated:
Operation ............................... 2.66 cents 2.51 cents 2.26 cents 2.36 cents
Maintenance ............................. .17 cents .15 cents .14 cents .13 cents
Average revenue per kwh sold:
Residential .............................. 6.19 cents 6.11 cents 5.94 cents 6.10 cents
Commercial ............................... 5.58 cents 5.46 cents 5.26 cents 5.46 cents
Industrial ............................... 3.72 cents 3.61 cents 3.48 cents 3.62 cents
Wholesale excluding non-firm sales
to other utilities ..................... 4.08 cents 3.72 cents 3.69 cents 3.63 cents
Total sales .............................. 4.46 cents 4.31 cents 4.11 cents 4.14 cents
</TABLE>
12
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Years
Continuous
Present office, date elected thereto, and Age at Service with
Name previous title if in current office less than 5 years 4-30-97 Company
- ------- ----------------------------------------------------- ------- -------
<S> <C> <C> <C>
Bill D. Helton Chairman of the Board and Chief Executive Officer since 3-1-91 58 32
David M. Wilks President and Chief Operating Officer since 9-1-95; 50 19
Senior Vice President, 1-9-91 to 9-1-95
Doyle R. Bunch II Executive Vice President, Accounting and Corporate Development 50 20
since 9-25-92;
Executive Vice President and Chief Financial Officer, 10-23-90
to 9-25-92
Kenneth L. Ladd, Jr. Senior Vice President since 1-9-91 57 35
John L. Anderson* Vice President, Personnel since 1-11-89 63 37
Robert D. Dickerson Secretary and Treasurer since 1-13-88 48 22
Gerald J. Diller Vice President, Rates and Regulation since 7-27-93; 63 30
Group Manager, Rates and Regulation, 2-1-89 to 7-27-93
Gary L. Gibson Vice President, Marketing since 1-1-85 55 32
Henry H. Hamilton Vice President, Production since 1-14-87 59 33
Carl E. Jeans Vice President, Management Systems since 1-9-85 55 31
John McAfee Vice President, Engineering and Operations since 9-1-95; 51 23
Vice President, Panhandle Division and Corporate Communication,
2-1-95 to 9-1-95;
Vice President, Corporate Services, 7-25-89 to 2-1-95
</TABLE>
*Retired 3-1-97
None of the above executive officers of the Company are family related.
Officers of the Registrant are elected by, and hold office at the will of, the
Board of Directors and do not serve a "term of office" as such.
There is no arrangement or understanding between any officer and any other
person pursuant to which the officer was selected.
13
<PAGE>
ITEM 2. PROPERTIES.
ELECTRIC GENERATING STATIONS
at December 31, 1996
<TABLE>
<CAPTION>
Maximum Station Totals
Generator Maximum Net Generation (Mwh)
Name-plate Generator Net Year
Rating Name-plate Capability Ended
Generating Year (Kilowatts) Principal Rating (Kilowatts) August Transition
Station Location New (A) Fuel (Kilowatts) (B) 31, 1996 Period
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steam
- -----
Harrington Near Amarillo, TX 1976 360,000 Coal
1978 360,000
1980 360,000 1,080,000 1,066,000 7,587,731 2,829,209
Tolk Near Muleshoe, TX 1982 568,000 Coal
1985 568,000 1,136,000 1,080,000 7,336,317 2,167,602
Jones Near Lubbock, TX 1971 247,500 Natural gas
1974 247,500 495,000 486,000 2,172,003 673,565
Plant X Near Earth, TX 1952 48,000 Natural gas
1953 98,000
1955 98,000
1964 190,400 434,400 442,000 901,672 162,472
Nichols Near Amarillo, TX 1960 113,635 Natural gas
1962 113,635
1968 247,500 474,770 457,000 1,062,550 317,164
Cunningham Near Hobbs, NM 1957 75,000 Natural gas
1965 190,400 265,400 267,000 1,099,466 340,813
Maddox Near Hobbs, NM 1967 113,636 Natural gas 113,636 118,000 499,587 134,417
CZ-2 Near Pampa, TX 1979 37,440 Purch. steam 37,440 26,000 207,265 70,714
Moore County Near Sunray, TX 1954 49,000 Natural gas 49,000 48,000 60,384 (625)
------ ------ ------ ----
Subtotal, steam .......................................... 4,085,646 3,990,000 20,926,975 6,695,331
--------- --------- ---------- ---------
Other
Gas Turbine
- -----------
Carlsbad Carlsbad, NM 1968 16,320 Natural gas 16,320 16,000 7,600 640
CZ-1 Near Pampa, TX 1964 13,281 Hot nitrogen 13,281 13,000 98,640 34,115
Maddox Near Hobbs, NM 1976 86,850 Natural gas
1963 11,500 98,350 76,000 40,220 5,097
Riverview Near Borger, TX 1916 25,000 Natural gas 25,000 25,000 7,681 6,650
Diesel Engines
- --------------
Tucumcari Tucumcari, NM 1975 1,000 Diesel
1959 2,250
1963 1,000
1964 3,000
1968 4,100
1977 4,800 16,150 15,000 1,034 17
------ ------ ----- --
Subtotal, other .......................................... 169,101 145,000 155,175 46,519
------- ------- ------- ------
Total, all generating stations ......................... 4,254,747 4,135,000 21,082,150 6,741,850
========= ========= ========== =========
</TABLE>
(A) Pursuant to FERC instructions, name-plate ratings show the manufacturer's
maximum generator rating of each unit.
(B) Capability as used herein represents the demonstrated dependable carrying
abilities of the respective stations during peak periods as proven
under actual operating conditions.
14
<PAGE>
WATER SUPPLY
The Company has an adequate supply of water for condensing and other
purposes at its principal generating stations for the design life of the
stations. To ensure future flexibility in the use of these stations beyond their
original design lives, the Company is negotiating additional water supplies for
certain generating stations. In an effort to conserve the fresh, potable water
of the area, the Company purchases for its Harrington and Nichols Stations
located near Amarillo, Texas, and its Jones Station located near Lubbock, Texas,
an aggregate of approximately 15,000,000 gallons of water per day from sewage
treatment plants owned by the respective cities, which it processes to a point
which permits its use as cooling tower water. The water is subsequently used for
irrigation.
ITEM 3. LEGAL PROCEEDINGS.
Reference is made to Note (6) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for information regarding the litigation with Thunder Basin Coal Co.
The Company is involved in ordinary routine litigation incidental to the
business which litigation is not considered material. See REGULATION,
ENVIRONMENTAL MATTERS and Note (8) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for information on regulation, environmental and rate matters. See also OTHER -
City of Las Cruces.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the Transition Period to a vote of its
security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS.
The principal markets on which the Company's common stock is traded are the
New York, Chicago and Pacific Stock Exchanges. The common stock has unlisted
trading privileges on the Boston and Philadelphia Stock Exchanges. The table
below presents the high and low market prices as reported by the National
Quotations Bureau, Inc., and dividend information for the Company's common
stock.
Market Price Dividends
High Low Declared
---- --- --------
1996 - Transition Period:
Quarter ended November 30, 1996 $36-3/4 $31-3/4 $0.55
Month ended December 31, 1996 35-7/8 34-3/8 -
1996 - Fiscal Quarter Ended:
November 30, 1995 $33-7/8 $30 $0.55
February 29, 1996 33-7/8 32-1/8 0.55
May 31, 1996 34-1/8 30-5/8 0.55
August 31, 1996 33-3/8 30-1/4 0.55
1995 - Fiscal Quarter Ended:
November 30, 1994 $27 $25-1/8 $0.55
February 28, 1995 29-3/8 25-7/8 0.55
May 31, 1995 29 27-1/4 0.55
August 31, 1995 30-3/4 28-5/8 0.55
The Company has agreed with PSCo in the merger agreement that it will not
raise its common stock dividend rate without the consent of PSCo. The Company's
dividend payout on its common stock was 96% for the twelve months ended December
1996, and 87% and 79% for the twelve months ended August 1996 and 1995,
respectively. At December 31, 1996, the number of holders of record of the
Company's common stock was 27,585.
The Company covenants, in the Mortgage pursuant to which First Mortgage
Bonds are issued, that it will not declare any dividends (other than dividends
payable in its stock) upon its common stock, or make any payment on account of
the purchase, redemption or other retirement of, or make any distribution in
respect of, any shares of its stock except to the extent that the sum of (1)
$1,278,243.59, (2) net income of the Company, as defined, since June 1, 1946,
and (3) net proceeds received by the Company from the issue since such date of
any shares of its stock (but only up to an amount equal to the aggregate amount
of all payments since such date
15
<PAGE>
on account of the acquisition of any shares of its stock) shall be (after giving
effect to such dividends or distributions) greater than the aggregate amount of
dividends declared on all classes of the Company's stock and of all payments
made on account of the acquisition of, or distribution in respect of, any shares
of its stock since such date. See Note (4) of NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
In 1991 the Company adopted a Shareholder Rights Plan, which has been
amended so that it is not applicable to the Merger. See Note (1) of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Transition Fiscal year ended August 31,
Period 1996 1995 1994 1993 1992
------ ---- ---- ---- ---- ----
(Dollars In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues ...... $ 295,579 $ 899,397 $ 834,083 $ 843,448 $ 809,753 $ 749,154
Operating income ........ 47,192 $ 150,666 $ 154,211 $ 139,719 $ 140,684 $ 137,755
Net earnings ............ $ 19,137 $ 105,773 $ 119,477 $ 102,168 $ 105,254 $ 102,987
Earnings per weighted
average common share
outstanding ............ $ 0.47* $ 2.52** $ 2.80*** $ 2.38 $ 2.43 $ 2.34
Dividends per share ..... $ 0.55 $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20
Ratio of earnings to
fixed charges .......... 2.56 4.21 5.10 4.76 4.82 4.53
Ratio of earnings to
fixed charges and
preferred dividend
requirements combined .. 2.56 3.91 4.37 4.04 4.01 3.63
Return on average
common equity .......... 8.0% 14.2% 16.2% 14.1% 14.5% 14.2%
Operating income as a
percent of operating
revenue ................ 16.0% 16.0% 18.5% 16.6% 17.4% 18.4%
Total assets ............$2,041,210 $1,997,817 $1,909,005 $ 1,821,235 $1,718,546 $1,705,734
Long-term debt and
redeemable
preferred stock**** .... $ 635,631 $ 638,107 $ 576,348 $ 523,228 $ 548,772 $ 554,117
SPS Obligated Mandatorily
Redeemable Preferred
Securities ............. $100,000 -- -- -- -- --
Weighted average common
stock outstanding ......40,917,908 40,917,908 40,917,908 40,917,908 40,917,908 40,917,908
Book value per common
share .................. $17.88 $17.97 $17.61 $17.01 $16.84 $16.61
</TABLE>
* Includes a $0.25 decrease in earnings per share attributable to the
write-off of Quixx's investment in BCH.
** Includes a $0.19 increase in earnings per share attributable to the sale
of water rights owned by Quixx.
*** Includes a $0.13 increase in earnings per share attributable to a change
in the estimated delivered not billed kwh sales and an 0.11 increase in
earnings per share attributable to a one-time adjustment resulting from
settlement of the 1985 FERC rate case with New Mexico wholesale customers.
**** Includes current maturities of long-term debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
On April 22, 1997, the Board of Directors of the Company approved a change
in the Company's fiscal year. Effective January 1, 1997, the Company's new
fiscal year will be the twelve-month period ending December 31. Previously, the
Company's fiscal year was a twelve-month period ending August 31. Fiscal years
presented and referred to in these consolidated financial statements and notes
thereto are on an August 31 fiscal-year basis unless otherwise indicated. The
Transition Period relates to the four months ended December 31, 1996 and, where
applicable, unaudited comparative information for the four months ended December
31, 1995 has been presented.
RESULTS OF OPERATIONS
Operating Revenues and Kilowatt-Hour Sales
Substantially all of the Company's operating revenues result from the sale
of electric energy. The principal factors determining revenues are the amount
and price per unit of energy sold. The following table describes the principal
components of changes in revenues.
16
<PAGE>
Increase (Decrease) From Prior Period
Transition Fiscal Fiscal
Period 1996 1995
------ ---- ----
(Dollars In Thousands)
Estimated effect on revenues of:
Variations in kilowatt-hour(kwh) sales* $ 5,519 $ 40,001 $ 19,943
Variations in rates 2,487 (7,321) 9,110
Variations in fuel and purchased power
cost recovery 18,572 31,191 (22,583)
------ ------ -------
Subtotal 26,578 63,871 6,470
Variations in non-firm kwh sales 1,574 1,443 (15,835)
----- ----- -------
Total revenue increase (decrease) $ 28,152 $ 65,314 $ (9,365)
========= ========= ========
Increase in kwh sales* (in millions) 172 935 579
=== === ===
Increase (Decrease) in non-firm kwh
sales (in millions) 73 (382) (646)
== ==== ====
*Comprised of retail and wholesale sales excluding economy and
interruptible wholesale (non-firm) kwh sales.
Variations in Kwh Sales. Revenues during the Transition Period increased
from the comparable period in 1995 primarily due to higher kwh sales to retail
customers resulting from dry colder weather. This increase was offset, in part,
by lower firm sales to RECs who migrated to lower priced non-firm power
purchases from the Company. The revenue increase in 1996 was primarily due to
increased kwh sales to all retail customers and to RECs which resulted from a
hotter than normal late spring and early summer. These conditions increased air
conditioning load for the year. A dry winter and early spring increased
irrigation while oil-related industry activity in some areas also contributed to
increased REC sales as well as sales to Cap Rock. Sales to Cap Rock began in
February 1994 and increased to 100% of Cap Rock's West Texas requirements in
February 1995. In addition, the acquisition of electric properties in the Texas
panhandle from TNP contributed to higher 1996 revenues
The increase in 1995 was due primarily to increased kwh sales to RECs,
primarily Cap Rock, and retail (ultimate) customers. Accounting adjustments to
the estimate of delivered not billed kwh sales also increased kwh revenues by
approximately $8.3 million in 1995. These estimated kwh sales relate to energy
used by customers but not billed until the subsequent month.
The Company expects modest growth in kwh sales (excluding non-firm sales)
in 1997, given normal weather conditions. Current estimates of the compound
annual growth rate in kwh sales for the five-year period 1997-2001 are 2.4% for
retail sales. Last year the Company estimated for the period 1996-2000 that its
wholesale sales growth rate would be 2.5% and the retail sales growth rate would
be 2.0%. When and if Golden Spread builds generating capacity (which may occur
in 1998 and 1999), it is anticipated that the Company's full requirements
wholesale sales will decline by approximately 11% when this capacity is placed
in service; however, the overall growth rate for other wholesale sales would
have an expected annual growth rate of 2.8%.
Actual kwh sales by class of customer are shown in the following table:
Four months ended
December 31, Years ended August 31,
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(Kwh In Millions)
Retail Sales:
Residential .......... 892 846 2,869 2,709 2,685
Commercial ........... 989 938 2,887 2,810 2,693
Industrial ........... 2,662 2,544 7,813 7,686 7,635
Other ................ 190 184 572 548 533
--- --- --- --- ---
Total Retail Sales .. 4,733 4,512 14,141 13,753 13,546
Wholesale Sales:
Rural electric
cooperatives ....... 1,335 1,370 5,239 4,683 4,157
Other utilities:
Firm ................ 148 163 605 615 769
Non-firm* ........... 420 347 903 1,285 1,931
--- --- --- ----- -----
Total Wholesale Sales 1,903 1,880 6,747 6,583 6,857
----- ----- ----- ----- -----
Total Sales ......... 6,636 6,392 20,888 20,336 20,403
===== ===== ====== ====== ======
*Comprised of economy and interruptible sales.
17
<PAGE>
Variations in Rates. Increased revenues for the Transition Period are
primarily due to increased demand charges per kwh received from certain
wholesale customers. Such demand charges are based on a historical rolling
12-month usage by the customer. Decreased revenues for 1996 resulted from
decreased demand charges per kwh received from certain wholesale customers and
interruptible rates available to certain classes of retail customers which were
approved and implemented in Texas and New Mexico in 1996 and acted to lower
related revenues. Increased revenues for 1995 resulted primarily from additional
demand charge revenues paid by certain wholesale customers. Additionally for
1995, a settlement of the 1985 FERC rate case with the Company's New Mexico
wholesale REC customers contributed increased revenues of approximately $4.0
million (and interest of $3.0 million that is included in other income) (see
Note 8).
Variations in Fuel and Purchased Power Cost Recovery. The increase in
revenues during the Transition Period and during fiscal 1996 was primarily due
to higher gas and coal costs. These revenues decreased in 1995 due to
substantially lower natural gas prices.
Fuel and purchased power costs are recoverable in Texas under a rule that
provides for a fixed factor (based on known or reasonably measurable fuel costs)
to be used for fuel cost collection with final approval of the amount of
recoverable fuel cost being determined at the time of a utility's fuel
reconciliation proceeding. If reasonably unforeseeable circumstances result in a
material underrecovery of fuel costs, the utility may file a petition with the
PUCT requesting a surcharge and change in its fuel factors. The Company's
current fixed factor, set by the PUCT in May 1996, is based on then reasonably
predictable fuel and purchased power costs. In all other jurisdictions, the
Company currently recovers substantially all increases and refunds substantially
all decreases in fuel and purchased power costs pursuant to monthly adjustment
clauses. At December 31, 1996, the Company had approximately $12.9 million in
underrecovered fuel costs in Texas and is surcharging Texas retail customers for
approximately one-half of the underrecovery. The Company has requested to
continue the surcharge to collect the remaining amount. In April 1996, the
Company refunded to its Texas retail customers overrecovered fuel costs totaling
$3.9 million, consisting of $2.1 million of overrecovered fuel costs and $1.8
million of disallowed fuel costs. The Company also refunded to its Texas retail
customers margin credits on non-firm sales totaling $5.4 million during 1996
(see Note 8).
Variations in Non-Firm Kwh Sales. The amount of revenues arising from
non-firm sales is dependent, in large part, upon the amount and cost of power
available to the Company for sale, the demand for power, the availability of
competing hydroelectric power from the Northwest and generation from major
plants in the West. The increase during the Transition Period, as compared to
the same period in 1995, was due in part to higher interruptible sales to PNM as
a result of an increased demand for power. The declines in non-firm sales in
1996 and 1995 were primarily due to available power from major western plants
and excess hydroelectric power in the Northwest. Company load growth in 1996
also contributed to the decline in 1996 non-firm sales. The 1995 decrease was
also affected by mild weather throughout the region, particularly in the winter.
Operating Expenses
Fuel and purchased power expense as a percentage of total operating
expenses, approximated 59% and 55% for the four months ended December 31, 1996
and 1995, respectively. These costs increased approximately $25 million, or 20%,
during the four months ended December 31, 1996, when compared to the same period
in 1995, primarily due to increased gas costs. Fuel expense increased from 1.81
to 2.09 cents per net kwh generated.
Fuel and purchased power expense as a percentage of total operating
expenses approximated 58% in 1996, 55% in 1995 and 58% in 1994. Such expenses,
when compared to prior years, increased 15.9% in 1996 and decreased 8.0% in
1995. The fluctuations in these expenses are primarily attributable to increases
and decreases in fuel costs. The fuel cost per net kwh generated was 1.98 cents,
1.75 cents and 1.87 cents in 1996, 1995 and 1994, respectively. The increase in
1996 is primarily due to higher natural gas prices and a slight increase in coal
costs. The decrease in 1995 is primarily due to lower natural gas prices and a
decrease in generation. When the Company requires less generation, more
efficient plants that use less fuel are utilized. Although fuel costs are
expected to rise marginally throughout 1997, the Company plans to mitigate any
such increases through the purchase of lower-priced gas on the open market and
under short-term contracts, as well as using low-priced coal purchased on the
spot market for generation of off-system sales.
