SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 1-3789
Southwestern Public Service Company
(Exact name of registrant as specified in its charter)
New Mexico 75-0575400
(State or other jurisdiction of (IRS Employer
incorporation or 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
--------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
At November 10, 1997, 100 shares of the registrant's Common Stock, $1.00
par value (the only class of common stock), were outstanding.
Registrant meets the conditions of General Instruction H(1)(a) and (b) to
Form 10-Q and is therefore filing this form with a reduced disclosure format.
<PAGE>
Table of Contents
PART I - FINANCIAL INFORMATION
Item l.Financial Statements ............................................... 1
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 15
Item 6. Exhibits and Reports on Form 8-K.................................. 15
SIGNATURE.................................................................. 16
EXHIBIT 12................................................................. 17
EXHIBIT 15 ................................................................ 18
In addition to the historical information contained herein, this report
contains a number of "forward-looking statements", within the meaning of the
Securities Exchange Act of 1934. Such statements address future events and
conditions concerning capital expenditures, earnings, resolution and impact of
litigation, regulatory matters, liquidity and capital resources, and accounting
matters. Actual results in each case could differ materially from those
projected in such statements due to a variety of factors including, without
limitation, restructuring of the utility industry; future economic conditions;
earnings retention and dividend payout policies; developments in the
legislative, regulatory and competitive environments in which the Company
operates; and other circumstances that could affect anticipated revenues and
costs, such as compliance with laws and regulations. These and other factors are
discussed in the Company's filings with the Securities and Exchange Commission,
including this report.
i
<PAGE>
TERMS
The abbreviations or acronyms used in the text and notes are defined below:
Abbreviation or Acronym Term
- --------------------------------------------------------------------------------
Cheyenne..................................Cheyenne Light, Fuel and Power Company
Company......................................Southwestern Public Service Company
FERC........................................Federal Energy Regulatory Commission
Merger.............................the business combination between PSCo and SPS
NCE...................................................New Century Energies, Inc.
NC Enterprises.............NC Enterprises, Inc., an intermediate holding company
NCS...................................................New Century Services, Inc.
NMPUC.......................................New Mexico Public Utility Commission
PSCo..................Public Service Company of Colorado, a Colorado corporation
PUHCA.................................Public Utility Holding Company Act of 1935
PSCCC.............................................PS Colorado Credit Corporation
PSRI.......................................................PSR Investments, Inc.
PUCT..........................................Public Utility Commission of Texas
Quixx.........................................Quixx Corporation and subsidiaries
SEC...........................................Securities and Exchange Commission
SFAS 71.....................Statement of Financial Accounting Standards No. 71 -
"Accounting for the Effects of Certain Types of Regulation"
SFAS 121...................Statement of Financial Accounting Standards No. 121 -
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of"
Thunder Basin.........................................Thunder Basin Coal Company
UE..............................Utility Engineering Corporation and subsidiaries
WGI.....................................................WestGas InterState, Inc.
ii
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
(Thousands of Dollars)
ASSETS
September 30, December 31,
1997 1996
---- ----
(Unaudited)
Property, plant and equipment, at cost:
Electric ........................................ $2,510,263 $2,517,579
Other............................................ - 37,542
Construction in progress......................... 161,827 79,346
------- -------
2,672,090 2,634,467
Less: accumulated depreciation .................. (971,757) (944,279)
-------- --------
Total property, plant and equipment............. 1,700,333 1,690,188
--------- ---------
Investments, at cost:
Notes receivable from affiliate (Note 1)......... 119,039 -
Other............................................ 5,773 34,446
------- -------
Total investments............................... 124,812 34,446
------- -------
Current assets:
Cash and temporary cash investments.............. 13,572 40,610
Accounts receivable, less reserve for uncollectible
accounts ($3,826 at September 30, 1997; $2,574
at December 31, 1996) ......................... 103,319 67,779
Accrued unbilled revenues ........................ 16,706 20,304
Recoverable fuel and purchased power cost, net.... 17,776 15,715
Materials and supplies, at average cost........... 18,050 17,776
Fuel inventory, at average cost................... 2,306 2,320
Prepaid expenses and other........................ 2,837 4,984
------- -------
Total current assets............................. 174,566 169,488
------- -------
Deferred charges:
Regulatory assets (Note 1)........................ 121,981 117,546
Unamortized debt expense ......................... 9,538 9,864
Other............................................. 44,188 23,262
------- -------
Total deferred charges........................... 175,707 150,672
------- -------
$2,175,418 $2,044,794
========== ==========
The accompanying notes to condensed financial statements are an
integral part of these financial statements.
