- --------------------------------------------------------------------------------
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 June 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 August 1, 1997, 40,917,908 shares of the registrant's Common Stock,
$1.00 par value (the only class of common stock), were outstanding. In
connection with the Merger, effective August 1, 1997, each share of outstanding
common stock of the registrant stock was exchanged for 0.95 of one share of New
Century Energies, Inc., common stock, $1.00 par value.
<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 ............................................. 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 16
Item 6. Exhibits and Reports on Form 8-K.................................. 16
SIGNATURES................................................................. 17
EXHIBIT 12................................................................. 18
EXHIBIT 15 ................................................................ 19
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>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHWESTERN PUBLIC SERVICE COMPANY
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Thousands of Dollars)
ASSETS
June 30, December 31,
1997 1996
---- ----
(Unaudited)
Property, plant and equipment, at cost:
Electric .......................................... $2,531,927 $2,517,579
Other.............................................. 37,522 37,542
Construction in progress........................... 122,795 79,346
------- -------
2,692,244 2,634,467
Less: accumulated depreciation .................... (973,114) (944,279)
-------- --------
Total property, plant and equipment.............. 1,719,130 1,690,188
--------- ---------
Investments, at cost, and receivables................. 22,481 34,446
------- -------
Current assets:
Cash and temporary cash investments................ 23,561 40,610
Accounts receivable, less reserve for uncollectible
accounts ($2,786 at June 30, 1997; $2,574 at
December 31, 1996) .............................. 73,984 67,779
Accrued unbilled revenues ......................... 19,863 20,304
Recoverable fuel and purchased power cost, net..... 14,377 15,715
Materials and supplies, at average cost............ 18,056 17,776
Fuel inventory, at average cost.................... 2,322 2,320
Prepaid expenses and other......................... 4,860 4,984
----- -----
Total current assets.............................. 157,023 169,488
------- -------
Deferred charges:
Regulatory assets (Note 1)......................... 127,774 117,546
Unamortized debt expense .......................... 9,681 9,864
Other.............................................. 33,671 23,262
------ -------
Total deferred charges............................ 171,126 150,672
------- -------
$2,069,760 $2,044,794
========== ==========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
1
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Thousands of Dollars)
CAPITAL AND LIABILITIES
June 30, December 31,
1997 1996
---- ----
(Unaudited)
Common stock (Note 2)................................. $348,402 $348,402
Retained earnings..................................... 362,938 383,350
------- -------
Total common equity............................... 711,340 731,752
SPS obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures of SPS (Note 4) ............. 100,000 100,000
Long-term debt........................................ 620,516 620,400
------- -------
1,431,856 1,452,152
--------- ---------
Noncurrent liabilities:
Employees' postretirement benefits other than pensions 3,466 2,967
Employees' postemployment benefits................. 1,344 2,369
----- -----
Total noncurrent liabilities...................... 4,810 5,336
----- -----
Current liabilities:
Notes payable and commercial paper ................ 144,330 53,836
Long-term debt due within one year................. 173 15,231
Accounts payable................................... 55,427 63,003
Customers' deposits................................ 5,653 5,842
Accrued taxes...................................... 16,444 19,999
Accrued interest................................... 12,789 13,151
Current portion of accumulated deferred income taxes 5,119 3,583
Other.............................................. 23,570 28,504
------ ------
Total current liabilities......................... 263,505 203,149
------- -------
Deferred credits:
Customers' advances for construction............... 420 366
Unamortized investment tax credits ................ 5,594 5,719
Accumulated deferred income taxes ................ 358,101 367,272
Other.............................................. 5,474 10,800
------- -------
Total deferred credits............................ 369,589 384,157
------- -------
Commitments and contingencies (Notes 1 and 3).........