Total operating expenses, excluding fuel and purchased power, increased
$2.5 million, or 2.5%, during the Transition Period, as compared to the same
period in 1995, primarily due to an increase in steam production maintenance
expenses, offset, in part, by lower income taxes. Such expenses increased 3.0%
in 1996 and 2.9% in 1995. The increase in 1996 was due primarily to increased
steam production maintenance expense and costs associated with the acquisition
of the TNP electric properties. Maintenance expenses were higher due to the
normal recurring eighteen month repair cycle and expenses associated with
additional cooling tower and coal feeder maintenance. The increase in 1995 was
due primarily to increased federal income taxes resulting from higher taxable
income. The Company continues to have a hiring freeze in effect during the
Merger process (see Note 2). The Company's expenses were not significantly
impacted by inflation during these periods.
18
<PAGE>
Other Income (Expense), Net. Other income (expense), net decreased
approximately $9.3 million during the Transition Period primarily due to the
December 1996 write-off of the Quixx investment in BCH and related receivables
and expenses ($16 million, or $0.25 per common share, after-tax). The BCH
project is a waste-to-energy cogeneration project in North Carolina. The project
experienced problems primarily related to deficiencies in the waste-fuel
handling system. In June 1997, Quixx and UE wrote-off their net investment of
approximately $16 million in a companion project as discussed in Earnings and in
Note 6. In connection with the Merger, all of the stock of the Company's two
wholly-owned subsidiaries, UE and Quixx, will be sold to a wholly-owned
subsidiary of NCE in exchange for a promissory note of that subsidiary in an
amount equal to the fair market value of UE and Quixx.
Other income (expense), net decreased 34.8% in 1996 and increased 150.7% in
1995. The decrease in 1996 was due to increased merger and business integration
expenses. Other income (expense), net was favorably impacted by the approximate
$7.7 million after-tax gain on the sale of certain Texas Panhandle water rights
by Quixx. However, the effect of such gain was offset by merger-related expenses
that totaled approximately $5.7 million and business integration expenses that
totaled approximately $2.1 million. Also contributing to the decrease was the
non-deductibility of these merger-related expenses for federal income tax
purposes. The increase in 1995 was primarily due to approximately $3.0 million
of interest realized on the rate case settlement with New Mexico wholesale
customers and greater subsidiary earnings. The write-off in 1994 of nonrecurring
items caused a $3.4 million decline in such income that year. Subsidiary
operations contributed approximately 29 cents per share to earnings in 1996 (19
cents per share from the Quixx water rights sale) and 13 cents in 1995.
Earnings
While operating income remained flat during the Transition Period as
compared to the same period in 1995, higher interest expense and the write-off
of the BCH project were the primary factors that contributed to the decline in
earnings applicable to common stock. The higher interest expense resulted from
higher levels of debt that were used to finance the retirement of preferred
stock, the 1995 acquisition of electric properties from TNP and increased
construction expenditures.
Operating income and earnings applicable to common stock decreased in
fiscal 1996 due to increased maintenance expenses, costs associated with the
acquisition of electric properties from TNP, and increased merger-related and
business integration expenses. Additionally, the decline in income was adversely
affected by the increase in interest expense resulting from higher levels of
debt throughout the year caused by the retirement of preferred stock, the TNP
electric property acquisition and increased construction expenditures. Operating
income and earnings applicable to common stock increased in 1995 due primarily
to greater sales to RECs, the change in estimate of delivered not billed kwh
sales ($5.4 million or 13 cents per share) and the rate settlement with
wholesale customers in New Mexico ($4.5 million or 11 cents per share).
In June 1997, Quixx wrote-off its investment of approximately $13.6 million
in the Carolina Project, another waste-to-energy facility, which is a similar
project to BCH, but with design modifications. Additionally, UE wrote-off its
net investment of approximately $2.4 million, comprised of subordinated debt,
interest receivable, and engineering services, in this same partnership. This
combined investment represents approximately $16.0 million, or $0.25 per common
share, after tax (see Note 6).
Assuming normal weather conditions, calendar year 1997 operating income is
expected to remain relatively flat, but net earnings for 1997 will be negatively
impacted by increased merger-related and business integration expenses and the
write-off of the Carolina Energy Project. A resolution of the 1985 FERC rate
case with Texas wholesale REC customers, by settlement or otherwise, would
favorably affect income and earnings in the year received.
The Company's average common equity for the Transition Period and for the
fiscal years 1996, 1995 and 1994 was $733.4 million, $727.9 million, $708.5
million and $692.5 million, respectively. The annualized rate of return on
average common equity for the Transition Period was 8.0%; however, comparability
to prior fiscal years is impacted by the seasonality of the Company's electric
sales. The rate of return on average common equity for the fiscal years 1996,
1995 and 1994 was 14.2%, 16.2% and 14.1%, respectively. The components of such
return are presented as follows:
Transition Fiscal Years
Period 1996 1995 1994
------ ---- ---- ----
Components of Return on Average
Common Equity:
Rate-related income 9.1% 13.3% 13.5% 13.5%
Subsidiary and other income (1.4) .7 1.0 .4
AFUDC ................. .3 .2 .3 .2
New Mexico wholesale settlement - - .6 -
Delivered not billed adjustment - - .8 -
--- --- -- ---
Total 8.0% 14.2% 16.2% 14.1%
=== ==== ==== ====
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's demand for capital is normally related to the construction of
utility plant and equipment. Cash construction expenditures, excluding AFUDC,
were $66 million and $45 million for the four months ended December 31, 1996 and
1995, respectively, and $112.0 million, $94.7 million and $91.8 million in
fiscal 1996, 1995 and 1994, respectively. During 1996, the Company generated
approximately 75% of its capital requirements for such purposes internally. Also
in 1996, the Company received regulatory approval to make investments in Quixx
of up to $90 million at the cumulative rate of $15 million per year for six
years. Upon completion of the Merger, the Company will no longer make these
investments in Quixx. These investments, if made, will then be made by NCE.
Quixx's investment in independent power projects is dependent upon suitable
investment opportunities and the availability of capital. Estimated construction
expenditures, excluding AFUDC, are $120 million for 1997 and $327 million for
the three-year period 1997-1999. The portion of the Company's construction
expenditures to be provided by internally generated funds cannot be accurately
forecast, but the Company expects that it will be approximately 40% in 1997. To
the extent the capital required in 1997 is not supplied by internally generated
funds, the Company will obtain such capital from short-term borrowing or from
the sale of long-term debt, preferred stock and/or common stock. The Company's
estimates of capital needs, in particular those related to construction, and the
generation of internal funds are subject to review and revision, and may vary
substantially from the foregoing especially in a more competitive environment
(see Note 8). Additionally, the completion of the Merger will significantly
impact these estimates. Following a review as a result of the Merger, Standard &
Poor's has downgraded the Company's rated debt from AA to A.
During the period 1997-2001, the Company will be required to retire $105
million of long-term debt, comprised of $15 million First Mortgage Bonds
(Bonds), 5.70% Series due 1997, and $90 million Bonds 6.875% Series due 1999.
The Company currently contemplates the sale of preferred stock, common stock and
long-term debt during the five-year period 1997-2001 in connection with the
financing of its construction program and retirement of Bonds.
In August 1994, the Company entered in a forward interest rate swap
agreement in anticipation of redeeming its $25 million principal amount of
13-1/2% Pollution Control Revenue Bonds (PCRBs) due 2001 with a new issuance of
variable rate PCRBs. Such bonds were redeemed October 1, 1996, and replaced with
a variable rate PCRB issue due July 1, 2016 that has been swapped for a fixed
rate of 6.435%. Additionally, the Company redeemed on September 26, 1996, the
$25 million 6-1/2% PCRBs due 2004 and the $32.3 million 6-5/8% PCRBs due 2009
and replaced these series on September 18, 1996, with $57.3 million 5-3/4% PCRBs
due September 1, 2016 (see Note 5).
In October 1996, Southwestern Public Service Capital I, a wholly owned
trust, issued in a public offering $100 million of 7.85% Trust Preferred
Securities, Series A. The sole asset of the trust is $103 million principal
amount of the Company's 7.85% Deferrable Interest Subordinated Debentures,
Series A, due September 1, 2036. The securities are shown as SPS Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trust holding solely
Subordinated Debentures of SPS on the Consolidated Balance Sheet. The funds from
this financing were used to reduce short-term debt.
The Company also has an effective shelf registration statement under which
$220 million of debt securities and/or preferred stock are available for
issuance.
OTHER MATTERS
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, to provide wholesale transmission service to others and
may order electric utilities to enlarge their transmission systems to facilitate
transmission services without impairing reliability. State regulatory
authorities are in the process of changing utility regulations in response to
federal and state statutory changes and evolving markets, including
consideration of providing open access to retail customers (see Note 8). In part
in response to these changing conditions, the Company has entered into a
definitive merger agreement with PSCo. Consummation of the Merger is subject to
customary conditions, including the receipt of all regulatory authority
approvals, all of which have been received except for the approval of the SEC
under PUHCA, which is pending. The foregoing discussions of the Company's
"Results of Operations" and "Liquidity and Capital Resources" do not take into
account any changes that could arise as a result of the Merger (see Item 1.
Business General and Note 2).
The foregoing discussion and analysis by management is intended to provide
a summary of information relevant to an assessment of the financial condition
and results of operations of the Company and should be read together with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
in order to arrive at a more complete understanding of such matters.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
- ----------------------------
The Board of Directors and Shareholders
Southwestern Public Service Company:
We have audited the accompanying consolidated balance sheets and statements
of capitalization of Southwestern Public Service Company and subsidiaries as of
December 31, 1996, August 31, 1996 and August 31, 1995, and the related
consolidated statements of earnings, common shareholders' equity and cash flows
for each of the four months ended December 31, 1996 and for each of the three
years in the period ended August 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Southwestern Public Service
Company and subsidiaries as of August 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended August 31, 1996, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 1997
(June 19, 1997, as to the Carolina Energy
Limited Partnership Investment in Note 6)
21
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Consolidated Balance Sheets
December 31, 1996 and August 31, 1996 and 1995
December 31, August 31,
1996 1996 1995
---- ---- ----
(In Thousands)
Assets
- ------
Utility Plant:
Utility plant in service ............... $2,517,579 $2,484,025 $2,366,435
Accumulated depreciation ............... (930,436) (911,422) (854,015)
-------- -------- --------
Net plant in service ................. 1,587,143 1,572,603 1,512,420
Construction work in progress .......... 79,346 49,143 31,026
------ ------ ------
Net utility plant .................... 1,666,489 1,621,746 1,543,446
--------- --------- ---------
Nonutility Property and Investments ...... 58,144 71,855 70,087
------ ------ ------
Current Assets:
Cash and temporary investments ......... 40,610 31,223 36,860
Accounts receivable, net ............... 67,779 77,959 73,262
Undercollected fuel and purchased
power cost, net ...................... 15,715 7,193 -
Accrual for unbilled revenues .......... 20,304 23,152 28,626
Materials and supplies, at average cost 20,096 21,513 21,647
Prepayments and other current assets ... 3,887 7,452 10,734
----- ----- ------
Total current assets ................. 168,391 168,492 171,129
------- ------- -------
Deferred Debits .......................... 148,186 135,724 124,343
------- ------- -------
Total Assets ......................... $2,041,210 $1,997,817 $1,909,005
========== ========== ==========
Capitalization and Liabilities
- ------------------------------
Capitalization (See Consolidated Statements
of Capitalization):
Common shareholders' equity ............. $ 731,752 $ 735,119 $ 720,752
Preferred stock - - 72,680
SPS Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary
Trust holding solely Subordinated
Debentures of SPS ..................... 100,000 - -
Long-term debt .......................... 620,400 622,931 576,072
------- ------- -------
Total capitalization .................. 1,452,152 1,358,050 1,369,504
--------- --------- ---------
Current Liabilities:
Short-term debt ......................... 53,836 69,624 -
Current maturities of long-term debt .... 15,231 15,176 276
Accounts payable ........................ 20,785 15,979 12,187
Overcollected fuel and purchased power
cost, net ............................. - - 5,969
Interest accrued ........................ 13,151 10,962 9,067
Fuel and purchased power expense
accrued ............................... 42,218 46,396 40,164
Taxes accrued ........................... 19,999 32,486 39,757
Dividends payable on common stock ....... - 22,505 22,505
Other current liabilities ............... 39,681 43,441 39,843
------ ------ ------
Total current liabilities ............. 204,901 256,569 169,768
------- ------- -------
Deferred Credits:
Deferred income taxes ................... 367,272 365,911 344,794
Unamortized investment tax credits ...... 5,719 5,803 6,053
Other ................................... 11,166 11,484 18,886
------ ------ ------
Total deferred credits ................ 384,157 383,198 369,733
------- ------- -------
Commitments and Contingencies
Total Capitalization and Liabilities .. $2,041,210 $1,997,817 $1,909,005
========== ========== ==========
See accompanying notes to consolidated financial statements.
22
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Consolidated Statements of Capitalization
December 31, 1996 and August 31, 1996 and 1995
December 31, August 31,
1996 1996 1995
---- ---- ----
(In Thousands)
Common Shareholders' Equity:
Common stock, $1 par value, authorized
100,000,000 shares in 1996 and 1995;
outstanding 40,917,908 shares in 1996
and 1995 ............................... $ 40,918 $ 40,918 $ 40,918
Premium on capital stock ................. 307,484 307,484 306,376
Retained earnings ........................ 383,350 386,717 373,458
------- ------- -------
Total common shareholders' equity ....... 731,752 735,119 720,752
------- ------- -------
Cumulative Preferred Stock:
Preferred stock, $25 par value,
authorized 3,000,000 shares; outstanding
920,000 shares in 1995; dividend rates
from 4.36% to 8.88% ..................... - - 23,000
Preferred stock, $100 par value,
authorized 2,000,000 shares; outstanding
496,800 shares in 1995; dividend rates
from 3.70% to 14.50% .................... - - 49,680
Preferred stock, $1 par value,
authorized 10,000,000 shares; none
outstanding ............................. - - -
---- ---- ----
Total cumulative preferred stock ........ - - 72,680
---- ---- ------
SPS Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust
holding solely Subordinated Debentures
of SPS ................................... 100,000 - -
------- ---- ----
Long-Term Debt:
First Mortgage Bonds:
Rate Maturity
- ------------------------------------------
5.70% .......... February 1997 ......... 15,000 15,000 15,000
6.875 .......... December 1999 ......... 90,000 90,000 90,000
7-1/4 .......... July 2004 ............. 135,000 135,000 135,000
6-1/2 .......... March 2006 ............ 60,000 60,000 -
8-1/4 .......... July 2022 ............. 40,000 40,000 40,000
8.20 ........... December 2022 ......... 100,000 100,000 100,000
8.50 ........... February 2025 ......... 70,000 70,000 70,000
Unamortized debt discount, net ........... (1,279) (1,323) (1,418)
------ ------ ------
Total first mortgage bonds 508,721 508,677 448,582
------- ------- -------
Pollution control obligations,
securing Red River Authority
Pollution Control Revenue Bonds, net:
Series Rate Maturity
--------------------------------------
Not collateralized by First Mortgage Bonds:
1991 .... adjustable .. July 2011 ...... 44,500 44,500 44,500
1994 .... 6.435 ..... July 2016 ...... 25,000 - -
1996 .... 5.75% September 2016 ...... 57,300 - -
Collateralized by First Mortgage Bonds:
1979 .... 6-1/2% .... March 2004 ...... - 25,000 25,000
1979 .... 6-5/8 ..... March 2009 ...... - 32,300 32,300
1981 .... 13-1/2 ... October 2001 ...... - 25,000 25,000
Funds held and invested by Trustee ....... (418) (120) (55)
---- ---- ---
Total pollution control obligations,
net ................................. 126,382 126,680 126,745
------- ------- -------
Other long-term debt ..................... 528 2,750 1,021
--- ----- -----
Total long-term debt, including
current maturities .................. 635,631 638,107 576,348
Current maturities ....................... (15,231) (15,176) (276)
------- ------- ----
Total long-term debt .................. 620,400 622,931 576,072
------- ------- -------
Total Capitalization ..................... $1,452,152 $1,358,050 $1,369,504
========== ========== ==========
See accompanying notes to consolidated financial statements.
23
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Consolidated Statements of Earnings
For the four months December 31, 1996 and 1995
1996 1995
---- ----
(In Thousands,Except
Per Share Amounts)
Operating Revenues ............................... $295,579 $267,427
-------- --------
Operating Expenses:
Operation:
Fuel ........................................... 141,896 119,081
Purchased power ................................ 4,900 2,756
Other .......................................... 37,127 35,259
Maintenance ..................................... 11,312 9,470
Depreciation and amortization ................... 22,289 21,873
Taxes other than property and income taxes 7,353 6,900
Property taxes .................................. 7,738 7,465
Income taxes .................................... 15,772 18,141
------ ------
Total operating expenses ...................... 248,387 220,945
------- -------
Operating Income ................................. 47,192 46,482
------- -------
Other Income (Expense), Net:
Allowance for equity funds used during construction 179 60
Income taxes .................................... 4,785 (822)
Other, net ...................................... (14,981) 87
------ -----
Total other income (expense), net ............. (10,017) (675)
----- -----
Interest Charges:
Interest on long-term debt ............... 15,556 14,424
Allowance for borrowed funds used during construction (891) (806)
Other interest ................................... 1,847 1,243
----- -----
Total interest charges ......................... 16,512 14,861
------ ------
Distributions on SPS Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust ......... 1,526 -
----- ---
Net Earnings ...................................... 19,137 30,946
Dividends and premiums on cumulative
preferred stock ................................. - 2,373
--- -----
Earnings Applicable to Common Stock ............... $19,137 $28,573
======== =======
Weighted Average Shares Outstanding ............... 40,918 40,918
====== ======
Earnings per Common Share ......................... $0.47 $0.70
===== =====
Dividends Declared per Common Share ............... $0.55 $0.55
===== =====
See accompanying notes to consolidated financial statements.
24
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Consolidated Statements of Earnings
For the years ended August 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
(In Thousands, Except Per Share Amounts)
Operating Revenues ........................ $899,397 $834,083 $843,448
-------- -------- --------
Operating Expenses:
Operation:
Fuel .................................... 417,023 370,052 403,207
Purchased power ......................... 18,010 5,241 4,604
Other ................................... 111,255 107,467 107,295
Maintenance .............................. 32,534 29,039 28,276
Depreciation and amortization ............ 65,448 61,069 60,551
Taxes other than property and income taxes 21,109 19,122 19,471
Property taxes ........................... 23,472 24,009 22,468
Income taxes ............................. 59,880 63,873 57,857
------ ------ ------
Total operating expenses ............... 748,731 679,872 703,729
------- ------- -------
Operating Income .......................... 150,666 154,211 139,719
------- ------- -------
Other Income (Expense), Net:
Allowance for equity funds used during
construction ........................... 60 229 559
Income taxes ............................. (5,417) (3,775) (531)
Other, net ............................... 10,050 10,746 2,844
------ ------ -----
Total other income (expense), net ...... 4,693 7,200 2,872
----- ----- -----
Interest Charges:
Interest on long-term debt ............... 44,964 40,644 37,881
Allowance for borrowed funds used during
construction ........................... (2,516) (2,463) (1,044)
Other interest ........................... 7,138 3,753 3,586
----- ----- -----
Total interest charges ................. 49,586 41,934 40,423
------ ------ ------
Net Earnings .............................. 105,773 119,477 102,168
Dividends and premiums on cumulative
preferred stock ......................... 2,494 4,878 4,878
----- ----- -----
Earnings Applicable to Common Stock ....... $103,279 $114,599 $ 97,290
======== ======== ========
Weighted Average Shares Outstanding ....... 40,918 40,918 40,918
====== ====== ======
Earnings per Common Share ................. $2.52 $2.80 $2.38
===== ===== =====
Dividends Declared per Common Share ....... $2.20 $2.20 $2.20
===== ===== =====
See accompanying notes to consolidated financial statements.
