UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended March 31, 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 (I.R.S. 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 __
As of May 31, 1997, 40,917,908 shares of the Company's common stock
were outstanding.
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
FORM 10-Q
For the Quarter Ended March 31, 1997
TABLE OF CONTENTS
PART I. Financial Information
Condensed Consolidated Balance Sheets at March 31, 1997
and December 31, 1996
Condensed Consolidated Statements of Earnings for the three months
ended March 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996
Notes to Condensed Consolidated Financial Statements
Report of Independent Public Accountants
Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. Other Information
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 12. Statement of Computation of Ratio of Earnings
FORWARD LOOKING INFORMATION
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, which are intended to qualify for the safe
harbors from liability established by the Private Securities Litigation Reform
Act of 1995. 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; future
economic conditions; developments in the legislative, regulatory and competitive
markets in which the Company operates; time and impact of pending merger; and
other circumstances affecting anticipated revenues and costs.
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SOUTHWESTERN PUBLIC SERVICE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In Thousands)
ASSETS
<S> <C> <C>
March 31, December 31,
1997 1996
Property, plant and equipment, at cost:
Electric ....................................................... $ 2,519,287 $ 2,517,580
Other .......................................................... 38,149 37,541
Construction in progress ....................................... 103,825 79,346
2,661,261 2,634,467
Less: accumulated depreciation ................................. (956,944) (944,279)
Total property, plant and equipment ................... 1,704,317 1,690,188
Investments, at cost .................................................... 35,153 34,446
Current assets:
Cash and temporary cash investments ............................ 50,709 40,609
Accounts receivable, less reserve for uncollectible accounts
($2,591 at March 31, 1997; $2,574 at December 31, 1996) 64,169 67,780
Accrued unbilled revenues ...................................... 15,634 20,304
Recoverable fuel and purchased power cost, net ................. 11,456 15,715
Materials and supplies, at average cost ........................ 18,149 17,776
Fuel inventory, at average cost ................................ 2,318 2,320
Current portion of accumulated deferred income taxes ........... 3,568 --
Prepaid expenses and other ..................................... 5,201 4,984
Total current assets .................................. 171,204 169,488
Deferred charges:
Regulatory assets (Note 1) ..................................... 139,553 117,546
Unamortized debt expense ....................................... 9,814 9,864
Other .......................................................... 33,779 23,262
Total deferred charges ................................ 183,146 150,672
$ 2,093,820 $ 2,044,794
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHWESTERN PUBLIC SERVICE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In Thousands)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
March 31, December 31,
1997 1996
Common stock .......................................................... $ 348,402 $ 348,402
Retained earnings ..................................................... 379,062 383,350
Total common equity ................................. 727,464 731,752
SPS obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely subordinated debentures of SPS 100,000 100,000
Long-term debt ........................................................ 620,597 620,400
1,448,061 1,452,152
Noncurrent liabilities:
Employees' postretirement benefits other than pensions ....... 3,158 2,967
Employees' postemployment benefits ........................... 1,340 2,369
Total noncurrent liabilities ........................ 4,498 5,336
Current liabilities:
Notes payable and commercial paper ........................... 119,586 53,836
Long-term debt due within one year ........................... 229 15,231
Accounts payable ............................................. 76,758 63,004
Customers' deposits .......................................... 5,761 5,842
Accrued taxes ................................................ 13,948 19,999
Accrued interest ............................................. 9,672 13,151
Current portion of accumulated deferred income taxes.......... -- 3,583
Other ........................................................ 29,162 28,503
Total current liabilities ........................... 255,116 203,149
Deferred credits:
Customers' advances for construction ......................... 412 366
Unamortized investment tax credits ........................... 5,657 5,719
Accumulated deferred income taxes ............................ 369,304 367,272
Other ........................................................ 10,772 10,800
Total deferred credits .............................. 386,145 384,157
Commitments and contingencies (Notes 2 and 4) ......................... -- --
$2,093,820 $2,044,794
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHWESTERN PUBLIC SERVICE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
(In Thousands, Except Per Share Amounts)
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Operating revenues:
Electric ............................................. $ 214,495 $ 207,640