$2,069,760 $2,044,794
========== ==========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
2
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
AND SUBSIDARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars Except per Share Data)
Three Months Ended
June 30,
1997 1996
-------- -------
Operating revenues:
Electric.......................................... $234,430 $241,140
Other............................................. 8,791 7,194
----- -----
243,221 248,334
Operating expenses:
Fuel used in generation........................... 116,411 112,154
Purchased power................................... 2,924 7,328
Other operating expenses.......................... 40,707 31,523
Maintenance....................................... 8,198 9,665
Depreciation and amortization..................... 18,215 17,565
Taxes (other than income taxes)................... 11,324 11,388
Income taxes...................................... 5,786 17,226
----- ------
203,565 206,849
------- -------
Operating income..................................... 39,656 41,485
Other income and deductions:
Write-off of investment in Carolina Energy Project
(Note 3) ......................................... (16,052) -
Miscellaneous income and deductions - net......... (3,026) (465)
------ ----
(19,078) (465)
Interest charges:
Interest on long-term debt........................ 11,032 11,733
Amortization of debt discount and expense less
premium ........................................ 561 529
Other interest.................................... 1,721 1,653
Allowance for borrowed funds used during
construction ................................... (1,078) (780)
Dividends on SPS obligated mandatorily redeemable
preferred securities of subsidiary trust .... 1,962 -
-------- -------
14,198 13,135
------ ------
Net income........................................... $ 6,380 $27,885
======== =======
Weighted average common shares outstanding (thousands) 40,918 40,918
====== ======
Earnings per weighted average
share of common stock outstanding................. $ 0.15 $ 0.68
======== =======
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
3
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
AND SUBSIDARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars Except per Share Data)
Six Months Ended
June 30,
1997 1996
-------- --------
Operating revenues:
Electric.......................................... $448,925 $448,780
Other............................................. 15,591 15,568
------ ------
464,516 464,348
Operating expenses:
Fuel used in generation........................... 221,029 210,547
Purchased power................................... 8,131 11,038
Other operating expenses.......................... 70,727 65,560
Maintenance....................................... 15,129 18,978
Depreciation and amortization..................... 36,445 35,128
Taxes (other than income taxes)................... 22,850 22,921
Income taxes...................................... 16,078 28,248
-------- -------
390,389 392,420
------- -------
Operating income..................................... 74,127 71,928
Other income and deductions:
Allowance for equity funds used during construction 5 -
Write-off of investment in Carolina Energy Project
(Note 3) ....................................... (16,052) -
Miscellaneous income and deductions - net......... (5,548) (2,790)
------ ------
(21,595) (2,790)
Interest charges:
Interest on long-term debt........................ 22,057 22,720
Amortization of debt discount and expense less
premium ........................................ 1,123 1,047
Other interest.................................... 2,747 4,237
Allowance for borrowed funds used during
construction ................................... (1,918) (1,633)
Dividends on SPS obligated mandatorily redeemable
preferred securities of subsidiary trust .... 3,925 -
----- ----
27,934 26,371
------ ------
Net income........................................... 24,598 42,767
Dividend requirements on preferred stock............. - 121
-------- -------
Earnings available for common stock.................. $ 24,598 $42,646
======== =======
Weighted average common shares outstanding (thousands) 40,918 40,918
====== ======
Earnings per weighted average
share of common stock outstanding................. $ 0.60 $ 1.04
======== ========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
4
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Six Months Ended
June 30,
1997 1996
---- ----
Operating activities:
Net income........................................ $24,598 $42,767
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................... 38,365 36,953
Amortization of investment tax credits........... (125) (125)
Deferred income taxes............................ (7,705) 10,847
Allowance for equity funds used during construction (5) -
Write-off of investment in Carolina Energy Project 16,052 -
Change in accounts receivable.................... (3,243) (10,611)
Change in inventories............................ (282) 3,481
Change in other current assets................... (16,685) (5,634)
Change in accounts payable....................... (7,576) 4,924
Change in other current liabilities.............. 1,760 (7,778)
Change in deferred amounts....................... (27,780) (4,982)
Change in noncurrent liabilities................. 4,810 -
Other............................................ (327) 97
------- -------
Net cash provided by operating activities...... 21,857 69,939
------- -------
Investing activities:
Construction expenditures......................... (65,888) (53,547)
Allowance for equity funds used during construction 5 -
Proceeds from disposition of property, plant
and equipment .................................. 369 154
Purchase of other investments..................... (3,866) (5,748)
------- -------
Net cash used in investing activities.......... (69,380) (59,141)
------- -------
Financing activities:
Proceeds from sale of long-term debt.............. - 58,614
Redemption of long-term debt...................... (15,010) (741)
Redemption of preferred stock..................... - (260)
Short-term borrowings - net....................... 90,494 (11,769)
Dividends on common stock......................... (45,010) (45,010)
Dividends on preferred stock...................... - (120)
------- -------
Net cash provided by financing activities....... 30,474 714
------- -------
Net (decrease) increase in cash and temporary
cash investments ............................. (17,049) 11,512
Cash and temporary cash investments at beginning
of period 40,610 13,612
------ ------
Cash and temporary cash investments at end of period $ 23,561 $ 25,124
======== ========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
5
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. 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 calendar 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.