25
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Consolidated Statements of Common Shareholders' Equity
For the four months ended December 31, 1996 and the years ended August 31, 1996,
1995 and 1994
<TABLE>
<CAPTION>
Shares of Amount of Premium
Common Common on Capital Retained
Stock Stock Stock Earnings Total
----- ----- ----- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1993 ........ 40,918 $ 40,918 $306,376 $341,608 $688,902
Net Earnings ...................... - - - 102,168 102,168
Dividends declared:
Cumulative preferred stock ....... - - - (4,878) (4,878)
Common stock, $2.20 per share .... - - - (90,020) (90,020)
---- ---- ---- ------- -------
Balance at August 31, 1994 ........ 40,918 40,918 306,376 348,878 696,172
Net earnings ...................... - - - 119,477 119,477
Dividends declared:
Cumulative preferred stock ....... - - - (4,878) (4,878)
Common stock, $2.20 per share .... - - - (90,019) (90,019)
---- ---- ---- ------ -------
Balance at August 31, 1995 ........ 40,918 40,918 306,376 373,458 720,752
Net earnings ...................... - - - 105,773 105,773
Retirement of cumulative preferred
stock and other .................. - - 1,108 (921) 187
Dividends declared:
Cumulative preferred stock ....... - - - (1,573) (1,573)
Common stock, $2.20 per share .... - - - (90,020) (90,020)
---- ---- ---- ------- -------
Balance at August 31, 1996 ........ 40,918 40,918 307,484 386,717 735,119
Net earnings ...................... - - - 19,137 19,137
Dividends declared on common stock,
$.55 per share ................... - - - (22,504) (22,504)
---- ---- ---- ------- -------
Balance at December 31, 1996 ...... 40,918 $ 40,918 $307,484 $383,350 $731,752
====== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Consolidated Statements of Cash Flows
For the four months ended December 31, 1996 and 1995
1996 1995
---- ----
(In Thousands)
Operating Activities:
Cash received from customers ................... $299,873 $286,712
Cash paid to suppliers and employees ........... (180,763) (174,362)
Interest paid .................................. (15,995) (11,581)
Income taxes paid .............................. (22,389) (30,726)
Taxes other than income taxes paid ............. (11,371) (10,458)
Other operating cash receipts and payments, net (28,366) 2,580
------ ------
Net cash provided by operating activities .... 40,989 62,165
------- -------
Investing Activities:
Construction expenditures ...................... (66,031) (44,950)
Nonutility property and investments ............ (2,297) (3,741)
Acquisition of TNP properties .................. - (29,200)
---- -------
Net cash used in investing activities ........ (68,328) (77,891)
-------- --------
Financing Activities:
Issuance of long-term debt ..................... 82,300 -
Issuance of SPS Obligated Mandatorily Redeemable
Preferred Securities 100,000 -
Retirement of long-term debt ................... (84,776) (1,717)
Change in short-term debt ...................... (15,788) 116,250
Retirement of cumulative preferred stock - (74,672)
Dividends paid (common and preferred) .......... (45,010) (47,383)
------- -------
Net cash used in financing activities ........ (36,726) (7,522)
------- --------
Net Increase (Decrease) in Cash and Temporary
Investments ................... ................ 9,387 (23,248)
Cash and Temporary Investments at
Beginning of Year .............................. 31,223 36,860
------ ------
Cash and Temporary Investments at
End of Year .................................... $ 40,610 $ 13,612
======== ========
Reconciliation of Net Earnings to Net Cash
Provided by Operating Activities:
Net earnings ................................... $19,137 $ 30,946
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ................ 22,289 21,873
Deferred income taxes and investment tax credits 4,806 3,166
Allowance for equity funds used
during construction ......................... (179) (60)
Write-off of investment in BCH project 16,008 -
Cash flows impacted by changes in:
Accounts receivable .......................... 10,180 9,402
Accrual for unbilled revenues ................ 2,848 8,787
Materials and supplies ....................... 1,417 928
Accounts payable ............................. 4,806 (2,481)
Fuel and purchased power expense accrued (4,178) (8,192)
Taxes accrued ................................ (12,487) (11,021)
Over (under) collected fuel and
purchased power cost ....................... (8,522) 1,190
Other, net ................................... (15,136) 7,627
------- ------
Net cash provided by operating activities .. $40,989 $ 62,165
======= ========
See accompanying notes to consolidated financial statements.
27
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Consolidated Statements of Cash Flows
For the years ended August 31, 1996, 1995
and 1994
1996 1995 1994
---- ---- ----
(In Thousands)
Operating Activities:
Cash received from customers ............ $886,116 $824,103 $851,602
Cash paid to suppliers and employees .... (564,122) (510,319) (536,618)
Interest paid ........................... (48,126) (42,090) (39,569)
Income taxes paid ....................... (55,425) (50,088) (47,126)
Taxes other than income taxes paid ...... (45,600) (41,898) (41,388)
Other operating cash receipts and
payments, net ......................... 7,243 9,819 12,751
----- ----- ------
Net cash provided by operating activities 180,086 189,527 199,652
------- ------- -------
Investing Activities:
Construction expenditures ............... (111,986) (94,662) (91,788)
Nonutility property and investments ..... (1,768) (28,219) (12,763)
Acquisition of TNP properties ........... (29,200) - -
------- ---- ----
Net cash used in investing activities . (142,954) (122,881) (104,551)
-------- -------- --------
Financing Activities:
Issuance of long-term debt .............. 60,000 76,204 -
Retirement of long-term debt ............ (4,445) (16,880) (25,544)
Change in short-term debt ............... 69,624 (14,994) 14,994
Retirement of cumulative preferred stock (75,434) - -
Dividends paid (common and preferred) ... (92,514) (94,898) (94,898)
------- ------- -------
Net cash used in financing activities . (42,769) (50,568) (105,448)
------- ------- --------
Net Increase (Decrease) in Cash and
Temporary Investments ................... (5,637) 16,078 (10,347)
Cash and Temporary Investments at
Beginning of Year ....................... 36,860 20,782 31,129
------ ------ ------
Cash and Temporary Investments at
End of Year ............................. $ 31,223 $ 36,860 $ 20,782
======== ======== ========
Reconciliation of Net Earnings to Net Cash
Provided by Operating Activities:
Net earnings ............................ $105,773 $119,477 $102,168
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization ......... 65,448 61,069 60,551
Deferred income taxes and investment
tax credits .......................... 16,173 9,467 11,314
Allowance for equity funds used
during construction .................. (60) (229) (559)
Cash flows impacted by changes in:
Accounts receivable ................... (4,697) (3,905) 4,080
Accrual for unbilled revenues ......... 5,474 (7,308) 2,304
Materials and supplies ................ 134 (3,409) (1,495)
Accounts payable ...................... 3,792 (114) 1,071
Fuel and purchased power expense accrued 6,232 (720) (306)
Taxes accrued ......................... (7,271) 9,398 4,612
Over (under) collected fuel and
purchased power cost ................ (13,162) 2,165 2,768
Other, net ............................ 2,250 3,636 13,144
----- ----- ------
Net cash provided by operating
activities .......................... $180,086 $189,527 $199,652
======== ======== ========
See accompanying notes to consolidated financial statements.
28
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(1) Nature of Operations and Summary of Significant Accounting Policies
GENERAL
The Company was incorporated in New Mexico in 1921. The Company's principal
business is the generation, transmission, distribution and sale of electric
energy. Electric service is provided through an interconnected system to a
population of about one million people in a 52,000-square-mile area of the
Panhandle and south plains of Texas, eastern and southeastern New Mexico, the
Oklahoma Panhandle and southwestern Kansas. Approximately 71% of the Company's
operating revenues during fiscal 1996, excluding sales to other utilities, were
derived from operations in Texas and New Mexico. The Company maintains its
accounts in accordance with the Uniform System of Accounts prescribed by the
FERC and as adopted by the PUCT, the NMPUC, the OCC and the KCC.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, UE and its subsidiaries and Quixx and its
subsidiaries. UE is primarily engaged in engineering, design and construction
management. Quixx invests in cogeneration projects and holds water rights and
certain other nonutility assets. The aggregate net earnings of UE and Quixx are
included in line items in Other Income, Net in the Consolidated Statements of
Earnings and consisted of a net loss of approximately $8.5 million for the four
months ended December 31, 1996 and net earnings of approximately $1.5 million
for the same period in 1995. Aggregate net earnings approximated $12.0 million,
$5.2 million and $3.3 million for the fiscal years 1996, 1995 and 1994. All
significant intercompany transactions and balances are eliminated in
consolidation.
On April 22, 1997, the Board of Directors of the Company approved a change
in the Company's fiscal year. Effective January 1, 1997, the Company's new
fiscal year will be the twelve-month period ending December 31. Previously, the
Company's fiscal year was a twelve-month period ending August 31. Fiscal years
presented and referred to in these consolidated financial statements and notes
thereto are on an August 31 fiscal-year basis unless otherwise indicated. The
Transition Period relates to the four months ended December 31, 1996 and, where
applicable, unaudited comparative information for the four months ended December
31, 1995 has been presented.
UTILITY PLANT
Utility plant is stated at the historical cost of construction, which
includes labor, materials, an allowance for funds used during construction and
indirect charges for such items as engineering, supervision and general
administrative costs. Maintenance, repairs and minor replacements are charged to
operating expense; major replacements and betterments are capitalized.
The cost of depreciable units of utility plant retired or disposed of in
the normal course of business is eliminated from utility plant accounts and such
cost plus removal expenses and less salvage value is charged to accumulated
depreciation. When complete operating units are disposed of, appropriate
adjustments are made to accumulated depreciation, and the resulting gains or
losses, if any, are recognized.
The provision for depreciation is computed on a straight-line method at
rates based on the estimated service lives and salvage values of the several
classes of depreciable property as indicated by periodic depreciation studies.
Depreciation as a percentage of average depreciable cost approximated 2.9% for
the Transition Period and in 1996 and 1995 and 2.8% in 1994.
OPERATING REVENUES
Electric rates include estimates of fuel costs incurred by the Company in
the generation or purchase of electricity. Differences between amounts collected
and allowable costs are recorded as over/undercollected fuel and purchased power
costs in accordance with rate-making policies of regulatory authorities. Such
over/undercollected fuel and purchased power costs are reflected as a current
liability or current asset in the accompanying consolidated financial
statements.
Included in operating revenues is an estimate of revenues for electric
services provided but not billed. In 1995 the Company made accounting
adjustments to the estimate of delivered not billed kilowatt-hour (kwh) sales
which increased operating revenues by approximately $8.3 million and net income
by approximately $5.4 million, or 13 cents per share.
29
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(1) Nature of Operations and Summary of Significant Accounting Policies,
continued
DEFERRED DEBITS
Losses on Early Retirements of Debt
Losses on early retirements of debt refinanced by new lower interest rate
debt are amortized on a straight-line basis over the term of the new debt.
Losses on early debt retirements not refinanced by new debt are amortized on a
straight-line basis over the remaining original term of the retired debt.
Amortization of such amounts is included in other interest charges in the
Consolidated Statements of Earnings. The unamortized balance of losses on early
retirements of debt approximated $19.9 million, $19.8 million and $21.3 million
as of December 31, 1996 and August 31, 1996 and 1995, respectively (see Note 4).
Debt Premium, Discount and Expense
Expenses incurred in connection with the issuance of long-term debt, and
premiums and discounts relating to such debt, are being amortized or accreted on
a straight-line basis over the term of the respective debt issues.
Regulatory Assets and Liabilities
The Company prepares its financial statements in accordance with the
provisions of Statement of Financial Accounting Standards No. 71 "Accounting for
the Effects of Certain types of Regulation," as amended (Statement 71).
Statement 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 costs (a regulatory asset) or
recognize an obligation (a regulatory liability) if it is probable that, through
the ratemaking process, there will be a corresponding increase or decrease in
revenues.
On September 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (Statement 121). Statement 121 requires
that long lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The statement also requires that rate-regulated enterprises
recognize an impairment for the amount of costs excluded when a regulator
excludes all or part of a cost from the enterprise's rate base. The adoption of
this statement did not have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
The following regulatory assets are reflected in the Consolidated Balance
Sheets as of December 31, 1996 and August 31, 1996 and 1995:
December 31, August 31, August 31,
1996 1996 1995
---- ---- ----
(In Thousands)
Regulatory assets:
Income taxes ......................... $ 81,403 $ 81,291 $ 73,824
Deferred refinancing costs ........... 19,880 19,757 21,262
Deferred costs related to a
development project ................. 4,035 4,256 4,921
Employees' postretirement
benefits other than pensions ........ 3,192 3,264 2,519
Early retirement costs ............... 1,727 1,848 2,211
Other ................................ 7,309 7,120 4,110
----- ----- -----
Total .............................. $117,546 $117,536 $108,847
======== ======== ========
As of December 31, 1996, the Company's regulatory assets are being
recovered through rates charged to customers over periods ranging from ten to
thirty years. Under current rates, the Company is recovering approximately $8
million of regulatory assets per year. The Company believes it will continue to
be subject to rate regulation to the extent necessary to recover these assets.
In the event that a portion of the Company's operations is no longer subject to
the provisions of Statement 71 as a result of a change in regulation or the
effects of competition, the Company could be required to write-off related
regulatory assets, determine any impairment to other
30
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(1) Nature of Operations and Summary of Significant Accounting Policies,
continued
assets resulting from deregulation and write-down any impaired assets to their
estimated fair value which could materially adversely impact the Company's
results of operations, financial position or cash flows.
In July 1995, the Company negotiated a settlement with the PUCT and various
intervenors. As part of this agreement, the Company is required to perform
certain demand side management activities and is allowed to defer the costs of
these activities and include them in rate base and cost of service in future
PUCT proceedings.
In early 1997, the Company recorded an approximate $22.3 million regulatory
asset associated with the Thunder Basin judgment pending authorization of
recovery from the PUCT and the NMPUC (see Note 6).
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
The allowance for funds used during construction (AFUDC) is designed to
allow the Company to capitalize the net composite interest and equity costs of
capital funds used to finance plant additions during construction periods and
does not represent current cash income. Established regulatory rate practices
permit the Company to recover these costs in future periods by fixing rates to
include a fair return on, and a recovery of, these capital costs through their
inclusion in the rate base and cost of service. The composite rates used for
AFUDC were 6.2% for the Transition Period, 6.0% in 1996, 6.5% in 1995 and 6.2%
in 1994. Such rates reflect semiannual compounding.
INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109).
Under Statement 109, the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted tax rates applicable to the differences between the financial statement
amounts and the tax bases of existing assets and liabilities (see Note 5).
Certain provisions of Statement 109 provide that regulated enterprises are
permitted to recognize adjustments resulting from the adoption of Statement 109
as regulatory assets or liabilities if it is probable that such amounts will be
recovered from or returned to customers through future rates.
Investment tax credits have been deferred and are being amortized to income
over the life of the related property.
CASH FLOWS
The Company uses the direct method of presentation for cash flows from
operating activities. For purposes of the Consolidated Statements of Cash Flows,
the Company considers temporary cash investments to be cash equivalents. These
temporary cash investments are securities having original maturities of three
months or less or having longer maturities but with put dates of three months or
less.
EARNINGS PER COMMON SHARE
Earnings per share of common stock is computed for each year based upon the
weighted average number of common shares outstanding. The effect of stock awards
and options outstanding under the Company's 1989 Stock Incentive Plan is not
significant (see Note 7).
SHAREHOLDER RIGHTS PLAN
The Company has a Shareholder Rights Plan (the Rights Plan) designed to
ensure that all shareholders receive fair and equal treatment in the event of
any proposal to acquire control of the Company. Under the Rights Plan, each
shareholder holds one right for each share of the Company's common stock held of
record. Each right entitles the holder to purchase one share of the Company's
common stock for $70 in the event a person or group acquires 10% or more of the
Company's common stock. Under certain circumstances, the holders of the rights
will be entitled to purchase common shares of the Company at one half of the
current market price.
31
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(1) Nature of Operations and Summary of Significant Accounting Policies,
continued
In addition, any time after a person or group acquires 10% or more of the
Company's outstanding common shares, the board of directors may, at its option,
exchange part or all of the rights for shares of common stock of the Company.
The Company will be entitled to redeem the rights for $0.01 per right at any
time until the tenth day following a public announcement of the acquisition of
10% of its common shares. The rights expire in 2001, unless earlier redeemed or
exchanged by the Company, and have no effect on operating results or earnings
per share. The Rights Plan has been amended to provide that the Merger will not
trigger the provisions of the Rights Plan.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's significant financial instruments at December 31, 1996 and August 31,
1996 and 1995. The carrying amount of all other financial instruments
approximates fair values.
<TABLE>
<CAPTION>
December 31, 1996 August 31, 1996 August 31, 1995
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
------ ----- ------ ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Long-term debt $620,400 $639,769 $622,931 $624,232 $576,072 $573,720
SPS Obligated Mandatorily
Redeemable Preferred Securities
of Subsidiary Trust holding
solely Subordinated Debentures
of SPS $100,000 $ 99,520 - - - -
</TABLE>
The estimated fair values of the financial instruments listed in the above
table are based on quoted market prices of the same or similar instruments.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1996 and August 31, 1996
and 1995. These fair value estimates have not been comprehensively revalued for
purposes of these financial statements since that date, and current estimates of
fair values may differ significantly from the amounts presented herein.
STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (Statement 123) on September 1, 1996.
This statement establishes financial accounting and reporting standards for
stock-based employee compensation plans. The adoption of Statement 123 did not
have a material effect on the Company's consolidated financial position, results
of operations or cash flows. As allowed by Statement 123, the Company uses the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25 - "Accounting for Stock Issued to Employees," in accounting
for its stock-based compensation plan (see Note 7).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. In the event estimates and/or assumptions prove to be
different from actual amounts, adjustments are made to reflect more current
information in subsequent periods. No material adjustments were made to
estimates during the current period.
Certain August 31, 1996 and 1995 Balance Sheet amounts have been
reclassified to conform to the December 31, 1996 presentation.
32
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(2) Merger and Acquisitions
MERGER WITH PUBLIC SERVICE COMPANY OF COLORADO
The Company and Denver-based PSCo entered into a definitive merger
agreement (the Merger) on August 22, 1995, to form a registered public utility
holding company, NCE, which will become the parent company for the Company and
PSCo. Upon completion of the Merger, holders of the Company and PSCo common
stock will receive 0.95 of one share and one share of the new holding company
common stock, respectively, for each share of stock held. As of December 31,
1996, the Company and PSCo had 40,917,908 and 64,818,759 shares, respectively,
of common stock outstanding. Based on that number of shares outstanding and the
conversion ratios, the Company and PSCo shareholders would own 37.5 percent and
62.5 percent, respectively, of the common equity of the new holding company. The
debt (including mortgage bonds) and any preferred stock of the Company
outstanding at the time of the effectiveness of the Merger will remain
outstanding debt and preferred stock of the Company.
In connection with the Merger, all of the stock of the Company's two
wholly-owned subsidiaries, UE and Quixx, will be sold to a wholly-owned
subsidiary of NCE in exchange for a promissory note of that subsidiary in an
amount equal to the fair market value of UE and Quixx.
The board of directors of NCE consists of 14 directors; six and eight
current directors of the Company and PSCo, respectively.
The transaction was approved by the shareholders of the Company and PSCo on
January 31, 1996, and all required state and federal regulatory agency
authorizations have been received, except for approval by the SEC under PUHCA,
which is now pending.
It is management's intention that NCE begin realizing certain savings upon
consummation of the Merger. Accordingly, costs associated with the Merger and
the transition planning and implementation are expected to negatively impact
earnings during 1997. The Company recognized approximately $2.0 million and $2.2
million of Merger related and business integration expenses during the four
months ended December 31, 1996 and 1995, respectively, and approximately $7.9
million and $759,000 during the fiscal years ended August 31, 1996 and 1995,
respectively. The Merger is expected to qualify as a tax-free reorganization and
as a pooling of interests for accounting purposes.