Other ................................................ 6,800 8,374
221,295 216,014
Operating expenses:
Fuel used in generation .............................. 104,618 98,393
Purchased power ...................................... 5,207 3,710
Other operating expenses ............................. 30,020 34,037
Maintenance .......................................... 6,931 9,313
Depreciation and amortization ........................ 18,230 17,563
Taxes (other than income taxes) ...................... 11,526 11,533
Income taxes ......................................... 10,292 11,022
186,824 185,571
Operating income .............................................. 34,471 30,443
Other income and deductions:
Allowance for equity funds used during construction .. 5 --
Miscellaneous income and deductions, net ............. (2,522) (2,325)
(2,517) (2,325)
Interest charges:
Interest on long-term debt ........................... 11,025 10,987
Amortization of debt discount and expense less premium 562 518
Other interest ....................................... 1,026 2,584
Allowance for borrowed funds used during construction (840) (853)
Dividends on SPS obligated mandatorily reedeemable
preferred securities of subsidiary trust .......... 1,963 --
13,736 13,236
Net income .................................................... 18,218 14,882
Dividend requirements on preferred stock ...................... -- 121
Earnings available for common stock ........................... $ 18,218 $ 14,761
Weighted average common shares outstanding .................... 40,918 40,918
Earnings per weighted average share of common stock outstanding $0.45 $0.36
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHWESTERN PUBLIC SERVICE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Operating Activities:
Net income ............................................................ $ 18,218 $ 14,882
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................................ $ 18,230 $ 17,563
Amortization of investment tax credits ....................... (62) (63)
Deferred income taxes ........................................ (5,119) 5,136
Allowance for equity funds used during construction .......... (5) --
Change in accounts receivable ............................... 3,611 2,795
Change in inventories ........................................ (371) 2,454
Change in other current assets ............................... 8,644 (738)
Change in accounts payable ................................... (7,833) 34,514
Change in other current liabilities .......................... (8,952) (57,733)
Change in deferred amounts ................................... (10,851) (1,853)
Change in noncurrent liabilities ............................. (838) 161
Net cash provided by operating activities ........... 14,672 17,118
Investing activities:
Construction expenditures ............................................. (32,359) (30,376)
Allowance for equity funds used during construction ................... 5 --
Purchase and sale of other investments ................................ (707) 360
Net cash used in investing activities ............... (33,061) (30,016)
Financing activities:
Proceeds from sale of long-term debt .................................. -- 60,000
Redemption of long-term debt .......................................... (14,755) (525)
Redemption of preferred stock ......................................... -- (260)
Short-term borrowings, net ............................................ 65,750 (25,201)
Dividends on common stock ............................................. (22,506) (22,505)
Dividends on preferred stock .......................................... -- (121)
Net cash provided by financing activities .................... 28,489 11,388
Net increase (decrease) in cash and temporary cash investments 10,100 (1,510)
Cash and temporary cash investments at beginning of period ... 40,609 13,613
Cash and temporary cash investments at end of period ......... $ 50,709 $ 12,103
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements.
</TABLE>
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) INTERIM PERIODS. The results of operations for the interim periods are not
necessarily an indication of the expected results for the year due to the
seasonal nature of Southwestern Public Service Company's (the "Company")
business. The unaudited condensed consolidated financial statements included
herein were prepared from the books of the Company in accordance with generally
accepted accounting principles and reflect all adjustments (none of which are
other than normal recurring adjustments) which are, in the opinion of
management, necessary to provide a fair presentation of the results of
operations, financial position or cash flows for the interim periods. The
current interim period reported herein is included in the year and is subject to
independent audit at the end of the year.
(2) ACCOUNTING POLICIES.
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. 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 Federal Energy
Regulatory Commission ("FERC") and as adopted by the Public Utility Commission
of Texas ("PUCT"), the New Mexico Public Utility Commission ("NMPUC"), the
Oklahoma Corporation Commission ("OCC") and the Kansas Corporation Commission
("KCC").
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries Utility Engineering Corporation and
its subsidiaries ("UE") and Quixx Corporation and its subsidiaries ("Quixx"). UE
is primarily engaged in engineering, design and construction management. Quixx
invests in energy related projects including cogeneration facilities and holds
water rights and certain other nonutility assets.