1
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
(Thousands of Dollars)
CAPITAL AND LIABILITIES
September 30, December 31,
1997 1996
---- ----
(Unaudited)
Common stock (Note 1)................................ $ 348,402 $ 348,402
Retained earnings.................................... 352,668 383,350
------- -------
Total common equity.............................. 701,070 731,752
SPS obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures of SPS (Note 3)........... 100,000 100,000
Long-term debt....................................... 620,572 620,400
------- -------
1,421,642 1,452,152
Noncurrent liabilities:
Employees' postretirement benefits other than
pensions ...................................... 6,152 2,967
Employees' postemployment benefits............... 498 2,369
------- -------
Total noncurrent liabilities.................... 6,650 5,336
------- -------
Current liabilities:
Notes payable and commercial paper .............. 155,175 53,836
Notes payable to affiliates...................... 25,160 -
Long-term debt due within one year............... 173 15,231
Accounts payable................................. 102,558 63,003
Dividends payable................................ 24,622 -
Customers' deposits.............................. 5,487 5,842
Accrued taxes.................................... 28,586 19,999
Accrued interest................................. 9,761 13,151
Current portion of accumulated deferred income taxes 9,338 3,583
Other............................................ 9,255 28,504
------- -------
Total current liabilities....................... 370,115 203,149
------- -------
Deferred credits:
Unamortized investment tax credits .............. 5,531 5,719
Accumulated deferred income taxes .............. 366,709 367,272
Other............................................ 4,771 11,166
------- -------
Total deferred credits.......................... 377,011 384,157
------- -------
Commitments and contingencies (Notes 1 and 2).......
$2,175,418 $2,044,794
========== ==========
The accompanying notes to condensed financial statements are an
integral part of these financial statements.
2
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Three Months Ended
September 30,
1997 1996
-------- -------
Operating revenues:
Electric.......................................... $279,511 $253,630
Other............................................. 4,645 8,915
-------- -------
284,156 262,545
Operating expenses:
Fuel used in generation........................... 141,907 118,303
Purchased power................................... 3,957 5,778
Other operating expenses.......................... 27,852 32,695
Maintenance....................................... 7,332 6,768
Depreciation and amortization..................... 17,272 17,396
Taxes (other than income taxes)................... 11,969 11,978
Income taxes...................................... 20,816 22,597
-------- -------
231,105 215,515
------- -------
Operating income..................................... 53,051 47,030
Other income and deductions:
Merger expenses................................... (7,200) (4,659)
Miscellaneous income and deductions - net......... (383) 11,805
--------- -------
(7,583) 7,146
Interest charges:
Interest on long-term debt........................ 11,000 12,139
Amortization of debt discount and expense less
premium ........................................ 560 534
Other interest.................................... 1,963 1,386
Allowance for borrowed funds used during
construction (1,129) (137)
Dividends on SPS obligated mandatorily redeemable
preferred securities of subsidiary trust .... 1,963 -
-------- -------
14,357 13,922
------ ------
Net income........................................... $ 31,111 $40,254
======== =======
The accompanying notes to condensed financial statements are an
integral part of these financial statements.