Under the various state regulatory approvals, the Company is required to
provide credits to retail customers over five years for one-half of the measured
non-fuel operation and maintenance expense savings associated with the business
combination. The Company will provide a guaranteed minimum annual savings of $3
million in Texas, $1.2 million in New Mexico, $100,000 in Oklahoma and $10,000
in Kansas.
ACQUISITION OF TNP PROPERTIES
In September 1995, the Company purchased properties of Texas-New Mexico
Power Company (TNP) located in the Texas Panhandle area for $29.2 million,
adding approximately 8,000 customers. The purchase amount in excess of book
value was approximately $15 million. Cost recovery of this amount was allowed by
the PUCT through a rate surcharge over a ten-year period. This purchase did not
have a significant impact on results of operations of the Company.
33
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(3) Short-Term Debt
<TABLE>
<CAPTION>
Maximum Average Weighted
Weighted Amount Amount Average
Category of Balance at Average Outstanding Outstanding Interest Rate
Short-term End of Interest During the During the For the
Borrowings Period Rate Period (A) Period (B) Period (C)
---------- ------ ---- ---------- ---------- ----------
(Dollars In
Thousands)
<S> <C> <C> <C> <C> <C>
At December 31, 1996:
Notes payable to banks ... - - - - -
Commercial paper ......... $53,836 5.61% $102,470 $56,589 5.65%
At August 31, 1996:
Notes payable to banks ... - - - - -
Commercial paper ......... $69,624 5.31% $138,834 $72,418 5.54%
At August 31, 1995:
Notes payable to banks ... - - $ 8,000 $ 679 6.25%
Commercial paper ......... - - 66,826 16,548 5.78
</TABLE>
(A) Maximum amount outstanding at any month-end for the period.
(B) The average amount outstanding for the period was computed by
dividing the total of daily outstanding principal balances by
the number of days in the period.
(C) The weighted average interest rate during the period was
computed by dividing actual interest expense by the average
short-term debt outstanding for the period (Transition Period is
annualized).
Unsecured borrowings permitted under bank lines of credit were $180 million
during the Transition Period and fiscal 1996 and $128 million in 1995.
(4) Capitalization
PREFERRED STOCK
The Company redeemed on December 27, 1995, all of its outstanding preferred
stock that was redeemable by its terms. The Company also purchased on January 9,
1996, all of the outstanding 2,600 shares of its 14.50% cumulative preferred
stock that was not redeemable by its terms. The aggregate cost to retire the
preferred stock was approximately $76 million, including accrued dividends.
On January 31, 1996, the shareholders approved an amendment to the Restated
Articles of Incorporation to delete the designations, preferences, limitations,
and relative rights of authorized shares of existing authorized preferred stock
and to provide for a class of 10 million authorized shares of preferred stock,
$1.00 par value, issuable from time to time in such series and having such
designations, preferences, limitations, and relative rights as the Board of
Directors may determine.
SPS OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY SUBORDINATED DEBENTURES OF SPS
In October 1996, Southwestern Public Service Capital I, a wholly-owned
trust of the Company, issued 4 million shares of 7.85% Trust Preferred
Securities, Series A for $100 million. The sole asset of the trust is $103
million principal amount of the Company's 7.85% Deferrable Interest Subordinated
Debentures, Series A, due September 1, 2036. Holders of the securities are
entitled to receive quarterly distributions at an annual rate of 7.85% of the
liquidation preference value of $25. The securities are redeemable at the option
of the Company on October 21, 2001 at 100% of the principal amount outstanding
plus accrued interest. In addition to the Company's obligations under the
Subordinated Debentures, the Company 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 (collectively, the "Back-up Undertakings"). Considered together, the
Back-up Undertakings
34
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(4) Capitalization, continued
constitute a full and unconditional guarantee by the Company of the trust
obligations under the preferred securities. The securities are shown as SPS
Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust
holding solely Subordinated Debentures of SPS on the Consolidated Balance Sheet.
The net proceeds were used to reduce short-term debt.
LONG-TERM DEBT
First Mortgage Bonds (Bonds) issued under the Indenture of Mortgage and
Deed of Trust, dated August 1, 1946, as supplemented and amended (Mortgage) are
secured by substantially all of the Company's utility plant. The Mortgage limits
the maximum principal amount of Bonds that may be outstanding thereunder to $3
billion and contains provisions relating to the restriction of the payment of
dividends on common stock. At December 31, 1996, approximately $327,000 of total
retained earnings of approximately $383.4 million was so restricted.
The Company is limited in the amount of Bonds that it can issue by certain
restrictions contained in the Mortgage. The Mortgage permits the issuance of
Bonds against 60% of certain property additions, against certain retired Bonds
or against deposited cash. Property additions and retired Bonds available for
the issuance of Bonds were approximately $393.8 million and $55.3 million,
respectively, at December 31, 1996, which would permit issuance of approximately
$291.6 million of additional Bonds. Substantial amounts of property additions
are used by the Company to satisfy a maintenance fund covenant under the
Mortgage. The Mortgage also provides that, with certain exceptions, additional
Bonds may not be issued unless net earnings, as defined, are at least twice the
annual interest requirements on all Bonds outstanding and then to be issued and
on all prior lien indebtedness. Such ratio for the calendar year ended December
31, 1996, was 4.83.
The Red River Authority of Texas has issued certain obligations, based on
long-term installment sale agreements executed by the Company, that relate to
the pollution control facilities installed at the Company's coal-fueled
generating units. The Company's payments under the pollution control obligations
are pledged to secure the Red River Authority Pollution Control Revenue Bonds.
In October 1996, the Company called its $25 million principal amount of
13-1/2% pollution control revenue bonds (PCRBs) and issued $25 million of new
variable rate PCRBs. In connection with the new issuance of variable rate PCRBs,
the Company has an interest rate swap agreement, which, in effect, fixes the
interest rate on a $25 million notional amount at 6.435%. Amounts paid or
received under this agreement are accrued as interest rates change and are
recognized over the life of the agreement as an adjustment to interest expense.
The Company is exposed to interest rate risk in the event of nonperformance by
counterparties; however, the Company does not anticipate such nonperformance.
The trust indenture for the 1991 Series of pollution control obligations
permits the Company to choose between various interest rate options, including
the option to convert to a fixed rate. Currently, the interest rate is adjusted
weekly and as of December 31, 1996 and August 31, 1996 and 1995, the interest
rate was 3.95%, 3.35% and 3.45%, respectively.
The 1991 Series may be subject to tender for purchase at the option of the
holder and will be subject to mandatory tender at certain times. The Company
entered into a credit agreement with a bank to provide liquidity support in
connection with the optional and mandatory tenders. The Company has also entered
into a remarketing agreement to provide for the remarketing of any tendered
bonds. The credit agreement is scheduled to expire on July 1, 1998. Based upon
the Company's intent and ability to remarket such obligations, the 1991 Series
obligations have been classified as long-term debt.
The Company redeemed in September 1996, the $25 million 6-1/2% PCRBs due
2004 and the $32.3 million 6-5/8% PCRBs due 2009 and replaced these series in
September 1996, with $57.3 million 5-3/4% PCRBs due 2016.
At December 31, 1996, aggregate maturities of long-term debt for each of
the calendar years in the five-year period are as follows: 1997, $15.2 million;
1998, $0.2 million; 1999, $90.1 million; 2000 and 2001, $0. Sinking fund and
improvement fund requirements are not significant.
The Company has an effective shelf registration statement under which $220
million of debt securities and/or preferred stock are available for issuance.
35
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(5) Income Taxes
The components of income tax expense (benefit) for the four months ended
December 31, 1996 and 1995 and for the years ended August 31, 1996, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
Four months ended December 31, Years ended August 31,
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
(In Thousands)
<S> <C> <C> <C> <C> <C>
Current income taxes:
Federal ..................... $ 5,991 $14,799 $46,435 $56,297 $45,232
State ....................... 190 998 2,689 1,884 1,842
--- --- ----- ----- -----
Total current income taxes 6,181 15,797 49,124 58,181 47,074
----- ------ ------ ------ ------
Deferred income taxes:
Federal ..................... 4,697 3,117 15,776 9,321 11,085
State ....................... 192 132 647 396 479
--- --- --- --- ---
Total deferred income taxes 4,889 3,249 16,423 9,717 11,564
----- ----- ------ ----- ------
Investment tax credits - net .. (83) (83) (250) (250) (250)
--- --- ---- ---- ----
Total provision for income taxes $10,987 $18,963 $65,297 $67,648 $58,388
======= ======= ======= ======= =======
</TABLE>
A reconciliation of the statutory U.S. income tax rates and the effective
tax rates follows:
<TABLE>
<CAPTION>
Four months ended December 31, Years ended August 31,
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
(In Thousands)
<S> <C> <C> <C> <C> <C>
Tax computed at U.S. statutory rate on
pre-tax accounting income .......... $10,544 $17,468 $59,874 $65,494 $56,194
Increase (decrease) in tax from:
State income taxes ................. 123 649 1,748 1,225 1,197
Non-deductible merger costs ........ 488 620 2,006 - -
Allowance for funds used
during construction .............. (144) (180) (248) (322) (594)
Amortization of investment tax credits (83) (83) (250) (250) (250)
Other-net .......................... 59 489 2,167 1,501 1,841
-- --- ----- ----- -----
Total income taxes ............... $10,987 $18,963 $65,297 $67,648 $58,388
======= ======= ======= ======= =======
Effective tax rate ................... 36.5% 38.0% 38.2% 36.2% 36.4%
==== ==== ==== ==== ====
</TABLE>
The Company has historically provided for deferred income taxes to the
extent allowed by its regulatory agencies whereby deferred taxes were not
provided on all differences between financial statement and taxable income (the
flow-through method). At December 31, 1996, the Company is fully normalized for
FERC jurisdictional purposes. For state jurisdictional purposes, the Company is
fully normalized in Texas and Oklahoma. The Company is fully normalized to the
extent allowed by its regulators in New Mexico and Kansas, with flow-through
treatment of certain temporary differences. To give effect to temporary
differences for which deferred taxes were not previously required to be
provided, a regulatory asset was recognized. The regulatory asset represents
temporary differences primarily associated with prior flow-through amounts and
the equity component of allowance for funds used during construction, net of
temporary differences related to unamortized investment tax credits and excess
deferred income taxes that have resulted from historical reductions in tax rates
(see Note 1).
The significant components of the Company's deferred tax assets and
liabilities, which are reflected net in the accompanying Consolidated Balance
Sheets at December 31, 1996 and August 31, 1996 and 1995, are as follows:
36
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(5) Income Taxes, continued
December 31, August 31,
1996 1996 1995
---- ---- ----
(In Thousands)
Current Deferred Tax Assets and
Liabilities (included in prepayments
and other current assets):
Over (under) recovered fuel revenue $ (5,889) $ (2,773) $ 2,365
Other 2,806 1,940 734
----- ----- ---
Net current liability $ (3,583) $ (833) $ 3,098
========= ======== ========
Noncurrent Deferred Tax Assets:
Employee benefit plans 1,747 1,794 3,068
Interest on pollution control obligations 1,799 1,802 1,812
Avoided cost method of capitalized interest 1,942 1,942 1,942
Contributions in aid of construction 2,172 2,172 2,172
Deferred compensation 4,306 4,201 3,578
Unamortized investment tax credits 3,206 3,253 3,398
Deferred promotional cost 3,746 3,746 4,624
Other 3,830 3,836 3,736
----- ----- -----
Total noncurrent deferred tax assets 22,747 22,746 23,330
------ ------ ------
Noncurrent Deferred Tax Liabilities:
Differences related to depreciation $273,197 $271,520 $260,744
Capitalized construction costs 31,373 31,679 28,954
Previously unrecognized temporary
differences net of the tax rate
adjustment of previously normalized
temporary differences 55,971 56,517 51,581
Plant related timing differences 19,720 19,393 17,864
Losses on reacquisition of long-term debt 5,936 5,906 6,345
Other 3,822 3,642 3,636
----- ----- -----
Total noncurrent deferred tax liabilities $390,019 $388,657 $369,124
-------- -------- --------
Net noncurrent deferred income tax liability $367,272 $365,911 $344,794
======== ======== ========
(6) Commitments, Contingencies and Financial Guarantees
SYSTEM PURCHASE OPTION
The Company and the City of Las Cruces, New Mexico (the City) entered into
a System Purchase Option and Rate Agreement in August 1994, which grants the
City the option to sell to the Company the electric utility system serving the
City (including distribution, subtransmission, and transmission facilities),
which the City plans to acquire from El Paso Electric Company (EPE) by purchase
or through condemnation proceedings. The agreement has a three-year term
beginning at the time the City acquires the facilities and ending no later than
January 1, 2002. The purchase price which would be paid by the Company would be
equal to the amount required to retire all outstanding debt incurred by the City
in acquiring the facilities plus the City's reasonable costs in acquiring the
facilities. The Company has the right to terminate the agreement if, in the
Company's sole discretion, it determines that any proposed condemnation award is
excessive or upon the occurrence of certain other events. The agreement also
provides that, if the City abandons or dismisses condemnation proceedings as a
consequence of the Company's termination of the agreement, the Company will
reimburse the City for one-half of its reasonable litigation expenses and for
any of EPE's damages and litigation expenses that the City is obligated to pay
by final court order.
In July 1995, the NMPUC ordered the Company to respond to an Order to Show
Cause Why the System Purchase Options and Rate Guarantee is not a security, and
if it is a security, why the Company did not obtain prior NMPUC approval under
the New Mexico
37
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(6) Commitments, Contingencies and Financial Guarantees, continued
Public Utility Act. The Company has responded to the Commission's Order to Show
Cause and does not believe the agreement to be a security or the guarantee of a
security. A hearing is scheduled for July 1997.
FUEL PURCHASE COMMITMENTS
In the ordinary course of business, the Company has made substantial
commitments with respect to the purchase of coal and natural gas for use as fuel
in its generating units. To provide fuel for its coal-fueled generating units,
the Company has various long-term commitments with TUCO for the purchasing and
processing of coal which is delivered to the Company's coal bunkers in the form
of crushed, ready-to-burn coal. The commitments include the use of rail coal
cars, unloading facilities and related services. Such commitments in 1996
dollars for the remaining term of the contract approximate $1.5 billion. The
contracts for coal supply, transportation and other services expire in 2001,
2002 and 2017, respectively.
FINANCIAL GUARANTEES
In connection with an agreement for the sale of electric power, the Company
guaranteed certain obligations of a customer totaling $48 million. These
obligations related to the construction of certain utility property that, in the
event of default by the customer, would revert to the Company.
ENVIRONMENTAL MATTERS
The Company's facilities are regulated by federal and state environmental
agencies. These agencies have jurisdiction over air emissions, water quality,
wastewater discharges, solid wastes and hazardous substances. The Company has
received all necessary authorizations for the construction and continued
operation of its generation, transmission and distribution systems. Company
facilities have been designed and constructed to operate in compliance with
environmental standards.
Beginning in the year 2000, CAAA Phase II will require more stringent
limits on SO2 emissions at the Company's existing fossil-fueled plants. However,
current regulations permit compliance with sulfur emissions limitations in the
year 2000 by using SO2 allowances allocated to plants by the EPA, using
allowances generated by reducing emissions at existing plants and by using
allowances purchased from other companies. Based upon information from the
Company's fuel suppliers, the SO2 allowances issued by the EPA approximate the
Company's projected SO2 emissions. The Company monitors options to ensure that
allowances will be sufficient to economically operate the Company's existing
plants without significant emission reductions. The CAAA also requires the EPA
to develop new NOx emission standards for existing and new plants which may be
more stringent than the current standards. The Company anticipates being able to
comply with Phase II NOx emission standards with no additional material capital
cost. The Company continues to monitor the impact that the CAAA may have on the
Company.
Capital expenditures for environmental protection facilities aggregated
approximately $1.8 million for the Transition Period and $2.8 million, $4.1
million, and $11.6 million for fiscal 1996, 1995 and 1994, respectively.
Estimates of future capital expenditures for environmental protection facilities
are subject to change but the Company has included approximately $3.2 million in
its construction program for these expenditures for calendar 1997.
The Company has not developed any specific site removal and exit plans for
its fossil fuel plants or substation sites. Plant removal and exit plans are
under development, and when such plans are developed in the future, the Company
intends to treat removal and exit costs as a cost of retirement in utility plant
and include them in depreciation accruals. An estimated removal cost (based on
historical experience) is currently included in depreciation expense.
THUNDER BASIN LAWSUIT
The Company was named as a defendant in a case entitled Thunder Basin Coal
Co. v. Southwestern Public Service Co., No. 93-CV-304B (D. Wyo.). On November 1,
1994 the jury returned a verdict in favor of Thunder Basin and awarded them
damages of approximately $18.8 million. The Company appealed the judgment to the
Tenth Circuit Court of Appeals and on January 7, 1997, that Court found in favor
of Thunder Basin and upheld the judgment. The Company filed a motion for
rehearing which was denied. In
38
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(6) Commitments, Contingencies and Financial Guarantees, continued
February 1997, the Company recorded the liability for the judgment including
interest and court costs in the amount of approximately $22.3 million and
deferred these costs for future rate recovery. These amounts, including
interest, were paid in April 1997.
Management believes that the judgment amount paid is recoverable from
customers, although any such recovery would be subject to review by various
regulatory agencies. On September 17, 1996, the FERC issued an order granting
the Company conditional approval to collect the FERC jurisdictional portion of
the judgment from wholesale customers. Therefore, management believes that the
ultimate resolution will not have a material adverse effect on the Company's
results of operations, financial position or cash flows.
BCH ENERGY LIMITED PARTNERSHIP INVESTMENT
Quixx holds a 49% limited partnership interest in BCH Energy Limited
Partnership, which owns a waste-to-energy cogeneration facility located near
Fayetteville, North Carolina. Limited commercial operation of the BCH project
began in June 1996; however, the facility did not achieve the Iexpected
performance level. An effort was made to restructure the project, but it was not
possible to achieve the required improvements on economically viable terms;
therefore, in December 1996, Quixx wrote off its investment of approximately $16
million or $0.25 per common share, after tax, in this project.
CAROLINA ENERGY LIMITED PARTNERSHIP INVESTMENT
In June 1997, Quixx wrote-off its investment of approximately $13.6 million
in the Carolina Energy Limited Partnership. Additionally, UE wrote-off its net
investment of approximately $2.4 million in this same partnership. Quixx held a
one-third ownership interest, including a 1% general partnership interest, in
the Carolina Energy Limited Partnership. UE's net investment in the partnership
was comprised of subordinated debt, the related interest receivable, as well as
engineering services. This combined investment represents approximately $16
million or $0.25 per common share, after tax.
The Carolina Energy Project is similar to the BCH project, but with design
modifications. Construction was originally scheduled to be completed later in
1997 but was halted pending an independent analysis of the project's engineering
and financial viability. Additionally, the banks providing debt financing to the
project withheld funds for continued construction. Quixx, UE, other equity
owners, senior creditors and the constructor have been unable to restructure the
project on mutually agreeable terms. The construction contractor is demobilizing
and the creditors have initiated remedies provided under the credit agreement.
Accordingly, management has determined it is unlikely the project will be
completed under the present ownership, if at all, and Quixx's and UE's
investments in the Carolina Energy Project are unlikely to be recovered.
OTHER
The Company is a defendant in various claims and legal actions, primarily
workers' compensation, contractual matters and general liability lawsuits, all
arising in the normal course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
the Company's consolidated financial statements.