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, the Company and Public Service Company of
Colorado ("PSCo") merged and became wholly-owned subsidiaries of New Century
Energies, Inc. ("NCE"), which will be a registered holding company under the
Public utility Holding Company Act of 1935. This transaction has been accounted
for as a pooling of interests for accounting purposes. After effecting the
Merger, NCE will own the following direct subsidiaries: the Company, PSCo,
Cheyenne Light, Fuel and Power Company, WestGas InterState, Inc., New Century
Services, Inc., and NC Enterprises, Inc. PSCo owns the following subsidiaries:
PS Colorado Credit Corporation, PSR Investments, Inc., 1480 Welton, Inc., Fuel
Resources Development Co., a dissolved Colorado Corporation, and New Century
International, Inc., which was established in 1997 in connection with the
acquisition of Yorkshire Electricity Group plc. NC Enterprises, Inc. ("NC
Enterprises"), an intermediate holding company, owns the following subsidiaries:
Quixx, UE, e prime, inc. and subsidiaries and Natural Fuels Corporation. The
transfer of Quixx and UE is not expected to have a material impact on the
Company's financial position, results of operations or cash flows (see Note 2).
The Company has reclassified certain items in its consolidated condensed
financial statements in order to conform to the presentation of the holding
company's financial statements.
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
6
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
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 in 1996 and the application during
1997 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 consolidated condensed balance sheets:
June 30, December 31,
1997 1996
---- ----
(Thousands of Dollars)
Income taxes.............................. $80,303 $81,403
Employees' postretirement benefits
other than pensions..................... 3,097 3,192
Early retirement costs.................... 1,545 1,727
Demand-side management costs.............. 2,900 2,317
Unamortized debt reacquisition costs...... 19,112 19,880
Thunder Basin judgment.................... 12,652 -
Other..................................... 8,165 9,027
------- ------
Total................................... $127,774 $117,546
======== ========
As of June 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. Although rate recovery has not yet
been approved, the Company is amortizing these costs as a recoverable component
of fuel used in generation. As of June 30, 1997, approximately $9.7 million of
these costs have been amortized.
7
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
Management believes that the Thunder Basin judgment amount paid is
recoverable from customers, although any such recovery would be subject to
review by various regulatory agencies. On September 17, 1996, the FERC issued an
order granting the Company conditional approval to collect the FERC
jurisdictional portion of the judgment from wholesale customers. Therefore,
management believes that the ultimate resolution will not have a material
adverse effect on the Company's results of operations, financial position or
cash flows.
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. Merger
In August 1995, the Company, PSCo, a Colorado corporation, and 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 tax-free "merger of equals" transaction (the
"Merger"). Effective August 1, 1997, following receipt of all required state and
Federal regulatory approvals, the Company and PSCo merged and became
wholly-owned subsidiaries of NCE. 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. Based on the
outstanding common stock of the Company and PSCo at August 1, 1997, the Merger
resulted 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. Effective with the Merger, the common stock of Quixx Corporation
and Utility Engineering Corporation, 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 (approximately $118.7 million) to NC Enterprises,
in exchange for notes payable of 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.