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" ("SFAS 71"). SFAS 71 recognizes that accounting for rate regulated
enterprises should reflect the relationship of costs and revenues introduced by
rate regulation. A regulated utility may defer recognition of a cost (a
regulatory asset) or recognize an obligation (a regulatory liability) if it is
probable that, through the ratemaking process, there will be a corresponding
increase or decrease in revenues.
On September 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 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 consolidated balance sheets:
<TABLE>
<S> <C> <C>
March 31, 1997 December 31, 1996
(In Thousands)
Income taxes ............................................. $80,867 $81,403
Employees' postretirement benefits other than pensions ... 3,138 3,192
Early retirement costs ................................... 1,636 1,727
Demand-side management costs ............................. 2,658 2,317
Unamortized debt reacquisition costs ..................... 19,496 19,880
Thunder Basin judgement .................................. 22,346 --
Other .................................................... 9,412 9,027
$139,553 $117,546
</TABLE>
As of March 31, 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 judgement 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 ITEM
3. LEGAL PROCEEDINGS in the Company's 1996 Annual Report on Form 10-K as of
August 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 judgement to the Tenth Circuit Court of Appeals and on
January 7, 1997, that Court found in favor of Thunder Basin and upheld the
judgement. The Company filed a motion for rehearing which was denied. In
February 1997, the Company recorded the liability for the judgement including
interest and court costs. These amounts, including interest, were paid in April
1997. The recording of the liability for the amount of the judgement and related
costs resulted in a noncash transaction for the three-month period ended March
31, 1997.
Management believes that the judgement 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 judgement 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.
Change in Fiscal Year. On April 22, 1997, the Board of Directors of the
Company approved a change in the Company's fiscal year. 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
In conjunction with the change in the fiscal year and in order to
conform to the presentation of the proposed holding company's financial
statements (see Note 3), the Company has reclassified certain items in its
condensed consolidated financial statements.
General. See Note 1 of the Notes to Consolidated Financial Statements
in the Company's 1996 Annual Report on Form 10-K as of August 31, 1996 for a
summary of the Company's significant accounting policies.
(3) MERGER. In August 1995, the Company, Public Service Company of Colorado
("PSCo"), a Colorado corporation, and New Century Energies, Inc. ("NCE"), a
Delaware corporation, entered into an Agreement and Plan of Reorganization
("Merger Agreement") providing for a business combination as peer firms
involving the Company and PSCo in a "merger of equals" transaction (the
"Merger"). Based on the outstanding common stock of the Company and PSCo at
March 31, 1997, the Merger would result in the common shareholders of the
Company owning 37% of the common equity of NCE and the common shareholders of
PSCo owning 63% of the common equity of NCE.
All required State and Federal regulatory agency authorizations have
been received, except for the approval by the Securities and Exchange Commission
("SEC"). The completion of the Merger is targeted for the second quarter of
1997.
It is management's intention that NCE begin realizing certain savings
upon the 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 $2.8 and $2.6
million of merger-related and business integration expenses during the first
three months of 1997 and 1996, 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.
(4) COMMITMENTS AND CONTINGENCIES.
Rate and Regulatory Matters. 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 a
petition with the PUCT for a fuel reconciliation for the months of January 1992
through December 1994. A hearing was held in September 1995, and in January
1996, an order was issued which required 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. The Company filed
a motion for rehearing on January 25, 1996. The PUCT issued an order on March
14, 1996, denying rehearing on the fuel disallowance (which was adjusted to $1.9
million) and ordered the flow through of 100% of the margin effective with the
first billing cycle after the date of the order. On May 24, 1996, the Company
filed an appeal in the Travis County District Court on the PUCT's decision with
respect to the $1.9 million of disallowed fuel costs in which the hearing of
merits was held on November 1, 1996. The District Court upheld the PUCT's
decision on the disallowed fuel costs. The District Court decision has been
appealed to the Texas Court of Appeals which has not yet ruled in the matter.
Management believes the ultimate outcome of this matter will not significantly
affect the Company's results of operations, financial position or cash flows.