(7) Employee Benefit Plans
DEFINED BENEFIT PLANS
The Company has a noncontributory defined benefit retirement plan
(Retirement Plan) which provides retirement and certain other benefits to its
officers and employees. The Company's policy is to fund the accrued costs of the
Retirement Plan. Assets of the Retirement Plan consist primarily of U.S.
government and agency obligations, bonds and common stocks (including 586,236
shares of common stock of the Company with an estimated fair market value of
$20.7 million as of December 31, 1996).
Additionally, the Company has a noncontributory defined benefit
supplemental retirement income plan (Supplemental Plan) for qualifying executive
personnel. The Supplemental Plan is unfunded, and benefits due under the plan
are paid out of the Company's general funds.
39
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(7) Employee Benefits Plans, continued
Net periodic pension cost for the Retirement and Supplemental Plans, as
determined using the projected unit credit actuarial cost method for the
Transition Period and for the years ended August 31, 1996, 1995 and 1994, is
presented below:
Transition
Period 1996 1995 1994
------ ---- ---- ----
(In Thousands)
Net periodic pension cost:
Service cost for benefits earned
during the period ................. $ 2,390 $ 6,846 $ 6,606 $ 6,394
Interest cost on projected benefit
obligation ........................ 7,066 20,266 19,563 18,444
Actual return on plan assets ....... (22,878) (53,666) (37,912) 2,729
Net amortization and deferral ...... 13,413 27,409 12,840 (26,806)
------ ------ ------ -------
Net periodic pension cost (benefit) $ (9) $ 855 $ 1,097 $ 761
======= ======= ======= =======
The funded status of the Retirement and Supplemental Plans and amounts
recognized in the Company's Consolidated Balance Sheets as of December 31, 1996
and August 31, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
December 31, 1996 August 31, 1996 August 31, 1995
Supplemental Supplemental Supplemental
Retirement Retirement Retirement Retirement Retirement Retirement
Plan Plan Plan Plan Plan Plan
---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefit obligation $219,406 $ 6,037 $ 198,196 $ 5,774 $ 190,848 $ 5,749
Nonvested benefit obligation 10,868 1,566 14,458 1,505 13,139 1,255
------ ----- ------ ----- ------ -----
Accumulated benefit obligation $230,274 $ 7,603 $ 212,654 $ 7,279 $ 203,987 $ 7,004
======== ======= ========= ======== ========= ========
Plan assets at fair value $361,118 $ - $ 345,699 $ - $ 306,783 $ -
Projected benefit obligation (290,785) (7,974) (265,317) (7,647) (253,793) (7,421)
-------- ------ -------- ------ -------- ------
Plan assets in excess of (less
than)projected benefit obligation 70,333 (7,974) 80,382 (7,647) 52,990 (7,421)
Unrecognized prior service costs 1,139 274 1,184 288 1,320 330
Unrecognized net loss (gain) from
past experience (58,264) 1,973 (67,527) 1,682 (36,847) 1,520
Additional minimum liability - (2,211) - (2,023) - (2,112)
Unrecognized transition obligation
(asset) (19,756) 335 (20,944) 421 (24,508) 679
------- --- ------- --- ------- ---
Accrued pension liability $ (6,548) $(7,603) $ (6,905) $ (7,279) $ (7,045) $ (7,004)
========= ======= ========= ======== ========= ========
</TABLE>
The current and noncurrent portions of the accrued pension liability are
included in other current liabilities and other deferred credits, respectively,
in the accompanying Consolidated Balance Sheets.
The assumed discount rate and the rate of increase in compensation levels
used in determining the actuarial present value of the projected benefit
obligations were 7.5% and 6%, respectively, at December 31, 1996, and 8% and 6%,
respectively at August 31, 1996 and 1995. The expected long-term rate of return
on plan assets was 8% for all periods. Plan assets and liabilities are valued
using a measurement date of December 31, 1996 and June 30 for fiscal years
August 31, 1996 and 1995.
HEALTH AND WELFARE BENEFIT PLANS
The Company provides health care and life insurance benefits to its active
and retired employees (primarily group term life insurance, medical and dental
benefits provided to retired employees) through various health and welfare
benefit plans. Postretirement costs are comprised of: (1) the portion of the
expected postretirement benefit obligation attributable to employee
40
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(7) Employee Benefits Plans, continued
service during the year, (2) amortization of the transition obligation and (3)
interest costs associated with the unfunded accumulated obligation for future
benefits. An assumed discount rate of 8% was used to develop the associated
interest costs. The assumed health care cost trend rate used to measure the
expected cost of benefits was 11% for 1996 and was assumed to diminish to a
level of 5.5% in 2007 and thereafter. The transition obligation of approximately
$58 million is being amortized over a 20-year period. A one percentage point
increase in the assumed health care cost trend rate in each future year would
increase the accumulated postretirement benefit obligation (APBO) at December
31, 1996, by approximately $12 million and other postretirement benefits cost
for 1996 by approximately $1.2 million.
Postretirement costs have historically been included in rates when paid.
Federal and state agencies that regulate the Company have issued guidelines
permitting recovery of such additional costs on an accrual basis. In Texas and
New Mexico, which represent approximately 70% of the Company's revenues, the
Company was permitted in its rate settlements to recover the additional costs.
The Company is required to deposit the amounts included in Texas and New Mexico
rates in an irrevocable external trust dedicated to the payment of these
postretirement benefits. In remaining jurisdictions, the Company is permitted to
recognize regulatory assets for the difference between any amounts paid
currently and those accrued. However, beginning September 1, 1996, the Company
no longer defers such differences in those remaining jurisdictions. Amortization
of the FERC portion will be accomplished over a 17-year period beginning
September 1, 1996. At December 31, 1996 and August 31, 1996 and 1995, deferred
debits in the Consolidated Balance Sheets include $3.2 million, $3.3 million and
$2.5 million, respectively, that represent the future revenues expected to be
realized at the time the additional postretirement benefits are included in the
Company's rates.
The Company's net periodic postretirement benefits cost other than pensions
for the Transition Period and for the years ended August 31, 1996, 1995 and
1994, including amounts capitalized, were comprised of the following components:
Transition Years ended August 31,
Period 1996 1995 1994
------ ---- ---- ----
(In Thousands)
Service cost for benefits earned
during the period $ 419 $1,266 $1,213 $1,280
Interest cost on the APBO 1,608 5,109 4,843 4,715
Actual return on plan assets 100 (1,964) (723) (134)
Net amortization and deferral 31 3,049 2,476 2,138
-- ----- ----- -----
Net postretirement benefits cost $2,158 $7,460 $7,809 $7,999
====== ====== ====== ======
The funded status for other postretirement benefits and amounts recognized
by the Company at December 31, 1996 and August 31, 1996 and 1995, is presented
below:
December 31, August 31,
1996 1996 1995
---- ---- ----
(In Thousands)
APBO:
Retirees $37,768 $36,240 $40,210
Fully eligible active employees 2,763 2,529 2,307
Other active employees 26,897 22,929 22,753
------ ------ ------
Total APBO $67,428 $61,698 $65,270
======= ======= =======
Plan assets at fair value $24,929 $23,400 $17,129
APBO (67,428) (61,698) (65,270)
------- ------- -------
APBO in excess of plan assets (42,499) (38,298) (48,141)
Unrecognized net loss (4,947) (10,238) (2,671)
Unrecognized transition obligation 44,572 45,464 48,138
------ ------ ------
Accrued postretirement benefits cost $(2,874) $(3,072) $(2,674)
======= ======= =======
41
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(7) Employee Benefits Plans, continued
DEFINED CONTRIBUTION PLANS
The Company has an Employee Stock Ownership Plan and a 401(k) plan. Total
contributions to the plans by the Company for the Transition Period and for the
years ended August 31, 1996, 1995 and 1994 were approximately $1.1 million, $1.9
million, $1.5 million and $1.0 million, respectively. Effective March 1, 1995,
the plan assets of the Employee Stock Ownership Plan and 401(k) plan were
combined into one plan called the Employee Investment Plan.
INCENTIVE COMPENSATION
The Company's 1989 Stock Incentive Plan provides for awards of share
options and restricted shares, and delivery of shares in certain cases. The
number of shares of common stock of the Company registered in connection with
this plan is 800,000, the maximum amount that may be awarded prior to July 25,
1998.
As allowed by Statement 123, the Company applies APB Opinion No. 25 in
accounting for its stock-based compensation and, accordingly, no compensation
cost is recognized for the issuance of stock options as the exercise price of
the options are issued at the fair-market value of the Company's common stock at
the date of grant. Statement 123's method of accounting for stock-based
compensation plans has not been applied to options granted prior to January 1,
1995.
Stock options have been awarded to key employees under the 1989 Stock
Incentive Plan. Options granted under the plan have an exercise price equal to
the fair market value of the common stock on its award date. At December 31,
1996, there were 19 participants that had share options. Options generally
become exercisable evenly over nine years and expire ten years after the date of
the grant.
Number of Options
Transition Years Ended August 31,
Period 1996 1995 1994
------ ---- ---- ----
Summary of stock option activity:
Outstanding - beginning of period* 46,112 67,759 70,724 74,816
Granted* - - - 5,645
Exercised** (7,632) (21,647) (245) (6,581)
Canceled or expired* - - (2,720) (3,156)
--- --- ------ ------
Outstanding - end of period* 38,480 46,112 67,759 70,724
====== ====== ====== ======
Exercisable - end of period - - 9,345 1,348
=== === ===== =====
* The range of prices of options the Transisition Period and in 1996 was
$28.61 - $30.31.
** The range of prices of options exercised during the Transition Period and in
1996 was $28.63-$33.31. The prices of options exercised in 1995 and 1994
were $33.31 and $30.81.
At December 31, 1996, approximately 147,163 restricted shares of common
stock have been awarded to employees, generally subject to a ten-year vesting
requirement. Previously, the cost of shares awarded were charged to expense over
a ten-year period based on the fair market value at date of the award. However,
because there is a provision in the 1989 Stock Incentive Plan which provides
that the restricted shares fully vest upon shareholder approval of a change in
control of the Company, these shares vested late in fiscal 1996. Consequently,
the Company has recognized an expense of approximately $1.4 million in 1996.
The Company also has other plans which provide for cash awards to all
employees based on the achievement of corporate goals, of which certain goals
were met in fiscal 1996. The expenses accrued under these incentive programs
totaled approximately $332,000 for fiscal 1996.
OTHER
The Company has a Directors' Deferred Compensation Plan under which
directors of the Company or its subsidiaries may elect to defer the distribution
of all or a percentage of the annual retainer or meeting fees, or both,
otherwise currently payable to such directors.
42
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(8) Competitive Environment and Rate Matters
COMPETITIVE ENVIRONMENT
Electric utilities have historically been recognized as natural monopolies
and have 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, to provide wholesale
open-access transmission service to others and may order electric utilities to
enlarge their transmission systems to facilitate transmission services.
The changing regulatory environment has stimulated competition in the
wholesale electric markets by creating a new class of independent power
producers. Revisions to the PUHCA have allowed both utilities and non-utilities
to form independent power production companies called exempt wholesale
generators (EWGs), which operate without the restrictions of the PUHCA. EWGs
offer alternative sources of power supply to electric utilities across the
country. Utilities are often required by state regulation to solicit to purchase
power from nonutility power producers and other utilities before seeking
approval to construct new generation of their own.
Some state regulatory authorities are in the process of changing utility
regulations in response to federal and state statutory changes and evolving
competitive markets. Texas legislation enacted in 1995 recognizes the movement
to a more competitive marketplace by requiring the PUCT to issue new regulations
including: allowance of less than fully costed rates in wholesale and retail
markets; recognition of and essentially waiving all Texas utility regulation of
EWGs and power marketers; and implementation of transmission access comparable
to the owning utility's use of its transmission system for non-FERC regulated
utilities (the Company is FERC regulated). The Company believes that these
statutory and conforming regulations may result in increased wholesale
competition. However, due to the Company's low cost structure, increased
wholesale competition is not expected to adversely affect it in the near term
and may favorably impact it in the long term.
All of the Company's jurisdictions continue to evaluate utility regulations
with respect to retail competition. The New Mexico legislature in 1996 and 1997
rejected retail wheeling proposals; however, it continues post-session committee
investigation of the matter. Texas introduced legislative proposals relating to
retail wheeling in the 1997 session; however, the Texas legislature adjourned
without adopting any legislation on this issue. The Company is unable to predict
what financial impact or effect the adoption of these proposals would have on
its operations.
RATE MATTERS
The Company may effect changes in its rates only as approved by the
regulatory authorities governing its jurisdictions. Amounts ultimately realized
will differ from amounts approved because kilowatt-hour sales and other factors
will vary from those approved in the rate proceedings.
Fuel and Purchased Power Recovery
A PUCT substantive rule requires periodic examination of the Company's fuel
and purchased power costs, the efficiency of the use of such fuel and purchased
power, fuel acquisition and management policies and purchase power commitments.
On May 1, 1995, the Company filed with the PUCT a petition for a fuel
reconciliation for the months of January 1992 through December 1994. The PUCT
issued an order in January 1996 requiring the Company to make a $3.9 million
fuel refund consisting of $2.1 million of overrecovered fuel costs and $1.8
million of disallowed fuel costs for the period. This refund was made in April
1996. Additionally, the order required the Company to flow through to customers
100% of margins from non-firm off-system opportunity sales as of January 1995.
Prior PUCT rulings had allowed the Company to retain 25% of these margins. The
100% flow through is required by PUCT rules, absent rule waiver. A motion for
rehearing on the fuel disallowance (which was adjusted to $1.9 million) was
subsequently denied by the PUCT and the Company was ordered to flow through 100%
of the margin effective with the first billing cycle after the date of the
order. Upon appeal to the Travis County District Court in May 1996, the PUCT's
decision on the disallowed fuel costs was upheld. The Travis County District
Court decision has been appealed to the Texas Court of Appeals which has not yet
ruled in the matter. The
43
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(8) Rate Matters, continued
ultimate outcome of this matter will not significantly affect consolidated
financial results. At December 31, 1996, the Company had approximately $12.9
million in underrecovered fuel costs in Texas and is surcharging Texas retail
customers for approximately one-half of the underrecovery. The Company has
requested to continue the surcharge to collect the remaining amount of
underrecovered fuel costs.
FERC Rate Case
On December 19, 1989, the FERC issued its final order regarding the 1985
rate case. The Company appealed certain portions of the order that related to
recognition in rates of the reduction of the federal income tax rate from 46% to
34%. The United States Court of Appeals for the District of Columbia Circuit
remanded the case, directing the FERC to reconsider the Company's claim of an
offsetting cost and limiting the FERC's actions. The FERC issued its Order on
Remand in July 1992, required filings were made and a hearing was completed in
February 1994. In October 1994, the administrative law judge issued a favorable
initial decision that, if approved by the FERC, would result in a substantial
recovery by the Company. Negotiated settlements with the Company's partial
requirements customers and TNP were approved by the FERC in July 1993 and
September 1993, respectively, and the Company received approximately $2.8
million, including interest. In a settlement with the Company's New Mexico
cooperative customers the Company received approximately $7 million, including
interest. The FERC approved this settlement in July 1995. Resolutions of these
matters with the remaining wholesale customers, Golden Spread member
cooperatives and Lyntegar Electric Cooperative, have not been reached. The
Company cannot reasonably estimate the remaining amount recoverable from these
proceedings; however, a favorable resolution could materially improve
consolidated earnings in the year in which it is resolved.
44
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
December 31, 1996
(9) Quarterly Operating Results (Unaudited)
The following quarterly and transition period operating results are
unaudited, but, in the opinion of management, include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the Company's operating results for the periods indicated.
Quarter Month
Ended Ended
11-30-96 12-31-96
(In Thousands, Except Per Share Amounts)
Transition Period
Total kilowatt hours sold ......... 4,893,200 1,743,104
Operating revenues ................ $214,381 $81,198
Operating income .................. 34,711 12,481
Net earnings ...................... 21,470 (2,333)
Earnings applicable to common stock 21,470 (2,333)
Earnings per common share ......... 0.52 (0.05)*
Quarter Ended
11-30-95 2-29-96 5-31-96 8-31-96
-------- ------- ------- -------
(In Thousands, Except Per Share Amounts)
1996
Total kilowatt hours sold 4,709,152 4,809,272 5,344,286 6,025,729
Operating revenues $200,957 $203,785 $225,029 $269,626
Operating income 33,238 28,801 31,980 56,647
Net earnings 23,168 18,081 19,878 44,645
Earnings applicable to
common stock 21,949 16,806 19,878 44,645
Earnings per common share .54 .41 .49 1.08**
11-30-94 2-28-95 5-31-95 8-31-95
-------- ------- ------- -------
(In Thousands, Except Per Share Amounts)
1995
Total kilowatt hours sold 4,732,246 4,467,149 5,035,896 6,100,285
Operating revenues $187,216 $181,848 $205,187 $259,832
Operating income 30,088 27,785 36,037 60,301
Net earnings 21,169 18,677 26,429 53,202
Earnings applicable to
common stock 19,950 17,457 25,210 51,982
Earnings per common share .49 .43 .62 1.26***
* Includes a decrease of $0.25 attributable to the write-off of Quixx's
investment in BCH.
** Includes an increase of $0.19 attributable to the sale of water rights by
Quixx.
*** Includes an increase of $0.13 attributable to a change in the estimated
delivered not billed kwh sales (see Note 1) and an increase of $0.11
attributable to a one-time adjustment resulting from the 1985 FERC rate
case (see Note 8).
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On April 22, 1997, the Company notified its certifying accountants,
Deloitte & Touche LLP, that the client-auditor relationship between the Company
and Deloitte & Touche LLP will be terminated effective with the completion of
the December 31, 1996 audit of the Company's consolidated financial statements.
Additionally, the Company announced its new certifying accountants, Arthur
Andersen LLP, to serve as independent accountants for the calendar year 1997.
The decision to change accountants was made in conjunction with the anticipated
merger with Public Service Company of Colorado and was recommended by the Audit
Committee and approved by the Board of Directors.
Deloitte & Touche's LLP's reports on the Company's consolidated financial
statements during the two most recent fiscal years, preceding the date hereof
contained no adverse opinion or disclaimer of opinion, and was not qualified or
modified as to uncertainty, audit scope, or accounting principles.
During the last two fiscal years and the subsequent interim periods
preceding the date hereof, there were no disagreements between the Company and
Deloitte & Touche LLP on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Deloitte & Touche LLP,
would have caused Deloitte & Touche LLP to make a reference to the subject
matter of the disagreements in connection with its reports.
None of the "reportable events" described under Regulation S-K, Item
304(a)(1)(v), occurred within the Company's two most recent fiscal years and any
subsequent interim periods preceding the date hereof.
During the last two fiscal years and the subsequent interim periods
preceding the date hereof, the Company did not consult Arthur Andersen LLP
regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii)
of Regulation S-K.
PART III*
*The information required by Items 10, 11, 12 and 13 with respect to
directors and officers to the extent not set forth under Item 1 of Part I in
this Form 10-K (pursuant to instruction 3 of paragraph (b) of Item 401 of
Regulation S-K) under "Executive Officers of the Registrant" or disclosed below
is set forth in the Company's proxy statement for its Annual Meeting of
Shareholders held January 8, 1997, which is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
CLASS I DIRECTORS
(Terms Expire in 2000)
First Principal Occupation
Became and Business Experience;
Name and Age Director Other Directorships
------------ -------- -------------------
J. C. Chambers-65 1978 Agent, Massachusetts Mutual Life Insurance
Company, Lubbock, Texas, 1957 to present (1);
Director, State National Bank of West Texas,
Lubbock, Texas.
Giles M. Forbess-62 1991 President, Benton Oil Company (petroleum marketer)
Lubbock, Texas, 1970 to present; President,
Petroleum Transport, Inc. (trucking), Lubbock,
Texas, 1970 to present; Director, State National
Bank of West Texas, Lubbock, Texas.