3
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Nine Months Ended
September 30,
1997 1996
---- ----
Operating revenues:
Electric.......................................... $728,436 $702,410
Other............................................. 20,236 24,483
-------- -------
748,672 726,893
Operating expenses:
Fuel used in generation........................... 364,221 328,850
Purchased power................................... 12,088 16,816
Other operating expenses.......................... 97,294 98,255
Maintenance....................................... 22,461 25,746
Depreciation and amortization..................... 53,717 52,524
Taxes (other than income taxes)................... 34,819 34,899
Income taxes...................................... 36,894 50,845
-------- -------
621,494 607,935
------- -------
Operating income..................................... 127,178 118,958
Other income and deductions:
Write-off of investment in Carolina Energy Project
(Note 2) ....................................... (16,052) -
Merger expenses................................... (15,239) (8,444)
Miscellaneous income and deductions - net......... 2,113 12,800
-------- -------
(29,178) 4,356
Interest charges:
Interest on long-term debt........................ 33,057 34,859
Amortization of debt discount and expense less
premium ........................................ 1,683 1,581
Other interest.................................... 4,710 5,623
Allowance for borrowed funds used during
construction ................................... (3,047) (1,770)
Dividends on SPS obligated mandatorily redeemable
preferred securities of subsidiary trust .... 5,888 -
-------- -------
42,291 40,293
Net income........................................... 55,709 83,021
Dividend requirements on preferred stock............. - 121
-------- -------
Earnings available for common stock.................. $ 55,709 $ 82,900
======== ========
The accompanying notes to condensed financial statements are an
integral part of these financial statements.
4
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Nine Months Ended
September 30,
1997 1996
---- ----
Operating activities:
Net income........................................ $55,709 $83,021
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................... 56,290 54,918
Write off of investments......................... 16,052 695
Amortization of investment tax credits........... (188) (188)
Deferred income taxes............................ 1,957 (12,345)
Allowance for equity funds used during construction (5) -
Change in accounts receivable.................... (37,112) (3,580)
Change in inventories............................ (1,419) 1,425
Change in other current assets................... 1,543 (97)
Change in accounts payable....................... 39,276 4,279
Change in other current liabilities.............. (10,565) (5,340)
Change in deferred amounts....................... (52,143) 13,775
Change in noncurrent liabilities................. 1,419 5,601
Other............................................ 312 (278)
------- -------
Net cash provided by operating activities...... 71,126 141,886
------- -------
Investing activities:
Construction expenditures......................... (87,707) (86,304)
Allowance for equity funds used during construction 5 -
Proceeds from disposition of property, plant and
equipment ...................................... 61 2,377
Sale of Quixx and UE to NC Enterprises (Note 1)... (29,567) -
Purchase of other investments..................... (4,583) (3,290)
------ ------
Net cash used in investing activities.......... (121,791) (87,217)
-------- -------
Financing activities:
Proceeds from sale of long-term debt.............. - 58,615
Redemption of long-term debt...................... (16,099) (6,086)
Redemption of preferred stock..................... - (260)
Short-term borrowings - net....................... 101,495 (18,727)
Dividends on common stock......................... (61,769) (67,515)
Dividends on preferred stock...................... - (121)
------- -------
Net cash provided by (used in) financing
activities .................................. 23,627 (34,094)
------ -------
Net (decrease) increase in cash and temporary
cash investments ............................ (27,038) 20,575
Cash and temporary cash investments at
beginning of period ......................... 40,610 13,612
------ ------
Cash and temporary cash investments at end of period $13,572 $34,187
======= =======
The accompanying notes to condensed financial statements are an
integral part of these financial statements.
5
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
Merger
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 is the twelve-month period ending December 31. Previously, the
Company's fiscal year was a twelve-month period ending August 31.
Effective August 1, 1997, following receipt of all required state and
Federal regulatory approvals, the Company and PSCo merged in a tax-free "merger
of equals" transaction and became wholly-owned subsidiaries of NCE, which is a
registered holding company under the PUHCA. NCE owns the following direct
subsidiaries: the Company, PSCo, Cheyenne, WGI, NCS and NC Enterprises. Each
outstanding share of Company common stock was canceled and converted into the
right to receive 0.95 of one share of NCE common stock and each outstanding
share of PSCo common stock was canceled and converted into the right to receive
one share of NCE common stock with this transaction being accounted for as a
pooling of interests for accounting purposes.