Currently the Company has approximately $11.5 million in underrecovered fuel
costs and is surcharging customers for a portion of the underrecovery. The
Company has requested to continue the surcharge to collect the remaining amount
of underrecovered fuel costs.
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 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.
Thunder Basin Lawsuit. Reference is made to Note (2) for discussion of
the judgement made against the Company in this litigation.
BCH Energy Limited Partnership Investment. As discussed in the
Company's 1996 Annual Report on Form 10-K as of August 31, 1996 under BUSINESS.
Nonutility Businesses, 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
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.
Carolina Energy Limited Partnership Investment. Quixx also has an
equity investment of approximately $13 million, holding a one-third ownership
interest in the Carolina Energy Project which is similar to the BCH project, but
with design modifications. Construction was originally scheduled to be completed
later this year but has been halted pending an independent analysis of the
project's engineering and financial viability. Negotiations are in progress
concerning the restructuring of the project; however, a final restructuring plan
has not yet been approved. In addition, UE loaned $2.6 million to Carolina
Energy Limited Partnership to assist in the financing of the construction. The
note bears interest at 12% per annum and is due on the financial completion date
of the project. Any unpaid principal amount, together with interest, is due on
December 31, 2002. The Company is unable to predict at this time if the project
will be completed. Should the project not be completed, Quixx would be required
to write-off its investment in the project, and UE would be required to
write-off its loan and related accrued interest.
(5) ISSUANCE OF SECURITIES. In October 1996, Southwestern Public Service Capital
I, a wholly-owned trust, issued in a public offering $100,000,000 of its 7.85%
Trust Preferred Securities, Series A. The sole asset of the trust is
$103,000,000 principal amount of the Company's 7.85% Deferrable Interest
Subordinated Debentures, Series A due September 1, 2036.
(6) MANAGEMENT'S REPRESENTATIONS. In the opinion of the Company, the
accompanying unaudited condensed consolidated financial statements include all
adjustments necessary for the fair presentation of the financial position of the
Company and its subsidiaries at March 31, 1997 and December 31, 1996, and the
results of operations and cash flows for the three months ended March 31, 1997
and 1996. The condensed consolidated financial information and notes thereto
should be read in conjunction with the consolidated financial statements and
notes for the years ended August 31, 1996, 1995 and 1994 included in the
Company's 1996 Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
Because of seasonal and other factors, the results of operations for
the three months ended March 31, 1997 should not be taken as an indication of
earnings for all or any part of the balance of the year.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Southwestern Public Service Company:
We have reviewed the accompanying condensed consolidated balance sheet of
Southwestern Public Service Company and subsidiaries as of March 31, 1997, and
the related condensed consolidated statements of earnings and cash flows for the
three month period ended March 31, 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 condensed consolidated statements of
earnings and cash flows of Southwestern Public Service Company and subsidiaries
for the three month period ended March 31, 1996, were not reviewed by us and,
accordingly, we do not express an opinion on them.
ARTHUR ANDERSEN LLP
June 5, 1997
Denver, Colorado
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
<TABLE>
<CAPTION>
Increase (Decrease) From
Corresponding Prior Period
Three Months Ended
3-31-97
(Dollars In Thousands)
<S> <C>
Estimated effect on revenues of variations in:
Kilowatt-hour (kwh) sales* ............................ $ 5,776
Rates ................................................. (2,614)
Fuel and purchased power cost recovery ................ 4,121
Subtotal ..................................... 7,283
Non-firm kwh sales .................................... (428)
Total revenue increase ....................... $ 6,855
Increase in kwh sales* (in millions) ........................... 176
Decrease in non-firm kwh sales (in millions) ................... (49)
*Comprised of retail and wholesale excluding economy and interruptible (non-firm) wholesale kwh sales.
</TABLE>
Variations in Kwh Sales. The revenue increase in the current
three-month period is attributable to increased sales to all classes of
customers. These sales increased due primarily to increased economic activity
throughout the region. Additionally, the dry, colder weather this winter
contributed to sales increases in the retail and agriculture sectors.