Shirley Bird Perry-60 1993 Vice Chancellor for Development and External
Relations, The University of Texas System,
Austin, Texas, 1992 to present; Vice President
for Development and University Relations, The
University of Texas at Austin, 1983 to 1992;
Advisory Director, Texas Commerce Bank-Austin,
National Association, Austin, Texas.
David M. Wilks-50 1995 President and Chief Operating Officer of the
Company, 1995 to present; Senior Vice President,
1991 to 1995.
46
<PAGE>
CLASS II DIRECTORS
(Terms Expire in 1998)
First Principal Occupation
Became and Business Experience;
Name and Age Director Other Directorships
------------ -------- -------------------
Gene H. Bishop-67 1988 Retired Chairman of the Board and Chief Executive
Officer, Life Partners Group, Inc.(life insurance
holding company), Englewood, Colorado, 1994 to
present; Chairman of the Board and Chief
Excutive Officer, 1991 to 1994;
Director, Drew Industries Incorporated, White
Plains, New York;
Director, First USA, Inc., Dallas, Texas;
Director, First USA Paymentech, Inc., Dallas,
Texas;
Trustee, Liberte Investors, Dallas, Texas;
Director, Southwest Airlines Company, Dallas,
Texas.
C. Coney Burgess-59 1994 President, Burgess-Herring Ranch Company
(agriculture), Amarillo, Texas, 1974 to present;
President, Chain-C, Inc. (agriculture), Amarillo,
Texas, 1968 to present;
Chairman of the Board, Herring Bancorp, Inc.
(bank holding company), Vernon, Texas, 1991 to
present;
President, Monarch Trust Company, Amarillo,Texas,
1972 to present;
Director, First Bank and Trust, Clarendon, Texas;
Director, Herring National Bank, Vernon, Texas.
J. Howard Mock-55 1992 Chairman of the Board and Chief Executive Officer,
Jaynes Corporation (general contractors),
Albuquerque, New Mexico, 1988 to present;
Chairman of the Board, Banes General Contractors,
El Paso, Texas, 1989 to present;
Advisory Director, Norwest Banks New Mexico, N.A.,
Albuquerque, New Mexico.
Gary W. Wolf-59 1986 Senior Partner, Cahill Gordon & Reindel
(attorneys), New York, New York, 1970 to present
(2);
Director, New Jersey Resources Corporation, Wall,
New Jersey.
CLASS III DIRECTORS
(Terms Expire in 1999)
First Principal Occupation
Became and Business Experience;
Name and Age Director Other Directorships
------------ -------- -------------------
Danny H. Conklin-62 1988 Petroleum Geologist and Partner, Philcon
Development Co. (oil and gas production and
exploration), Amarillo, Texas, 1960 to present;
Director, Parallel Petroleum Corporation,
Midland, Texas.
Bill D. Helton-58 1990 Chairman of the Board and Chief Executive
Officer of the Company, 1991 to present.
R. R. Hemminghaus-60 1994 Chairman and Chief Executive Officer, Ultramar
Diamond Shamrock Corporation, successor to
Diamond Shamrock, Inc. (refiner and marketer of
petroleum products), San Antonio, Texas, 1996 to
present;
Chairman, Chief Executive Officer, and President,
Diamond Shamrock, Inc., San Antonio, Texas, 1987
to 1996;
Chairman of the Board, Federal Reserve Bank of
Dallas, Dallas, Texas;
Director, Luby's Cafeterias, Inc., San Antonio,
Texas.
Don Maddox-56 1983 Director, Maddox Law Firm, P.C. (attorneys),
Hobbs, New Mexico, 1982 to present.
(1) At December 31, 1996, the Company had in force $10,170,000 aggregate face
amount of insurance policies on the lives of certain executives and
participants in the Company's Supplemental Retirement Income Plan (the
"Supplemental Plan"). For the four months ended December 31, 1996, the
47
<PAGE>
Company paid $52,624 in premiums. Mr. Chambers, a director of the Company
and an agent of the insurer, received commissions during the four months
ended December 31, 1996, in the amount of $3,453 in connection therewith.
Mr. Chambers will also receive commissions during the 1997 fiscal year on
these policies.
(2) Cahill Gordon & Reindel represents the Company as legal counsel with
respect to various matters.
ITEM 11. EXECUTIVE COMPENSATION.
References to "SAR" and in the tables below mean stock appreciation rights.
Summary of Cash and Certain Other Compensation
The following table provides certain summary information concerning
compensation paid or accrued by the Company to or on behalf of its Chief
Executive Officer and the other four most highly compensated executive officers
of the Company (determined as of December 31, 1996) for the four months ended
December 31, 1996:
Summary Compensation Table
Long-term Compensation
Awards
Restricted All Other
Stock Award(s) Compensation
Name and Principal Position Salary ($) ($)(1) ($)(2)
- --------------------------- ---------- ------ ------
Bill D. Helton 108,333 65,107 7,936
Chairman of the Board and
Chief Executive Officer;
Director
David M. Wilks 66,667 40,086 2,898
President and
Chief Operating Officer;
Director
Doyle R. Bunch II 51,667 31,047 3,066
Executive Vice President,
Accounting and
Corporate Development
Kenneth L. Ladd, Jr. 50,333 30,261 1,027
Senior Vice President
Henry H. Hamilton 50,000 29,999 2,957
Vice President, Production
(1) Effective September 1, 1996, Messrs. Helton, Wilks, Bunch, Ladd, and
Hamilton were granted 1,988, 1,224, 948, 924, and 916 performance
non-certificated restricted stock awards, respectively, pursuant to the
1989 Plan, consisting of that nearest number of whole shares of the Common
Stock equal to 20 percent of the executive officer's base salary on
September 1, 1996, divided by the fair market value on September 1, 1996,
subject to certain performance objectives and vesting restrictions. The
amounts reported in the summary compensation table represent the market
value of unrestricted Common Stock at the date of grant. A stock
certificate will be issued in the executive's name for 100 percent of the
shares, on the basis of 25 percent of the shares for attaining each of the
following four performance objectives for the 12 months ending August 31,
1997: (i) total shareholder return on the Common Stock equal to or better
than the S&P 24 Electric Utilities Index, (ii) total return on common
equity of the Company at least equal to or better than the third highest of
the ten utilities comparable to the Company in kilowatt-hour sales, (iii)
average retail rates of the Company equal to or better than the third
lowest when compared to the average retail rates of the composite regional
companies, and (iv) dividend payout ratio of 90 percent or less of the
Company's annual earnings per share. In the event of a Change of Control
(as defined in the 1989 Plan, which includes completion of the Merger),
restrictions will lapse and the shares will vest. Dividend equivalents are
48
<PAGE>
not paid on the non-certificated restricted stock. At December 31, 1996,
such stock had market values of $70,326, $43,299, $33,536, $32,687, and
$32,404 for Messrs. Helton, Wilks, Bunch, Ladd, and Hamilton, respectively.
At December 31, 1996, Messrs. Helton, Wilks, Bunch, Ladd, and Hamilton did
not hold any certificated restricted shares.
(2) The amounts shown for the four months ended December 31, 1996, are
comprised of the following:
Company
Contributions
to the
Company Non-Qualified
Contributions Salary Deferral Insurance
Name to the EIP Plan Premiums
---- ---------- ---- --------
Bill D. Helton $2,346 $3,928 $1,662
David M. Wilks 1,846 1,052 0
Doyle R. Bunch II 1,689 1,377 0
Kenneth L. Ladd, Jr. 1,027 0 0
Henry H. Hamilton 1,655 1,302 0
Option/SAR Exercises and Values
The following table provides information for the executive officers named
below, concerning the exercise of options/SARs during the four months ended
December 31, 1996, and unexercised options/SARs held as of December 31, 1996:
Aggregated Option/SAR Exercises in Transition Period and Option/SAR Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
December 31, 1996 (#) December 31, 1996($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable(1)
---- --------------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C>
Bill D. Helton 938 2,873 0/4,686 0/21,380
David M. Wilks 501 1,534 0/2,507 0/11,438
Doyle R. Bunch II 526 1,611 0/2,631 0/12,004
Kenneth L. Ladd, Jr. 488 1,495 0/2,436 0/11,114
Henry H. Hamilton 478 1,464 0/2,391 0/10,909
</TABLE>
(1) The closing price of the Common Stock on December 31, 1996, was $35.3750
per share, and the exercise price for all options was $30.8125 per share.
Retirement Benefits
The following table contains approximate annual retirement benefits payable
to executive officers and certain key employees of the Company in certain salary
classifications pursuant to its non-contributory retirement plan (the
"Retirement Plan") and the Supplemental Plan, assuming retirement on December
31, 1996, at age 65 and election of the lifetime only option under the
Retirement Plan and not one of the various survivor options. The annual
retirement benefits payable under any other option would generally be lower than
the amounts shown in the table. The amounts listed in the table take into
account the reduction for Social Security benefits.
49
<PAGE>
Pension Plan Table
Years of Service (1)
Remuneration (2)(3) 15 20 25 30 35 40
- ------------------- -- -- -- -- -- --
$125,000 $ 30,590 $ 40,787 $ 65,892 $ 79,620 $ 86,483 $ 86,483
150,000 36,768 49,024 82,365 98,838 107,075 107,075
175,000 42,945 57,260 98,838 118,057 127,666 127,666
200,000 49,122 65,497 115,311 137,275 148,257 148,257
225,000 55,300 73,733 131,784 156,494 168,848 168,848
250,000 61,477 81,970 148,257 175,712 189,440 189,440
300,000 73,832 98,443 181,203 214,149 230,622 230,622
350,000 86,187 114,916 214,149 252,586 271,805 271,805
400,000 98,541 131,389 247,095 291,023 312,987 312,987
(1) Includes years of credited service with the Company and accumulated, unused
sick leave. As of December 31, 1996, Messrs. Helton, Wilks, Bunch, Ladd,
and Hamilton had accrued 33, 20, 21, 35, and 34 years of service,
respectively.
(2) As of December 31, 1996, the amount of compensation covered by the
Retirement and Supplemental Plans for Messrs. Helton, Wilks, Bunch, Ladd,
and Hamilton was $325,000, $200,000, $155,000, $151,000, and $150,000,
respectively, which corresponded to each executive officer's annual base
salary at that date.
(3) The Supplemental Plan provides for (i) a pre-retirement death benefit for
the surviving spouse of a participant who dies while employed and has at
least 25 years of service with the Company and its subsidiaries equal to a
percentage of the final monthly salary of the participant, converted into
an amount that would be received by a surviving spouse under the Retirement
Plan on a joint and two-thirds survivor form of payment and reduced by the
amount that would be paid under the Retirement Plan; and (ii)
post-retirement death benefit protection in the amount of $70,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Ownership of Equity Securities by Directors and Executive Officers
The following tabulation shows as of May 31, 1997, the number of shares of
each class of the Company's equity securities beneficially owned by each
director, each executive officer named in the Summary Compensation Table, and
the directors and executive officers of the Company as a group. None of the
individual or collective holdings listed below exceeds 1 percent of the Common
Stock.
Amount and Nature of Securities
Name Title of Security Beneficially Owned (1)
- ---- ----------------- ----------------------
Gene H. Bishop Common Stock 16,322 (2)
Doyle R. Bunch II Common Stock 10,942 (3)
C. Coney Burgess Common Stock 1,715 (4)
J. C. Chambers Common Stock 1,955
Danny H. Conklin Common Stock 5,067 (5)
Giles M. Forbess Common Stock 1,495
Henry H. Hamilton Common Stock 14,205 (6)
Bill D. Helton Common Stock 23,466 (7)
R. R. Hemminghaus Common Stock 1,053 (8)
50
<PAGE>
Kenneth L. Ladd, Jr. Common Stock 7,606 (9)
Don Maddox Common Stock 24,816 (10)
J. Howard Mock Common Stock 1,987 (11)
Shirley Bird Perry Common Stock 1,332
David M. Wilks Common Stock 12,126 (12)
Gary W. Wolf Common Stock 2,412
All of the above and
other executive officers
as a group (20 persons) Common Stock 171,848 (13)
(1) A director or executive officer is considered to beneficially own the
Common Stock if the director or executive officer, directly or indirectly,
has or shares the power to vote or dispose of, or direct the voting or the
disposition of, the Common Stock or has the right to acquire such power
with respect to the Common Stock within 60 days. The number of shares does
not include fractional shares resulting from participation in the Company's
Dividend Reinvestment and Cash Payment Plans or the Employee Investment
Plan (the "EIP") or fractional share equivalents resulting from
participation in the Company's Directors' Deferred Compensation Plan (the
"Directors' Deferred Plan").
(2) Includes 5,322 share equivalents held pursuant to the Directors' Deferred
Plan, over which Mr. Bishop has no voting or investment power.
(3) Includes 4,752 shares held for the benefit of Mr. Bunch in the EIP, over
which Mr. Bunch has sole voting power but no investment power. Includes 948
restricted share equivalents held pursuant to the 1989 Stock Incentive Plan
(the "1989 Plan"), over which Mr. Bunch has no voting or investment power.
(4) Shares held by Herring Bancorp, Inc., of which Mr. Burgess is the majority
shareholder.
(5) Includes 100 shares owned by Mr. Conklin's wife, 467 shares held by Philcon
Development Co. Retirement Plan and Trust, and 500 shares held in a trust
of which Mr. Conklin is trustee and his sons are beneficiaries.
(6) Includes 6,716 shares held for the benefit of Mr. Hamilton in the EIP, over
which Mr. Hamilton has sole voting power but no investment power. Includes
916 restricted share equivalents held pursuant to the 1989 Plan, over which
Mr. Hamilton has no voting or investment power.
(7) Includes 5,891 shares held for the benefit of Mr. Helton in the EIP, over
which Mr. Helton has sole voting power but no investment power. Includes
1,988 restricted share equivalents held pursuant to the 1989 Plan, over
which Mr. Helton has no voting or investment power. Also includes 756
shares held in trusts for the benefit of Mr. Helton's grandchildren. Mr.
Helton's wife retains the right to the corpus of the trusts upon their
termination. Mr. Helton disclaims beneficial ownership of the shares held
in the trusts.
(8) Includes 174 share equivalents held pursuant to the Directors' Deferred
Plan, over which Mr. Hemminghaus has no voting or investment power.
(9) Includes 846 shares held for the benefit of Mr. Ladd in the EIP, over which
Mr. Ladd has sole voting power but no investment power. Includes 924
restricted share equivalents held pursuant to the 1989 Plan, over which Mr.
Ladd has no voting or investment power. Also includes 218 shares held in a
trust of which Mr. Ladd is trustee and his grandchildren are beneficiaries.
(10) Includes 750 shares owned by Mr. Maddox's wife and 4,825 shares and 5,175
shares held in trusts of which Mr. Maddox is trustee and his daughter and
son, respectively, are beneficiaries.
(11) Includes 1,255 share equivalents held pursuant to the Directors' Deferred
Plan, over which Mr. Mock has no voting or investment power.
(12) Includes 2,164 shares held for the benefit of Mr. Wilks in the EIP, over
which Mr. Wilks has sole voting power but no investment power. Includes
51
<PAGE>
1,224 restricted share equivalents held pursuant to the 1989 Plan, over
which Mr. Wilks has no voting or investment power.
(13) Includes 42,902 shares held for the benefit of the executive officers in
the EIP, over which the executive officers have sole voting power but no
investment power. Includes 9,464 restricted share equivalents held pursuant
to the 1989 Plan, over which the executive officers have no voting or
investment power.
The following table contains certain information regarding persons who the
Company has been advised are beneficial owners of more than 5 percent of the
Common Stock as of the date indicated in the footnote to the table.
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Class
Franklin Resources, Inc. 3,991,800(1) 9.8
777 Mariners Island Boulevard
San Mateo, California 94403-7777
(1) According to Schedule 13G filed as of December 31, 1996, with the
Securities and Exchange Commission by Franklin Resources, Inc.
("Franklin"), Franklin had (i) sole voting power with respect to 3,991,800
shares; and (ii) sole dispositive power with respect to 3,991,800 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There were no reportable transactions during the Transition Period.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS
Page
Independent Auditors' Report ........................................ 21
Consolidated Balance Sheets as of December 31, 1996 and August 31,
1996 and 1995 ..................................................... 22
Consolidated Statements of Capitalization as of December 31, 1996 and
August 31, 1996 and 1995 .......................................... 23
Consolidated Statements of Earnings for the 4 months ended December 31,
1996 and 1995 and the years ended August 31, 1996, 1995 and 1994 .. 24-25
Consolidated Statements of Common Shareholders' Equity for the 4
months ended December 31, 1996 and the years ended August 31, 1996,
1995 and 1994 ..................................................... 26
Consolidated Statements of Cash Flows for the 4 months ended December
31, 1996 and 1995 and the years ended August 31, 1996, 1995 and 1994 27-28
Notes to Consolidated Financial Statements .......................... 29-45
FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because of the absence of conditions under which
they are required or because the required information is included in the
Consolidated Financial Statements or notes thereto.
REPORTS ON FORM 8-K
Item reported - Item 5. Other Events
Financial Statements filed - None
Date of report filed - October 11, 1996, reporting 1996 fiscal year earnings
February 7, 1997, reporting a recorded charge related
to the write-off of the BCH project
February 24, 1997, reporting the joint offer by PSCo
and American Electric Power to acquire Yorkshire
Electricity Group plc. in the United Kingdom
June 30, 1997, reporting a recorded charge related to
the write-off of the Carolina Energy project.
Item reported - Item 4. Changes in Registrants Certifying Accountant
Item 8. Change in Fiscal Year
Financial Statements filed - None
Date of report filed - April 28, 1997
EXHIBITS
Filed with this Form 10-K:
3(a) Restated Bylaws as amended through May 1, 1997
12 Statements re computation of ratio of earnings
21 Subsidiaries of the registrant
52
<PAGE>
23 Consent of DELOITTE & TOUCHE LLP
24 Power of attorney
27 Financial Data Schedule
99 Unaudited Pro Forma Information
Incorporated in this Form 10-K by reference:
2 Agreement and Plan of Reorganization dated as of August 22, 1995,
among Southwestern Public Service Company, M-P New Co. and Public
Service Company of Colorado, filed as exhibit 2, Form 8-K dated August
22, 1995.
3(b) Restated Articles of Incorporation as amended through February 1,
1996, filed as exhibit 3(i), Form 8-K dated February 1, 1996.
4(a) First Mortgage Indenture dated August 1, 1946, filed as exhibit 7-A,
Registration No. 2-6910.
3(b) Supplemental Indentures to the First Mortgage Indenture:
Dated File Reference Exhibit
----- -------------- -------
February 1, 1967 2-25983 2-S
October 1, 1970 2-38566 2-T
February 9, 1977 2-58209 2-Y
March 1, 1979 2-64022 b(28)
April 1, 1983 (two) Form 10-Q, May 1983 4(a)
February 1, 1985 Form 10-K, August 1985 4(c)
July 15, 1992 (two) Form 10-K, August 1992 4(a)
December 1, 1992 (two) Form 10-Q, February 1993 4
February 15, 1995 Form 10-Q, May 1995 4
March 1, 1996 333-05199 4(c)
(c) Standby Credit Agreement with Union Bank of Switzerland (Houston Agency)
dated July 1, 1991, filed as exhibit 4(a), Form 10-K for the fiscal year
ended August 31, 1991.
(d) Red River Authority for Texas Indenture of Trust dated July 1, 1991, filed
as exhibit 4(b), Form 10-K for the fiscal year ended August 31, 1991.
(e) Rights Agreement dated July 23, 1991, filed as exhibit 2, Form 8-A dated
July 23, 1991.
(f) Amendment No. 1 dated August 22, 1995, to the Rights Agreement filed as
exhibit 4, Form 8-K dated August 30, 1995.
(g) Indenture dated as of October 21, 1996, between the Company and Wilmington
Trust Company, filed as exhibit 4(a), Form 10-Q for the quarter ended
November 30, 1996.