Effective with the Merger, the common stock of Quixx and UE, previously
wholly-owned subsidiaries, was transferred through the sale by the Company of
all of the outstanding common stock of such subsidiaries at net book value,
aggregating approximately $119.0 million, to NC Enterprises (an intermediate
holding company) in exchange for notes payable from NC Enterprises. These notes
payable have thirty-year terms and bear interest at a rate of 7.25% per year
with annual interest payments due beginning August 1, 1998 and annual principal
payments due beginning August 1, 2001. The accompanying financial statements
reflect the financial position, results of operations and cash flows for Quixx
and UE for all periods prior to August 1, 1997. The transfer of Quixx and UE did
not have a material impact on the Company's financial position, results of
operations or cash flows.
Business, Utility Operations and Regulation
The Company 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. The Company's operating revenues are
derived primarily 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 state utility commissions in Texas, New Mexico,
Oklahoma and Kansas.
Regulatory Assets and Liabilities
The Company prepares its financial statements in accordance with the
provisions of SFAS 71, as amended, which recognizes that accounting for rate
regulated enterprises should reflect the relationship of costs and revenues
introduced by rate regulation. A regulated utility may defer recognition of a
cost (a regulatory asset) or recognize an obligation (a regulatory liability) if
it is probable that, through the ratemaking process, there will be a
corresponding increase or decrease in revenues.
6
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Continued)
On September 1, 1996, the Company adopted SFAS 121, which imposes stricter
criteria for the continued recognition of regulatory assets on the balance sheet
by requiring that such assets be probable of future recovery at each balance
sheet date. The adoption of this statement did not have a material impact on the
Company's results of operations, financial position or cash flows. The following
regulatory assets are reflected in the Company's condensed balance sheets:
September 30, December 31,
1997 1996
---- ----
(Thousands of Dollars)
Income taxes.............................. $79,738 $81,403
Employees' postretirement benefits
other than pensions..................... 3,062 3,192
Early retirement costs.................... 1,454 1,727
Demand-side management costs.............. 3,593 2,317
Unamortized debt reacquisition costs...... 18,728 19,880
Thunder Basin judgment.................... 7,626 -
Other..................................... 7,780 9,027
------- ------
Total................................... 121,981 117,546
======= =======
As of September 30, 1997, the Company's regulatory assets are being
recovered through rates charged to customers over periods ranging from ten to
thirty years, except for the costs related to the state regulatory
jurisdictional portion of the Thunder Basin judgment for which recovery is
currently undetermined. Under current rates, the Company is recovering
approximately $8 million related to its 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 SFAS 71 as a result of a
change in regulation or the effects of competition, the Company could be
required to write-off related regulatory assets, determine any impairment to
other assets resulting from deregulation and write-down any impaired assets to
their estimated fair value which could materially adversely impact the Company's
results of operations, financial position or cash flows.
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.). (See Note 6 of
the Notes to Consolidated Financial Statements in the Company's 1996 Transition
Report on Form 10-K as of December 31, 1996). On November 1, 1994, the jury
returned a verdict in favor of Thunder Basin and awarded Thunder Basin 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 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. The Company is amortizing these
costs as a recoverable component of fuel used in generation. As of September 30,
1997, approximately $14.7 million of these costs have been amortized.
Management believes that the Thunder Basin judgment 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 approval to collect the FERC jurisdictional portion of the judgment
from wholesale customers. On October 24, 1997, the NMPUC issued an order
granting recovery of the New Mexico retail jurisdictional portion of the
judgment. On May 1, 1997, the Company filed a request with the PUCT to surcharge
under-collected fuel and purchased power expenses, which included $9.1 million
of the Thunder Basin judgment. On November 4, 1997, an administrative law judge
("ALJ") issued a proposal for a decision which denied recovery of the judgment
through a surcharge. The Company filed exceptions to this ALJ recommendation
7
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Continued)
and on November 19, 1997 the PUCT will consider this matter. Management believes
that recovery of the Thunder Basin costs in the Texas retail jurisdiction will
be approved either in this surcharge request or through a fuel reconciliation
proceeding in 1998.