Variations in Rates. The decrease for the current period is primarily
the result of interruptible rates available to certain classes of retail
customers. These rates were approved and implemented in Texas and New Mexico in
1996 and acted to lower related revenues. The Company sought approval to put
these new rates into effect in compliance with settlement agreements in the 1993
and 1994 rate cases in Texas and New Mexico, respectively, and to respond to
generation resource capacity needs.
Variations in Fuel and Purchased Power Cost Recovery. The revenue
increase in the current period is due to 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 the current quarter is due to the
availability of low cost power throughout the region.
Other Revenues. Other operating revenues are comprised of revenue from
the Company's consolidated subsidiaries and from non-electric operations.
Operating Expenses and Non-Operating Items
Fuel and purchased power expense comprised 60.6% of total operating
expenses for the three months ended March 31, 1997. When compared to the
corresponding period last year, these expenses increased $7.7 million or 7.6%.
Fuel expense (excluding purchased power expense), per net kwh generated,
increased from 2.03 to 2.12 cents, due to higher natural gas and coal costs.
Total operating expenses, excluding fuel and purchased power decreased
$7.1 million or 9.1%, for the three-month period ended March 31, 1997. This
decrease resulted primarily from continued cost containment efforts.
Other Income and Deductions. A decline in "other income and deductions"
for the three month period ended March 31, 1997, is due primarily to increased
merger-related and business integration expenses.
Earnings
Decreased operating expenses, excluding fuel and purchased power,
favorably affected earnings applicable to common stock for the three months
ended March 31, 1997. Additionally, increased revenue due to higher kwh sales
also contributed to increased earnings.
In December 1996 Quixx wrote off its investment in the BCH limited
partnership and related receivables and expenses of approximately $16 million or
$0.25 per SPS 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. Quixx also
has an equity investment of $13.2 million, representing approximately $0.21 per
SPS common share, after-tax, in the Carolina Energy Project, another
waste-to-energy facility, which is a similar project to BCH, but with design
modifications. (See Note 4). Also, UE has loaned $2.6 million to Carolina Energy
Limited Partnership. Construction at the Carolina Energy Project, originally
scheduled to be completed later this year, has been halted pending an
independent analysis of the project's engineering and financial viability.
Assuming normal weather conditions, 1997 operating income is expected
to remain relatively flat, but net earnings for 1997 will likely be negatively
impacted by increased merger-related and business integration expenses. 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
resolved.
LIQUIDITY AND CAPITAL RESOURCES
The Company's demand for capital is primarily related to the
construction of utility plant and equipment. Cash construction expenditures,
excluding allowance for funds used during construction for the three months
ended March 31, 1997, were $32.4 million. Also in June 1996, the Company
received regulatory approval to make investments in Quixx of up to $15 million
each year beginning in fiscal 1996 and continuing for five years. Quixx's
investment in independent power projects is dependent upon suitable investment
opportunities and the availability of capital. The Company expects the portion
of internally generated funds to be used for capital expenditures will be
approximately 40% in calendar 1997. To the extent the capital required in 1997
is not supplied by internally generated funds, the Company expects to 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. Additionally, the
completion of the merger could significantly impact these estimates. Due to the
merger, Standard & Poor's downgraded the Company's rated debt.
The Company has effective a shelf registration 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. On July 9, 1996, the
Company filed its open access transmission tariff in compliance with FERC Order
No. 888. (See GENERAL. Competition. in the Company's 1996 Annual Report on Form
10-K as of August 31, 1996.) State regulatory authorities are in the process of
changing utility regulations in response to federal and state statutory changes
and evolving markets. 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. In part, and in response to these changing conditions,
the Company has entered into a definitive merger agreement with Public Service
Company of Colorado (the Merger). Consummation of the Merger is subject to
customary conditions including receiving regulatory authority approvals. The two
utilities have targeted a completion date in the second quarter of 1997. 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.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Thunder Basin Lawsuit - see Note (2).
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Shareholders was held January 8, 1997.
The following persons were reelected to the Company's Board of Directors to hold
office until the annual Meeting of Shareholders in 2000.