(h) Supplemental Indenture dated as of October 21, 1996, between the Company
and Wilmington Trust Company, filed as exhibit 4(b), Form 10-Q for the
quarter ended November 30, 1996.
(i) Guarantee Agreement dated as of October 21, 1996, between the Company and
Wilmington Trust Company, filed as exhibit 4(c), Form 10-Q for the quarter
ended November 30, 1996.
(j) Amended and Restated Trust Agreement dated as of October 21, 1996, among
the Company, David M. Wilks, as initial depositor, Wilmington Trust Company
and the administrative trustees named therein, filed as exhibit 4(d) , Form
10-Q for the quarter ended November 30, 1996.
(k) Agreement as to Expenses and Liabilities dated as of October 21, 1996,
between the Company and Southwestern Public Service Capital I (included as
Exibit F in Exhibit 4(d).
Instruments defining the rights of holders of other long-term debt not
required to be filed as exhibits will be furnished to the Commission upon
request.
10(a)Coal Supply Agreement (Harrington Station) between Southwestern Public
Service Company and TUCO, dated May 1, 1979, filed as exhibit 3, Form 8-K
dated May 14, 1979.
(b) Master Coal Service Agreement between Swindell-Dressler Energy Supply
Company and TUCO, dated July 1, 1978, filed as exhibit 5A, Form 8-K dated
May 14, 1979.
(c) Guaranty of Master Coal Service Agreement between Swindell-Dressler Energy
Supply Company and TUCO, filed as exhibit 5B, Form 8-K dated May 14, 1979.
(d) Coal Supply Agreement (Tolk Station) between Southwestern Public Service
Company and TUCO, dated April 30, 1979, as amended November 1, 1979 and
December 30, 1981, filed as exhibit 10(b), Form 10-Q for the quarter ended
February 28, 1982.
53
<PAGE>
(e) Master Coal Service Agreement between Wheelabrator Coal Services Co. and
TUCO, dated December 30, 1981, filed as exhibit 10(c), Form 10-Q for the
quarter ended February 28, 1982.
(f) Incentive Compensation Plan (an Executive Management Plan) as amended July
23, 1996, filed as exhibit 10(a), Form 10-K for the fiscal year ended
August 31, 1996.
(g) 1989 Stock Incentive Plan as amended April 23, 1991, filed as exhibit
10(b), Form 10-K for the fiscal year ended August 31, 1996.
(h) Director's Deferred Compensation Plan as amended January 10, 1990, filed as
exhibit 10(c), Form 10-K for the fiscal year ended August 31, 1996.
(i) Supplemental Retirement Income Plan as amended July 23, 1991, filed as
exhibit 10(d), Form 10-K for the fiscal year ended August 31, 1996.
(j) EPS Performance Unit Plan dated October 27, 1992, filed as exhibit 10(e),
Form 10-K for the fiscal year ended August 31, 1996.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOUTHWESTERN PUBLIC SERVICE COMPANY
By /s/ Bill D. Helton
(Bill D. Helton, Chairman
and Chief Executive Officer)
DATE: July 16, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the date indicated:
Signature Title Date
Chairman and Chief Executive Officer
(Principal Executive & Financial
/s/ BILL D. HELTON Officer & Director) July 16, 1997
- -------------------------
Bill D. Helton
Executive Vice President,
Accounting and Corporate Development
/s/ DOYLE R. BUNCH III (Principal Accounting Officer)
- --------------------------
Doyle R. Bunch
/s/ GENE H. BISHOP Director
- --------------------------
Gene H. Bishop
/s/ C. CONEY BURGESS Director
- --------------------------
C. Coney Burgess
/s/ J.C. CHAMBERS Director
- --------------------------
J. C. Chambers
/s/ DANNY H. CONKLIN Director
- --------------------------
Danny H. Conklin
/s/ GILES M. FORBESS Director
- --------------------------
Giles M. Forbess
Director
- --------------------------
R. R. Hemminghaus
/s/ DON MADDOX Director
- --------------------------
Don Maddox
/s/ J. HOWARD MOCK Director
- --------------------------
J. Howard Mock
/s/ SHIRLEY BIRD PERRY Director
- --------------------------
Shirley Bird Perry
/s/ DAVID M. WILKS Director
- --------------------------
David M. Wilks
/s/ GARY W. WOLF Director
- --------------------------
Gary W. Wolf
55
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
EXHIBIT 12. Statements re Computation of Ratio of Earnings
<TABLE>
<CAPTION>
Fiscal year ended August 31,
Transition
Period 1996 1995 1994 1993 1992
------ ---- ---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Computation of Ratio of
Earnings to Fixed Charges:
Fixed charges, as defined:
Interest on long-term debt $15,556 $44,964 $40,645 $ 37,881 $ 38,992 $ 41,528
Distributions on SPS Obligated
Mandatorily Redeemable Preferred
Securities 1,526 - - - - -
Amortization of debt premium,
discount and expense 235 577 534 518 498 314
Other interest 1,612 6,561 3,219 3,068 2,047 1,527
Estimated interest factor of
rental charges 415 1,245 1,292 1,184 1,094 1,067
--- ----- ----- ----- ----- -----
Total fixed charges $19,344 $ 53,347 $ 45,690 $ 42,651 $ 42,631 $ 44,436
======= ======== ======== ======== ======== ========
Earnings as defined:
Net earnings per consolidated
statements of earnings $19,137 $105,773 $119,477 $102,168 $105,254 $102,987
Fixed charges as shown 19,344 53,347 45,690 42,651 42,631 44,436
Income taxes:
Federal 5,991 46,435 56,297 45,232 42,272 39,101
State 190 2,689 1,885 1,842 1,763 1,621
Deferred 4,889 16,423 9,717 11,564 13,883 13,375
Investment tax credits (83) (250) (250) (250) (250) (250)
--- ---- ---- ---- ---- ----
Earnings available for fixed
charges $49,468 $224,417 $232,816 $203,207 $205,553 $201,270
======= ======== ======== ======== ======== ========
Ratio of earnings to fixed
charges 2.56 4.21 5.10 4.76 4.82 4.53
==== ==== ==== ==== ==== ====
Computation of Ratio of Earnings
to Fixed Charges and Preferred
Dividend Requirements Combined:
Total fixed charges, as shown above $19,344 $ 53,347 $ 45,690 $ 42,651 $ 42,631 $ 44,436
Preferred dividend requirements* - 4,016 7,593 7,620 8,663 10,987
---- ----- ----- ----- ----- ------
Total fixed charges and preferred
dividend requirements combined $19,344 $ 57,363 $ 53,283 $ 50,271 $ 51,294 $ 55,423
======= ======== ======== ======== ======== ========
Earnings available for fixed charges
and preferred dividend
requirements $49,468 $224,417 $232,816 $203,207 $205,553 $201,270
======= ======== ======== ======== ======== ========
Ratio of earnings to fixed charges
and preferred dividend
requirements combined 2.56 3.91 4.37 4.04 4.01 3.63
==== ==== ==== ==== ==== ====
*Preferred dividend requirements:
Annual preferred dividend
requirement $ - $ 2,494 $ 4,878 $ 4,878 $ 5,626 $ 7,243
Less amount deductible for
income tax purposes - 28 82 84 84 84
--- -- -- -- -- --
Net requirement [A] $ - $ 2,466 $ 4,796 $ 4,794 $ 5,542 $ 7,159
=== ======== ======== ======== ======== ========
1/(100% - effective tax rate)[B] 1.575 1.617 1.566 1.572 1.548 1.523
Effective tax rate 36.5% 38.2% 36.2% 36.4% 35.4% 34.3%
===== ==== ==== ==== ==== ====
[A] x [B] $ - $ 3,988 $ 7,511 $ 7,536 $ 8,579 $ 10,903
Add amount deductible for
income tax purposes - 28 82 84 84 84
--- -- -- -- -- --
Preferred dividend requirements $ - $ 4,016 $ 7,593 $ 7,620 $ 8,663 $ 10,987
=== ======= ======== ======== ======== ========
</TABLE>
56
SOUTHWESTERN PUBLIC SERVICE COMPANY
EXHIBIT 99. Unaudited Pro Forma Information
The following unaudited pro forma combined balance sheets at March 31, 1997
and December 31, 1996, give effect to the Merger as if it had occurred at March
31, 1997 and December 31, 1996, respectively. The unaudited pro forma statements
of income for the three months ended March 31,1997 and twelve months ended
December 31, 1996, give effect to the Merger as if it had occurred on January
1, 1996. These statements are prepared on the basis of accounting as required
under a pooling of interests and do not reflect any cost savings or other
synergies anticipated by management as a result of the Merger. Accordingly, the
pro forma information is not necessarily indicative of the financial position or
results of operations that would have occurred had the Merger been consummated
for the periods for which it is given effect, nor is it necessarily indicative
of future operating results or financial condition.
NEW CENTURY ENERGIES, INC.
Unaudited Pro Forma Combined Balance Sheet
March 31, 1997
SPS PSCo Pro Forma
--- ---- ---------
(In Thousands)
Assets
Property, plant and equipment, at cost:
Electric ............................ $2,519,287 $4,012,454 $6,531,741
Gas ................................. - 1,067,579 1,067,579
Steam and other ..................... 38,149 78,376 116,525
Common to all departments ........... - 429,123 429,123
Construction work in progress ....... 103,825 108,101 211,926
------- ------- -------
2,661,261 5,695,633 8,356,894
Less: accumulated depreciation ....... 956,944 2,079,254 3,036,198
------- --------- ---------
Total property, plant and equipment . 1,704,317 3,616,379 5,320,696
--------- --------- ---------
Investments, at cost, and receivables . 35,153 43,058 78,211
Current assets:
Cash and temporary cash investments . 50,709 368,418 419,127
Accounts receivable - net ........... 64,169 203,604 267,773
Accrued unbilled revenues ........... 15,634 69,992 85,626
Recoverable purchased electric
energy costs ....................... 11,456 63,365 74,821
Materials and supplies, at average cost 18,149 47,419 65,568
Fuel inventory, at average cost ..... 2,318 24,572 26,890
Gas in underground storage, at
cost (LIFO) ........................ - 19,954 19,954
Regulatory assets recoverable within
one year ........................... - 44,020 44,020
Prepaid expenses and other .......... 5,201 40,375 45,576
----- ------ ------
Total current assets ................ 167,636 881,719 1,049,355
------- ------- ---------
Deferred charges
Regulatory assets ................... 139,553 291,764 431,317
Unamortized debt expense ............ 9,814 11,908 21,722
Other ............................... 33,779 68,152 101,931
------ ------ -------
Total deferred charges ............. 183,146 371,824 554,970
------- ------- -------
$2,090,252 $4,912,980 $7,003,232
========== ========== ==========
The accompanying notes to unaudited pro forma combined balance sheets and
statements of income are an integral part of this statement.
57
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
EXHIBIT 99. Unaudited Pro Forma Information
NEW CENTURY ENERGIES, INC.
Unaudited Pro Forma Combined Balance Sheet, Continued
March 31, 1997
SPS PSCo Pro Forma
--- ---- ---------
(In Thousands)
Capitalization and Liabilities
Common stock (2) ........................ $ 40,918 $ 326,350 $ 104,142
Paid-in capital (2) ..................... 307,484 739,522 1,310,132
Retained earnings (5) ................... 379,062 415,513 787,122
------- ------- -------
Total common equity ................... 727,464 1,481,385 2,201,396
Preferred stock:
Not subject to mandatory redemption ... - 140,008 140,008
Subject to mandatory redemption ....... - 39,913 39,913
SPS Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary
Trust Holding soley subordinated
debentures of SPS ................... 100,000 - 100,000
Long-term debt .......................... 620,597 1,482,816 2,103,413
------- --------- ---------
1,448,061 3,144,122 4,584,730
--------- --------- ---------
Noncurrent liabilities:
Employees' postretirement benefits
other than pensions ................... 3,158 55,940 59,098
Employees' postemployment benefits .... 1,340 25,182 26,522
----- ------ ------
Total noncurrent liabilities ........ 4,498 81,122 85,620
----- ------ ------
Current liabilities:
Notes payable and commercial paper .... 119,586 295,400 414,986
Long-term debt due within one year .... 229 255,076 255,305
Preferred stock subject to
mandatory redemption within one year .. - 2,576 2,576
Accounts payable ...................... 76,758 154,394 231,152
Dividends payable ..................... - 37,210 37,210
Customers' deposits ................... 5,761 22,286 28,047
Accrued taxes ......................... 13,948 85,675 99,623
Accrued interest ...................... 9,672 27,885 37,557
Defueling and decommissioning liability - 7,913 7,913
Current portion of accumulated
deferred income taxes ................. (3,568) 21,280 17,712
Merger costs (5) ..................... - - 7,453
Other ................................. 29,162 53,935 83,097
------ ------ ------
Total current liabilities ............ 251,548 963,630 1,222,631
------- ------- ---------
Deferred credits:
Customers' advances for construction 412 47,013 47,425
Unamortized investment tax credits 5,657 104,676 110,333
Accumulated deferred income taxes 369,304 542,372 911,676
Other 10,772 30,045 40,817
------ ------ ------
Total deferred credits 386,145 724,106 1,110,251
------- ------- ---------
$2,090,252 $4,912,980 $7,003,232
========== ========== ==========
The accompanying notes to unaudited pro forma combined balance sheets and
statements of income are an integral part of this statement.
58
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
EXHIBIT 99. Unaudited Pro Forma Information
NEW CENTURY ENERGIES, INC.
Unaudited Pro Forma Combined Statement of Income
For the three months ended March 31, 1997
SPS PSCo Pro Forma
--- ---- ---------
(In Thousands, Except Per Share Data)
Operating revenues:
Electric $214,495 $373,953 $588,448
Gas - 291,825 291,825
Other 6,800 11,882 18,682
----- ------ ------
221,295 677,660 898,955
Operating expenses:
Fuel used in generation 104,618 44,261 148,879
Purchased power 5,207 122,626 127,833
Gas purchased for resale - 207,352 207,352
Other operating expenses 30,020 82,828 112,848
Maintenance 6,931 15,113 22,044
Depreciation and amortization 18,230 42,857 61,087
Taxes (other than income taxes) 11,526 22,488 34,014
Income taxes 10,292 35,317 45,609
------ ------ ------
186,824 572,842 759,666
------- ------- -------
Operating income 34,471 104,818 139,289
Other income and deductions:
Allowance for equity funds used
during construction 5 - 5
Miscellaneous income and
deductions - net (3) (2,522) (889) (3,411)
(2,517) (889) (3,406)
Interest charges:
Interest on long-term debt 11,025 26,906 37,931
Amortization of debt discount
and expense less premium 562 928 1,490
Other interest 1,026 14,675 15,701
Allowance for borrowed funds
used during construction (840) (1,461) (2,301)
Dividends on SPS obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely
subordinated debentures of SPS 1,963
Dividend requirements on
preferred stock of subsidiaries - 2,943 2,943
--- ----- -----
13,736 43,991 57,727
------ ------ ------
Net Income $ 18,218 $ 59,938 $ 78,156
========= ======== =========
Weighted average common shares
outstanding (2) 40,918 65,122 103,994
====== ====== =======
Earnings per weighted average
share of common stock outstanding $0.45 $0.92 $0.75
===== ===== =====
The accompanying notes to unaudited pro forma consolidated balance sheets and
statements of income are an integral part of this statement.
59
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
EXHIBIT 99. Unaudited Pro Forma Information
NEW CENTURY ENERGIES, INC.
Unaudited Pro Forma Combined Balance Sheet
December 31, 1996
SPS PSCo Pro Forma
--- ---- ---------
(In Thousands)
Assets
Property, plant and equipment, at cost:
Electric ............................ $2,517,580 $3,931,413 $6,448,993
Gas ................................. - 1,035,394 1,035,394
Steam and other ..................... 37,541 78,225 115,766
Common to all departments ........... - 418,262 418,262
Construction work in progress ....... 79,346 181,597 260,943
------ ------- -------
2,634,467 5,644,891 8,279,358
Less: accumulated depreciation ...... 944,279 2,045,996 2,990,275
------- --------- ---------
Total property, plant and equipment 1,690,188 3,598,895 5,289,083
--------- --------- ---------
Investments, at cost, and receivables 34,446 46,550 80,996
Current assets:
Cash and temporary cash investments 40,609 9,406 50,015
Accounts receivable - net .......... 67,780 218,132 285,912
Accrued unbilled revenues .......... 20,304 85,894 106,198
Recoverable purchased electric energy
costs ............................. 15,715 31,288 47,003
Materials and supplies, at average cost 17,776 48,972 66,748
Fuel inventory, at average cost .... 2,320 24,739 27,059
Gas in underground storage,
at cost (LIFO) ..................... - 42,836 42,826
Regulatory assets recoverable within
one year ........................... 8,000 44,110 52,110
Prepaid expenses and other ......... 4,983 41,790 46,773
----- ------ ------
Total current assets ............... 177,487 547,157 724,644
------- ------- -------
Deferred charges
Regulatory assets .................. 109,545 304,456 414,001
Unamortized debt expense ........... 9,864 10,975 20,839
Other .............................. 23,264 64,615 87,879
------ ------ ------
Total deferred charges ........... 142,673 380,046 522,719
------- ------- -------
$2,044,794 $4,572,648 $6,617,442
========== ========== ==========
The accompanying notes to unaudited pro forma combined balance sheets and
statements of income are an integral part of this statement.
60
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
EXHIBIT 99. Unaudited Pro Forma Information
NEW CENTURY ENERGIES, INC.
Unaudited Pro Forma Combined Balance Sheet
December 31, 1996
SPS PSCo Pro Forma
--- ---- ---------
(In Thousands)
Capitalization and Liabilities
Common stock (2) ..................... $ 40,918 $ 324,094 $ 103,691
Paid-in capital (2) .................. 307,484 724,353 1,293,158
Retained earnings (5) ................ 383,350 389,841 764,646
------- ------- -------
Total common equity .............. 731,752 1,438,288 2,161,495
Preferred stock:
Not subject to mandatory redemption - 140,008 140,008
Subject to mandatory redemption .... - 39,913 39,913
SPS Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary
Trust Holding soley subordinated
debentures of SPS ................... 100,000 - 100,000
Long-term debt ....................... 620,400 1,259,528 1,879,928
------- --------- ---------
1,452,152 2,877,737 4,321,344
--------- --------- ---------
Noncurrent liabilities:
Employees' postretirement benefits
other than pensions ................. 2,874 55,677 58,551
Employees' postemployment benefits .. 2,369 25,182 27,551
----- ------ ------
Total noncurrent liabilities ...... 5,243 80,859 86,102
----- ------ ------
Current liabilities:
Notes payable and commercial paper . 53,836 244,725 298,561
Long-term debt due within one year . 15,231 155,030 170,261
Preferred stock subject to mandatory
redemption within one year ......... - 2,576 2,576
Accounts payable ................... 63,004 254,256 317,260
Dividends payable .................. - 36,973 36,973
Customers' deposits ................ 5,842 21,441 27,283
Accrued taxes ...................... 19,999 58,990 78,989
Accrued interest ................... 13,151 33,797 46,948
Defueling and decommissioning liability - 8,665 8,665
Current portion of accumulated
deferred income taxes .............. 3,583 4,560 8,143
Merger costs (5) ................... - - 8,545
Other .............................. 28,596 69,203 97,799
------ ------ ------
Total current liabilities ........ 203,242 890,216 1,102,003
Deferred credits:
Customers' advances for construction 366 50,269 50,635
Unamortized investment tax credits . 5,719 105,928 111,647
Accumulated deferred income taxes .. 367,272 539,082 906,354
Other .............................. 10,800 28,557 39,357
------ ------ ------
Total deferred credits ........... 384,157 723,836 1,107,993
------- ------- ---------
$2,044,794 $4,572,648 $6,617,442
========== ========== ==========
The accompanying notes to unaudited pro forma combined balance sheets and
statements of income are an integral part of this statement.