General
See Note 1 of the Notes to Consolidated Financial Statements in the
Company's 1996 Transition Report on Form 10-K as of December 31, 1996 for a
summary of the Company's significant accounting policies.
2. Commitments and Contingencies
Regulatory Matters
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 a 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. Management believes that the ultimate outcome
of this matter will not significantly affect the Company's results of
operations, financial position or cash flows. At September 30, 1997, the Company
had approximately $18.1 million in underrecovered fuel costs in Texas and has
requested PUCT approval to surcharge Texas retail customers for the
underrecovery, including the Thunder Basin judgment as discussed in Note 1.
Accounting Policies Business, Utility Operations and Regulation - Regulatory
Assets and Liabilities.
FERC Rate Case
On December 19, 1989, the FERC issued its final order regarding a 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 Texas-New Mexico Power Company 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 Electric Cooperative, Inc. member cooperatives and Lyntegar Electric
Cooperative, have not been reached. The Company cannot reasonably estimate
8
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Continued)
the remaining amount recoverable from these proceedings; however, a favorable
resolution could materially improve earnings in the year in which it is
resolved.
BCH Energy Limited Partnership Investment
As discussed in the Company's 1996 Transition Report on Form 10-K as of
December 31, 1996 under BUSINESS. Nonutility Businesses, Quixx holds a 49%
limited partnership interest in BCH Energy Limited Partnership ("BCH"), 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 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.
Carolina Energy Limited Partnership Investment
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 construction contractor 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 net investments in the Carolina Energy Project are unlikely to be
recovered.
As a consequence, in June 1997, Quixx wrote-off its investment of
approximately $13.64 million in the Carolina Energy Limited Partnership.
Additionally, UE wrote-off its net investment of approximately $2.42 million in
this same partnership. Quixx held a one-third ownership interest, including a 1%
general partnership interest, in the partnership. UE's net investment in the
partnership was comprised of subordinated debt and the related interest
receivable, as well as engineering services. This combined investment represents
approximately $16.1 million.
3. 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, issued in a public offering $100 million of its 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.
4. Management's Representations
In the opinion of the Company, the accompanying unaudited condensed
financial statements include all adjustments necessary for the fair presentation
of the financial position of the Company at September 30, 1997 and December 31,
1996, and the results of operations for the three and nine months ended
September 30, 1997 and 1996 and cash flows for the nine months ended September
30, 1997 and 1996. The condensed financial information and notes thereto should
be read in conjunction with the consolidated financial statements and notes for
the four months ended December 31, 1996 and for the years ended August 31, 1996,
1995 and 1994 included in the Company's 1996 Transition Report on Form 10-K.
9
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Continued)
Because of seasonal and other factors, including the reorganization
associated with the Merger, the results of operations for the three and nine
months ended September 30, 1997 should not be taken as an indication of earnings
for all or any part of the balance of the year.
10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO SOUTHWESTERN PUBLIC SERVICE COMPANY
We have reviewed the accompanying condensed balance sheet of Southwestern Public
Service Company (a New Mexico corporation) as of September 30, 1997, and the
related condensed statements of income for the three and nine month periods
ended September 30, 1997 and condensed statement of cash flows for the nine
month period ended September 30, 1997. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
The consolidated balance sheet of Southwestern Public Service Company and
subsidiaries as of December 31, 1996, was not audited by us and, accordingly, we
do not express an opinion on it. The consolidated condensed statements of income
for the three and nine month periods ended September 30, 1996 and the
consolidated condensed statement of cash flows for the nine month period ended
September 30, 1996, of Southwestern Public Service Company and subsidiaries were
not reviewed by us and, accordingly, we do not express an opinion on them.