Director In Favor Withheld
J. C. Chambers 33,653,658 430,017
Giles M. Forbess 33,678,820 404,854
Shirley Bird Perry 33,650,066 433,608
David M. Wilks 33,699,992 383,682
Item 5. Other Information.
The Company's ratio of earnings to fixed charges for the twelve months
ended March 31, 1997, was 3.68.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
12 Statement showing computations of ratio of earnings
for the twelve months ended March 31, 1997
15 Letter of Arthur Andersen LLP regarding unaudited
condensed consolidated interim financial information
(b) Reports on Form 8-K:
Items reported - Item 5. Other Events
Financial Statements filed - None
Date of reports filed - 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.
Items reported - Item 4. Changes in Registrant's Certifying
Accountant
- Item 8. Change in Fiscal Year
Financial Statements filed - None
Date of report filed - April 28, 1997
SIGNATURES
Pursuant to the requirements 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 Doyle R. Bunch II
Executive Vice-President
Accounting and Corporate Development
DATE: June 5, 1997
SOUTHWESTERN PUBLIC SERVICE COMPANY
EXHIBIT 12. Statement of Computation of Ratio of Earnings
(not covered by Report of Independent Public Accountants)
<TABLE>
<CAPTION>
Twelve Months Ended
March 31, 1997
(In Thousands, Except Ratios)
Computation of Ratio of Earnings to Fixed Charges:
<S> <C>
Fixed charges, as defined:
Interest on long-term debt ............................. $ 46,135
Dividends on SPS obligated mandatorily redeemable
preferred securities of subsidiary trust ............ 3,489
Amortization of debt premium, discount and expense ..... 668
Other interest ......................................... 5,832
Estimated interest factor of rental charges ............ 1,245
Total fixed charges .................. $ 57,369
Earnings as defined:
Net earnings per statement of earnings ................. $ 97,299
Fixed charges as shown ................................. 57,369
Income taxes:
Federal-current ............................... 47,093
Federal-deferred .............................. 7,842
State ......................................... 1,907
Investment tax credits ................................. (250)
Earnings available for fixed charges ................... $ 211,260
Ratio of earnings to fixed charges .............................. 3.68
</TABLE>
EXHIBIT 15.
June 5, 1997
Southwestern Public Service Company:
We are aware that Southwestern Public Service Company has incorporated
by reference in its Registration Statement Nos. 33-53171 and 333-05199 on Form
S-3, Registration Statement No. 33-64951 on Form S-4, and Registration Statement
Nos. 33-27452 and 33-57869 on Form S-8, its Form 10-Q for the quarter ended
March 31, 1997, which includes our report dated June 5, 1997, covering the
unaudited condensed consolidated 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
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,704,317
<OTHER-PROPERTY-AND-INVEST> 35,153
<TOTAL-CURRENT-ASSETS> 171,204
<TOTAL-DEFERRED-CHARGES> 183,146
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,093,820
<COMMON> 40,918
<CAPITAL-SURPLUS-PAID-IN> 307,484
<RETAINED-EARNINGS> 379,062
<TOTAL-COMMON-STOCKHOLDERS-EQ> 727,464
0
0
<LONG-TERM-DEBT-NET> 620,597
<SHORT-TERM-NOTES> 101
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 119,485
<LONG-TERM-DEBT-CURRENT-PORT> 229
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 625,944
<TOT-CAPITALIZATION-AND-LIAB> 2,093,820
<GROSS-OPERATING-REVENUE> 221,295
<INCOME-TAX-EXPENSE> 11,526
<OTHER-OPERATING-EXPENSES> 175,298
<TOTAL-OPERATING-EXPENSES> 186,824
<OPERATING-INCOME-LOSS> 34,471
<OTHER-INCOME-NET> (2,517)
<INCOME-BEFORE-INTEREST-EXPEN> 31,954
<TOTAL-INTEREST-EXPENSE> 13,736
<NET-INCOME> 18,218
0
<EARNINGS-AVAILABLE-FOR-COMM> 18,218
<COMMON-STOCK-DIVIDENDS> 22,506
<TOTAL-INTEREST-ON-BONDS> 10,989
<CASH-FLOW-OPERATIONS> 14,672
<EPS-PRIMARY> 0.45
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