61
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
EXHIBIT 99. Unaudited Pro Forma Information
NEW CENTURY ENERGIES, INC.
Unaudited Pro Forma Combined Balance Sheet
December 31, 1996
SPS PSCo Pro Forma
--- ---- ---------
(In Thousands, Except Per Share Data)
Operating revenues:
Electric $927,549 $1,488,990 $2,416,539
Gas - 640,497 640,497
Other 32,047 41,899 73,946
------ ------ ------
959,596 2,171,386 3,130,982
Operating expenses:
Fuel used in generation 439,838 195,442 635,280
Purchased power 20,154 490,428 510,582
Gas purchased for resale - 393,163 393,163
Other operating expenses 133,657 336,100 469,757
Maintenance 34,916 63,908 98,824
Depreciation and amortization 70,234 154,631 224,865
Taxes (other than income taxes) 46,081 82,899 128,980
Income taxes 57,322 96,331 153,653
------ ------ -------
802,202 1,812,902 2,615,104
------- --------- ---------
Operating income 157,394 358,484 515,878
Other income and deductions:
Allowance for equity funds used
during construction 179 757 936
Miscellaneous income and
deductions - net (3) (10,202) (19,015) (29,217)
------- ------- -------
(10,023) (18,258) (28,281)
Interest charges:
Interest on long-term debt 46,096 92,205 138,301
Amortization of debt discount
and expense less premium 2,145 3,621 5,766
Other interest 6,241 57,398 63,639
Allowance for borrowed funds
used during construction (2,601) (3,344) (5,945)
Dividends on SPS obligated
mandatorily redeemable preferred
securities of subsidiary trust holding
solely subordinated debentures of SPS 1,526 - 1,526
Dividend requirements on
preferred stock of subsidiaries 121 11,848 11,969
--- ------ ------
53,528 161,728 215,256
------ ------- -------
Earnings available for common stock $ 93,834 $ 178,498 $ 272,341
======== ========== ==========
Weighted average common shares
outstanding (2) 40,918 64,187 103,059
====== ====== =======
Earnings per weighted average
share of common stock outstanding $2.29 $2.78 $2.64
===== ===== =====
The accompanying notes to unaudited pro forma consolidated balance sheets and
statements of income are an integral part of this statement.
62
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
EXHIBIT 99. Unaudited Pro Forma Information
NEW CENTURY ENERGIES, INC.
Notes To Unaudited Pro Forma Combined Financial Information
(1) The unaudited pro forma combined statements of income have been
prepared from the historical consolidated financial statements of PSCo and SPS
and are presented as if the companies were combined during the periods presented
herein. Certain items have been reclassified on the consolidated financial
statements of SPS to conform with the NCE presentation, including the
reclassification on the Statement of Income of UE and Quixx revenues and
expenses from Other Income, Net to Operating Revenues and Operating Expenses.
(2) The unaudited pro forma combined balance sheets and statements of
income reflect the conversion of each outstanding share of PSCo Common Stock
into one share of NCE Common Stock, and each outstanding share of SPS Common
Stock into 0.95 of one share of NCE Common Stock in accordance with the terms of
the Merger Agreement.
(3) There were no intercompany transactions and, accordingly, no pro forma
elimination adjustments were made.
(4) For discussion regarding material commitments and contingencies
relating to SPS, see Note (6) of Notes to Consolidated Financial Statements. For
PSCo, reference is made to its 1996 Annual Report on Form 10-K and its Form 10-Q
for the quarter ended March 31, 1997.
(5) The unaudited pro forma combined financial statements include
nonrecurring charges directly related to the Merger totaling approximately $1.0
million for the three months ended March 31, 1997, and approximately $9.4
million for the year ended December 31, 1996. These nonrecurring charges include
merger related and business integration expenses and benefits expense resulting
from an accelerated vesting of certain benefits. The unaudited pro forma
combined statement of income do not reflect future nonrecurring charges directly
related to the Merger. These costs are estimated to total approximately $7.5
million and $8.5 million at March 31, 1997 and December 31, 1996, respectively.
The pro forma combined balance sheets at March 31, 1997 and December 31, 1996,
respectively have been adjusted to include these items with the recognition of
additional current liabilities and the reduction of retained earnings.
63
EXHIBIT 21. Subsidiaries of the Registrant
Name Place of Incorporation
Utility Engineering Corporation*.......... Texas
Quixx Corporation*........................ Texas
*Utility Engineering Corporation and Quixx Corporation are wholly
owned subsidiaries of Southwestern Public Service Company.
64
EXHIBIT 23. Consent of DELOITTE & TOUCHE LLP
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-05199 on Form S-3 and Registration Statements No. 33-27452 and 33-57869 on
Form S-8 of Southwestern Public Service Company, of our report dated February
28, 1997 (June 19, 1997, as to the Carolina Energy Limited Partnership
Investment in Note 6) appearing in this transition annual report on Form 10-K of
Southwestern Public Service Company for the four month period ended December 31,
1996.
DELOITTE & TOUCHE
Dallas, Texas
July 16, 1997
65
EXHIBIT 24. Power of Attorney
Each director of Southwestern Public Service Company whose signature
appears herein hereby appoints Bill D. Helton and Doyle R. Bunch II, and each of
them severally, as his or her attorney-in-fact to sign in his or her name and
behalf, in any and all capacities stated herein, and to file with Securities and
Exchange Commission, any and all amendments to this Annual Report on Form 10-K.
66
Southwestern Public Service Company
BYLAWS
(As Amended Through May 1, 1997)
ARTICLE I
Shareholders
SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders of the
Company for the election of directors and for the transaction of any other
business that may be properly brought before the meeting shall be held at the
place, date, and hour as designated by resolution of the Board of Directors.
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders for any
purpose or purposes shall be called by the Secretary upon receipt of a written
request from either the Chairman of the Board or the President, a majority of
the directors, or any person or persons authorized by the New Mexico Business
Corporation Act (the "NMBCA") to request such a meeting. Special meetings of the
shareholders shall be held at the place, date, and hour as designated by either
the Chairman of the Board or the President or by resolution of the Board of
Directors.
SECTION 3. PROCEDURE. At each meeting of the shareholders, the Chairman of
the Board or, in his or her absence, the President shall act as chairman of the
meeting. The chairman of the meeting shall determine the order of business and
all other matters of procedure. The chairman of the meeting may establish rules
to maintain order and to conduct the meeting. The chairman of the meeting shall
act in his or her absolute discretion, and his or her rulings are not subject to
appeal.
ARTICLE II
Directors
SECTION 1. BOARD OF DIRECTORS. The business of the Company shall be managed
by a Board of Directors. The number of directors constituting the Board of
Directors shall be established from time to time by resolution of the Board of
Directors, within the limitations set forth in the Restated Articles of
Incorporation.
No person who has attained the age of sixty-five shall be eligible for
election as a director of the Company unless he or she is already a member of
the Board of Directors. No director who has attained the age of seventy (or
seventy-two in the case of any director who was over sixty-five as of January 1,
1991) shall serve as a director effective with the next annual meeting of the
shareholders. No director who was also an officer of the Company at the time he
or she was last elected as a director shall serve as a director effective with
the next annual meeting of the shareholders after ceasing to be an officer.
SECTION 2. REGULAR MEETINGS. Regular meetings of the Board of Directors may
be held without notice at times and places determined by the Board of Directors.
SECTION 3. SPECIAL MEETINGS. Special meetings of the Board of Directors
shall be called by the Secretary upon the receipt of a request from the Chairman
of the Board, the President, or any three directors. Notice of special meetings
shall be given to each director at any time before the special meeting either
personally or by telephone (including by message or recording device) or
telegraph or facsimile not less than two hours before the meeting or by mail not
less than three days before the meeting. Any notice shall be directed to the
address or telephone number of each director as furnished to the Secretary for
that purpose.
SECTION 4. ADJOURNMENT OF MEETINGS. The directors may adjourn from time to
time any regular or special meeting at which a quorum is present, without notice
other than announcement at the meeting. The adjourned meeting may be called to
order at any time without further notice, and any business may be transacted
which might have been transacted at the original meeting.
SECTION 5. COMPENSATION OF DIRECTORS. The Board of Directors may by
resolution provide for payment of fees for attendance at meetings of the Board
of Directors and the reimbursement of expenses of directors in attending
meetings. The Board of Directors may also by resolution provide for the payment
of other fees or compensation to members of the Board of Directors.
SECTION 6. AUTHORITY TO APPOINT COMMITTEES AND DELEGATE AUTHORITY. The
Board of Directors, by resolution adopted by a majority of the full Board of
Directors, may designate from among its members one or more committees, each of
which, except to the extent limited by law, the Restated Articles of
Incorporation, these Bylaws, and the resolution establishing the committee,
shall have and may exercise all the authority of the Board of Directors, and may
also prescribe rules of operation of the committee. Regular meetings of any
committee may be held without notice at times and places determined by the Board
of Directors or the committee. Special meetings of any committee shall be called
by the Secretary upon the receipt of a request from the Chairman of the Board,
the President, the chairman of the committee, or any two members of the
committee. Notice of special meetings shall be given in the same manner as
provided in Section 3 of this Article II.
ARTICLE III
Officers
SECTION 1. NUMBER. The officers of the Company shall be a Chairman of the
Board, a President, one or more Vice Presidents (one or more of whom may be
designated Executive Vice President or Senior Vice President), a Secretary, and
a Treasurer, and may include a Controller. A chief executive officer, a chief
operating officer, a chief financial officer, and a chief accounting officer may
be designated by the Board of Directors from among the officers.
SECTION 2. ELECTION AND TERM OF OFFICE. Each officer shall be elected by
the Board of Directors and shall hold office until the meeting of the Board of
Directors following the next annual meeting of the shareholders and until his or
her successor has been elected and qualified or until his or her earlier
retirement, resignation, or removal. The Chairman of the Board shall be chosen
from among the directors.
SECTION 3. REMOVAL AND VACANCIES. Any officer may be removed at any time
with or without cause by the Board of Directors. A vacancy in any office may be
filled for the unexpired portion of the term in the same manner as provided for
election to the office.
SECTION 4. ASSISTANT OFFICERS. The Company may have assistant officers as
the Board of Directors may elect. Each assistant officer shall hold office at
the pleasure of, and may be removed at any time with or without cause by, the
Board of Directors. Assistant officers may include one or more Assistant Vice
Presidents, Assistant Secretaries, Assistant Treasurers, and Assistant
Controllers.
SECTION 5. DUTIES. Each officer shall have the authority and shall perform
the duties as may be assigned by the Board of Directors, the Chairman of the
Board, or the President, or as shall be conferred or required by law or these
Bylaws, or as shall be incidental to the office.
ARTICLE IV
Indemnification of Directors, Officers, Employees, and Agents
Each person who is a party or is threatened to be made a party, either as
plaintiff, defendant, respondent, or otherwise, to any action, suit, or
proceeding, whether civil, criminal, administrative, or investigative (a
"Proceeding"), based upon, arising from, relating to, or by reason of the fact
that such person, or a person of whom such person is the legal representative,
is or was a director or officer of the Company, or is or was serving at the
request of the Company as a director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation or non-profit corporation,
cooperative, partnership, joint venture, trust, or other incorporated or
unincorporated enterprise, or any employee benefit plan or trust (each, a
"Company Affiliate"), shall be indemnified and held harmless by the Company to
the fullest extent authorized by the NMBCA, as the same exists on the date of
the adoption of this Bylaw [October 27, 1987] or as may hereafter be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits the Company to provide broader indemnification rights than the NMBCA
permitted the Company to provide prior to such amendment), against any and all
expenses, liability, and loss (including, without limitation, investigation
expenses and expert witnesses' and attorneys' fees and expenses, judgments,
penalties, fines, and amounts paid or to be paid in settlement) actually
incurred by such person in connection therewith; provided, however, that, except
as provided in the second paragraph of this Article IV with respect to
Proceedings seeking to enforce rights under this Bylaw, the Company shall
indemnify any such person seeking to enforce such rights in connection with a
Proceeding (or part thereof) initiated by such person only if such Proceeding
(or part thereof) was authorized by a two-thirds vote of the Board of Directors.
The right to indemnification conferred in this Article IV shall be a contract
right and shall include the right to be paid by the Company for expenses to be
incurred in defending or prosecuting any such Proceeding in advance of its final
disposition.
If a claim under the first paragraph of this Article IV is not paid in full
by the Company within thirty days after a written claim has been received by the
Company, except in the case of a claim for expenses to be incurred in defending
a Proceeding in advance of its final disposition in which case the applicable
period shall be ten days, the claimant may at any time thereafter bring suit
against the Company to recover the unpaid amount of the claim and, if successful
in whole or in part, the claimant shall be entitled to be paid also the expense
of prosecuting such claim. The claimant shall be presumed to be entitled to
indemnification under this Article IV upon submission of a written claim (and
any required undertaking and/or affirmations required by the NMBCA as the same
exists on the date of the adoption of this Bylaw [October 27, 1987] or as may
hereafter be amended but, in the case of any such amendment, only to the extent
that such amendment permits the Company to provide broader indemnification
rights than the NMBCA permitted the Company to provide prior to such amendment)
and thereafter the Company shall have the burden of proof to overcome the
presumption that the claimant is not so entitled. Neither the failure of the
Company (including its Board of Directors, independent legal counsel, or its
shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because such person has met the applicable standard of conduct set forth in the
NMBCA, nor an actual determination by the Company (including its Board of
Directors, independent legal counsel, or its shareholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
The right to indemnification and the payment of expenses incurred in
defending a Proceeding in advance of its final disposition conferred in this
Article IV shall not be exclusive of any other right which any person may be
entitled under any statute, provision of the Restated Articles of Incorporation,
or Bylaw, an agreement, a resolution of shareholders or directors, or otherwise
both as to action in such person's official capacity and as to action in another
capacity while holding such office.
The Company may purchase and maintain insurance or furnish similar
protection, including, but not limited to, providing a trust fund, letter of
credit, or self-insurance, on behalf of any person who is a director, officer,
employee, or agent of the Company or who, while a director, officer, employee,
or agent of the Company, is serving at the request of the Company as a director,
officer, partner, trustee, employee, or agent of a Company Affiliate, against
any liability asserted against and incurred by such director, officer, employee,
or agent in such capacity or arising out of such director's, officer's,
employee's, or agent's status as such, whether or not the Company would have the
power to indemnify such director, officer, employee, or agent against such
liability under the NMBCA.
The Company's indemnity of any person who was or is serving at its request
as a director, officer, partner, trustee, employee, or agent of a Company
Affiliate shall be reduced by any amounts such person may collect as
indemnification from such Company Affiliate.
The Company may, by action of its Board of Directors, authorize one or more
officers to grant rights to indemnification and advancement of expenses to
employees or agents of the Company on such terms and conditions as such officer
or officers deem appropriate under the circumstances.
Anything in this Article IV to the contrary notwithstanding, no elimination
of this Bylaw and no amendment of this Bylaw adversely affecting the right of
any person to indemnification or advancement of expenses hereunder shall be
effective until the sixtieth day following notice to such indemnified person of
such action, and no elimination of or amendment to this Bylaw shall deprive any
such person of such person's rights hereunder arising out of alleged or actual
occurrences, acts, or failures to act which had their origin prior to such
sixtieth day.
In case any provision in this Article IV shall be determined at any time to
be unenforceable in any respect, the other provisions shall not in any way be
affected or impaired thereby, and the affected provision shall be given the
fullest possible enforcement in the circumstances, it being the intention of the
Company to afford indemnification and advancement of expenses to the persons
indemnified hereby to the fullest extent permitted by law.
For purposes of this Article IV, references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan or
trust; and references to "serving at the request of the Company" shall include
any service as a director, officer, employee, or agent of the Company which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan or trust, its participants, or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan or trust shall be deemed to have acted in a manner
"not opposed to the best interests of the Company."
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article IV shall, unless otherwise provided when authorized,
continue as to a person who has ceased to be a director, officer, employee, or
agent and shall inure to the benefit of the heirs, executors, and administrators
of such a person.
Submission of this Bylaw to the shareholders of the Company for
ratification shall constitute notice to the shareholders of the Company and
shall be the only notice which the Company shall be required to give the
shareholders of the Company with respect to any of the matters covered hereby,
including, without limitation, the Company's entering into any agreement or
making other arrangements providing for the indemnification of or the
advancement of expenses to a director, officer, employee, or agent, the actual
advancement of expenses to a director, officer, employee, or agent of the
Company, or the payment of any other liability or indemnification to or on
behalf of a director, officer, employee, or agent.
ARTICLE V
Share Certificates and Transfer of Shares
SECTION 1. SHARE CERTIFICATES. Shares of stock of the Company may, at the
discretion of the Board of Directors, be represented by certificates or may be
uncertificated. Any share certificates of the Company shall be in the form and
contain the provisions determined by the Board of Directors and required by the
NMBCA.
SECTION 2. TRANSFER RULES. The Board of Directors, the Chairman of the
Board, the President, or the Secretary may from time to time promulgate rules or
regulations as it or such officer may deem advisable concerning the issue,
transfer, registration, or replacement of share certificates of the Company.
SECTION 3. REGISTERED SHAREHOLDERS. The Company shall be entitled to treat
the holder of record of any share or shares as the holder in fact of those
shares. The Company shall not be bound to recognize any equitable or other claim
to or interest in any shares on the part of any other person, regardless of
whether the Company has actual or imputed knowledge of a claim of interest,
except as otherwise required by the laws of New Mexico.
ARTICLE VI
Fiscal Year and Seal
SECTION 1. FISCAL YEAR. The fiscal year of the Company shall begin on the
first day of January and end on the last day of December each year.
SECTION 2. SEAL. The seal of the Company shall be circular in form. Around
the margin of the seal shall be placed the words "Southwestern Public Service
Company" and in the center the words "Corporate Seal Incorporated 1921 New
Mexico."
ARTICLE VII
Amendments
These Bylaws may be altered, amended, or repealed by the affirmative vote
of a majority of the Board of Directors at any regular meeting or, if notice of
intention to amend, alter, or repeal the Bylaws is given in the notice of the
meeting, at any special meeting of the Board of Directors. These Bylaws may also
be altered, amended, or repealed by the shareholders by the affirmative vote of
the holders of a majority in interest of the shares issued and outstanding and
entitled to vote.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHWESTERN
PUBLIC SERVICE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF
DECEMBER 31, 1996 AND CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE
FOUR MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
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<OTHER-PROPERTY-AND-INVEST> 58,144
<TOTAL-CURRENT-ASSETS> 168,391
<TOTAL-DEFERRED-CHARGES> 148,186
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,041,210
<COMMON> 40,918
<CAPITAL-SURPLUS-PAID-IN> 307,484
<RETAINED-EARNINGS> 383,350
<TOTAL-COMMON-STOCKHOLDERS-EQ> 731,752
0
0
<LONG-TERM-DEBT-NET> 620,400
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 53,836
<LONG-TERM-DEBT-CURRENT-PORT> 15,231
0
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<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 619,991
<TOT-CAPITALIZATION-AND-LIAB> 2,041,210
<GROSS-OPERATING-REVENUE> 295,579
<INCOME-TAX-EXPENSE> 15,772
<OTHER-OPERATING-EXPENSES> 232,615
<TOTAL-OPERATING-EXPENSES> 248,387
<OPERATING-INCOME-LOSS> 47,192
<OTHER-INCOME-NET> (10,017)
<INCOME-BEFORE-INTEREST-EXPEN> 37,175
<TOTAL-INTEREST-EXPENSE> 18,038
<NET-INCOME> 19,137
0
<EARNINGS-AVAILABLE-FOR-COMM> 19,137
<COMMON-STOCK-DIVIDENDS> 22,504
<TOTAL-INTEREST-ON-BONDS> 15,548
<CASH-FLOW-OPERATIONS> 40,989
<EPS-PRIMARY> 0.470
<EPS-DILUTED> 0.470
</TABLE>