ARTHUR ANDERSEN LLP
Denver, Colorado,
November 10, 1997
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Merger
Effective August 1, 1997, following receipt of all required state and
Federal regulatory approvals, the Company and PSCo merged in a tax-free "merger
of equals" transaction and became wholly-owned subsidiaries of NCE, which is a
registered holding company under PUCHA. This transaction was accounted for as a
pooling of interest for accounting purposes. Effective with the Merger, Quixx
and UE, previously wholly-owned subsidiaries, were transferred through the sale
by the Company of all of the outstanding common stock of such subsidiaries at
net book value, to NC Enterprises, an intermediate holding company of NCE. See
Note 1 in Item 1. FINANCIAL STATEMENTS for additional discussion of the Company,
the Merger and the sale of UE and Quixx.
The condensed statements of income and cash flows reflect the results of
operations of Quixx and UE through July 31, 1997. Where relevant, additional
information has been presented to discuss the impact of the transfer of these
subsidiaries.
Earnings
Net income decreased $9.1 million for the third quarter of 1997 and $27.3
million for the nine months ended September 30, 1997, as compared to the same
periods in 1996 primarily due to lower earnings of Quixx and UE, and the
recognition of higher merger costs. Net income decreased approximately $7.8
million due to the recognition of a gain on the sale of certain water rights by
Quixx in August 1996. The June 1997 write-off of investments in the Carolina
Energy Project by Quixx and UE contributed to the lower year-to-date September
1997 earnings. Higher merger-related and business integration costs, including
executive severance costs, resulting from the August 1, 1997 closing of the
Merger contributed to the lower earnings. While third quarter 1997 sales were
strong, the wet and mild weather during the spring and early summer of 1997
negatively impacted sales and margins for the nine months ended September 30,
1997.
Operating Revenues
Electric Operations
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 electric operating revenues.
Increase (Decrease) From
Corresponding Prior Period
--------------------------
Three Months Ended Nine Months
------------------ -----------
Ended
(Thousands of Dollars)
Estimated effect on revenues of variations in:
Kilowatt-hour (kwh) sales*............ $ 22,394 $ 12,434
Rates and other....................... (2,168) (7,917)
Fuel and purchased power cost recovery 6,708 22,132
----- ------
Subtotal............................ 26,934 26,649
Non-firm kwh sales.................... (1,053) (623)
------ ----
Increase in electric revenue........ $ 25,881 $ 26,026
======== ========
Percentage increase in kwh sales*........ 11.3% 2.8%
==== ===
Percentage decrease in non-firm kwh sales (47.9)% (30.8)%
===== =====
*Comprised of retail and wholesale excluding economy (non-firm) wholesale
kwh sales.
12
<PAGE>
Variations in Kwh Sales. Revenues during the third quarter and the nine
months ended September 30, 1997, respectively increased from the comparable
periods in 1996, primarily due to an increase in retail and firm wholesale Kwh
sales totaling 11.3% and 2.8%. The increase in revenues for the nine months
ended September 30, 1997 comparable periods, as compared to the third quarter
results, are lower primarily due to the mild, wet weather experienced in the
service territory during the spring and early summer months of 1997.
Variations in Rates and Other. Decreased revenues for the third quarter
and for the nine months ended September 30, 1997 are primarily due to lower
interruptible rates available to certain classes of retail and wholesale
customers. These rates were approved and implemented in Texas and New Mexico in
1996. Reductions for estimated refunds related to guaranteed merger savings,
also contributed to lower revenues for both the quarter and year-to-date
comparable periods. 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 Merger. The Company will provide a guaranteed minimum annual savings to
retail customers of $3.0 million in Texas, $1.2 million in New Mexico, $100,000
in Oklahoma and $10,000 in Kansas.
Variations in Fuel and Purchased Power Cost Recovery. The revenue increase
in the current period is primarily due to the recovery of the Thunder Basin
judgment (See Note 1 in Item 1. FINANCIAL STATEMENTS) and increased natural gas
prices and coal costs which are recovered through cost recovery mechanisms.
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 decrease in revenues for the third quarter of 1997 and
for the nine months ended September 30, 1997 is due to the availability of low
cost power throughout the region.
Operating Expenses and Non-Operating Items
Fuel and purchased power expense as a percentage of total operating
expenses approximated 63.1% and 57.6% for the third quarter of 1997 and 1996,
respectively. Fuel and purchased power expense increased $21.8 million in the
third quarter of 1997, as compared to the same period in 1996, primarily due to
higher electric kwh sales, higher gas costs and costs recognized in connection
with the Thunder Basin judgment. The effect of the judgment for the third
quarter of 1997 was approximately 0.03 cents per net kwh generated. Overall,
fuel expense increased from 2.03 to 2.19 cents per net kwh generated.
For the nine months end September 30, 1997 and 1996, fuel and purchased
power as a percentage of total operating expenses, approximated 60.5% and 56.9%,
respectively. The increase in fuel and purchased power during the nine months
ended September 30, 1997, as compared to the same period in 1996, was due
primarily to the effects of the Thunder Basin judgment and a slight increase in
electric kwh sales for the comparable periods. The effect of the judgment on the
cost per kwh generated for the nine months ended September 30, 1997 was 0.12
cents. Overall, fuel expense increased from 2.04 to 2.18 cents per net kwh
generated.
Operating and maintenance costs decreased for the third quarter of 1997
and for the nine months ended September 30, 1997, as compared to the same period
in 1996, primarily due to lower labor and employee benefit costs and other
decreases attributable to the Company's overall cost containment efforts.
Income taxes decreased for the third quarter of 1997 and for the nine
months ended September 30, 1997, as compared to the same periods in 1996,
primarily due to lower pre-tax income offset, in part, by the effect of higher
1997 non-deductible merger and executive severance costs.
13
<PAGE>
Other Income and Deductions
Other income and deductions decreased $14.7 million for the third quarter
of 1997, as compared to the third quarter of 1996, primarily due to the 1996
gain recognized by Quixx on the sale of certain water rights and increased 1997
merger and business integration costs, including executive severance costs. This
decrease was offset, in part, by higher interest income primarily due to the
note receivable from NC Enterprises for the sale of UE and Quixx.
Other income and deductions decreased $33.5 million for the nine months
ended September 30, 1997, as compared to the same period of 1996, primarily due
to the write-off of the Carolina Energy Project, the 1996 gain recognized by
Quixx on the sale of certain water rights (approximately $11.8 million) and
higher 1997 merger and business integration costs. While costs associated with
the Merger, transition planning and implementation have negatively impacted
earnings during 1997 and 1996, management anticipates that future operating
results will benefit from synergies resulting from the Merger. (For further
discussion of the Carolina Energy Project, see Note 2 Commitments and
Contingencies in Item 1. FINANCIAL STATEMENTS).
Commitments and Contingencies
Issues relating to regulatory matters are discussed in Note 2. Commitments
and Contingencies in Item 1. FINANCIAL STATEMENTS. These matters and the future
resolution thereof may impact the Company's future results of operations,
financial position or cash flows.
Based on a preliminary analysis, NCE and its subsidiaries expect to incur
costs of approximately $50-65 million over the next two years to modify its
computer software, hardware and other automated systems used in
operationsenabling proper data processing relating to the year 2000 and beyond.
Approximately one-third of these costs are expected to be incurred by or
allocated to the Company. The Company continues to evaluate appropriate courses
of corrective action, including the replacement of certain systems. A
significant portion of these costs will represent the redeployment of existing
information technology resources. Management does not anticipate these
activities will have a material adverse impact on the Company's financial
position, results of operations or cash flows.
Liquidity and Capital Resources
Cash Flows - Nine Months Ended September 30
1997 1996 Decrease
---- ---- --------
Net cash provided by operating activities
(in millions) ......................... $71.1 $141.9 $(70.8)
Cash provided by operating activities decreased in the nine months end
September 30, 1997, when compared to the same period in 1996, primarily due to
lower earnings (which included the write-off of investments in the Carolina
Energy Project by Quixx and UE), the effects resulting from the August 1, 1997
sale of Quixx and UE, and the payment in April 1997 of the Thunder Basin
judgment.
1997 1996 Increase
---- ---- --------
Net cash used in investing activities
(in millions) ........................ $(121.8) $(87.2) $34.6
Cash used in investing activities increased during the nine months end
September 30, 1997, when compared to the same period in 1996, primarily due to
the sale of Quixx and UE to NC Enterprises in connection with the Merger.
1997 1996 Increase
---- ---- --------
Net cash provided by (used in) financing
activities (in millions) ............. $23.6 $(34.1) $57.7
14
<PAGE>
Cash provided by financing activities increased (indicating that there
were more borrowings) in the nine months end September 30, 1997, when compared
to the same period in 1996, primarily due to a net increase in short-term
borrowings, offset in part by a decrease in the proceeds from the sale of
long-term debt. These proceeds were used to finance on-going capital
expenditures.
Electric Utility Industry
Electric utilities have historically operated in a highly regulated
environment in which they have an obligation to provide electric service to
their customers in return for an exclusive franchise within their service
territory with an opportunity to earn a regulated rate of return. This
regulatory environment is changing. The generation sector has experienced
competition from nonutility power producers and the FERC is requiring utilities,
including the Company, to provide wholesale transmission service to others and
may order electric utilities to enlarge their transmission systems to facilitate
transmission services without impairing reliability. State regulatory
authorities are in the process of changing utility regulations in response to
federal and state statutory changes and evolving markets, including
consideration of providing open access to retail customers. All of the Company's
jurisdictions continue to evaluate utility regulations with respect to
competition. The Company is unable to predict what financial impact or effect
the adoption of these proposals would have on its operations. The Merger between
the Company and PSCo was, in part, in response to these changing conditions.
15
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Thunder Basin Lawsuit - see Note (1).
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
12 Computation of Ratio of Earnings to Fixed Charges for the nine months
ended September 30, 1997 and 1996.
15 Letter from Arthur Andersen LLP regarding unaudited interim information.
27 Financial Data Schedule UT.
(b) Reports on Form 8-K:
- A report dated April 22, 1997 and filed on August 8, 1997 which included
Item 4. Changes in Registrant's Certifying Accountant.
16
<PAGE>
SIGNATURE
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/ R. C. Kelly
---------------------------------
R. C. KELLY
Executive Vice President and
and Chief Financial Officer
Dated: November 14, 1997
17
<PAGE>
EXHIBIT 12
SOUTHWESTERN PUBLIC SERVICE COMPANY
COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES
(not covered by Report of Independent Public Accountants)
Nine Months Ended
September 30,
1997 1996
---- ----
(Thousands of Dollars, except ratios)
Fixed charges:
Interest on long-term debt................... $33,057 $34,859
Other interest............................... 4,710 5,623
Dividends on SPS obligated mandatorily
redeemable preferred securities of
subsidiary trust .......................... 5,888 -
Amortization of debt discount and expense
less premium .............................. 1,683 1,581
Interest component of rental expense......... 934 934
--- ---
Total ..................................... $46,272 $42,997
======= =======
Earnings (before fixed charges and taxes on income):
Net income .................................. $55,709 $83,021
Fixed charges as above....................... 46,272 42,997
Provisions for Federal and state taxes on income,
net of investment tax credit amortization.... 36,894 50,845
------ ------
Total...................................... $138,875 $176,863
======== ========
Ratio of earnings to fixed charges.............. 3.00 4.11
==== ====
18
<PAGE>
EXHIBIT 15
November 10, 1997
Southwestern Public Service Company:
We are aware that Southwestern Public Service Company has incorporated by
reference in its Registration Statement No. 333-05199 on Form S-3 and
Registration Statements No. 33-27452 and 33-57869 on Form S-8, its Form 10-Q for
the quarter ended September 30, 1997, which includes our report dated November
10, 1997, covering the unaudited condensed financial statements contained
therein. Pursuant to Regulation C of the Securities Act of 1933, that report is
not considered a part of the registration statement prepared or certified by our
Firm or a report prepared or certified by our Firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
19
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHWESTERN
PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND
CONDENSED STATEMENTS OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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