Operating revenues and net income for the three months and six months
ended June 30, 1997 and 1996, for the Company, PSCo and NCE on a pro-forma basis
are as follows (in millions):
Company PSCo NCE*
------- ---- ----
Three months ended June 30, 1997:
Operating revenues $ 243 $ 543 $ 786
Net income 6 31 34
Three months ended June 30, 1996:
Operating revenues $ 248 $ 485 $ 733
Net income 28 35 59
Six months ended June 30, 1997:
Operating revenues $ 465 $ 1,220 $ 1,685
Net income 25 93 112
Six months ended June 30, 1996:
Operating revenues $ 464 $ 1,108 $ 1,572
Net income 43 99 136
* NCE's net income is net of dividend requirements on preferred stock of
subsidiaries
8
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
It is management's intention that NCE begin realizing certain savings upon
the consummation of the Merger and, accordingly, costs associated with the
Merger and the transition planning and implementation have negatively impacted
earnings during 1997. The Company recognized merger-related and business
integration expenses of approximately $5.3 and $1.2 million during the second
quarter of 1997 and 1996, respectively, and approximately $8.1 and $3.8 million
during the first six months of 1997 and 1996, respectively.
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 to
retail customers of $3.0 million in Texas, $1.2 million in New Mexico, $100,000
in Oklahoma and $10,000 in Kansas.
3. 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 June 30, 1997, the Company had
approximately $14.4 million in underrecovered fuel costs in Texas and has
requested to surcharge Texas retail customers for the underrecovery.
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
9
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
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 1 for discussion of the judgement made against
the Company in this litigation.
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 or $0.25 per common
share in this project.
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 constructor have been unable to restructure the
project on mutually agreeable terms. The construction contractor is demobilizing
and the creditors have initiated remedies provided under the credit agreement.
Accordingly, management has determined it is unlikely the project will be
completed under the present ownership, if at all, and Quixx's and UE's 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, the related interest receivable,
as well as engineering services. This combined investment represents
approximately $16.1 million or $0.25 per common share, after tax.
4. 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.
5. Management's Representations
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements include all adjustments necessary for the fair
presentation of the financial position of the Company and its subsidiaries at
June 30, 1997 and December 31, 1996, and the results of operations for the three
and six months ended June 30, 1997 and 1996 and cash flows for the six months
ended June 30, 1997 and 1996. The consolidated condensed financial information
and notes thereto should be read in conjunction with the consolidated financial
10
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
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 filed with the Securities and Exchange
Commission.
Because of seasonal and other factors including the reorganization
assoicated with the merger discussed in Note 2, the results of operations for
the three and six months ended June 30, 1997 should not be taken as an
indication of earnings for all or any part of the balance of the year.
11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO SOUTHWESTERN PUBLIC SERVICE COMPANY
We have reviewed the accompanying consolidated condensed balance sheet of
Southwestern Public Service Company (a New Mexico corporation) as of June 30,
1997, and the related consolidated condensed statements of income for the three
and six month periods ended June 30, 1997 and the consolidated condensed
statements of cash flows for the six month period ended June 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 six month periods ended June 30, 1996 and the consolidated
condensed statement of cash flow for the six month period ended June 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,
August 8, 1997
12
<PAGE>
Item 1. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Earnings
Decreased earnings for both the second quarter of 1997 and for the first
six months of 1997, as compared to the same periods in 1996, were primarily due
to the write-off in June 1997 of the investment in the Carolina Energy Project.
Lower electric kwh sales, resulting from wet and mild weather in the spring and
early summer of 1997, and higher merger-related and business integration
expenses also contributed to the decrease in earnings available to shareholders.
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 Six Months Ended
------------------ ----------------
(Thousands of Dollars)
Estimated effect on revenues of variations in:
Kilowatt-hour (kwh) sales*....... $(26,410) $(14,536)
Rates and other.................. 3,990 1,642
Fuel and purchased power cost recovery 17,029 14,617
------ ------
Subtotal....................... (5,391) 1,723
Non-firm kwh sales............... (1,319) (1,578)
------ ------
Increase (decrease) in electric revenue $ (6,710) $ 145
======== ========
Percentage decrease in kwh sales*... (10.9)% (3.6)%
===== ====
Percentage increase in non-firm kwh sales 110.6% 33.9%
===== ====
*Comprised of retail and wholesale excluding economy and interruptible
(non-firm) wholesale kwh sales.
Variations in Kwh Sales. Revenues during the second quarter and during the
first six months of 1997 decreased from the comparable periods in 1996 primarily
due to a reduction in retail and firm wholesale sales. Mild, wet weather during
1997 contributed to a 10.9% and 3.6% decline in kwh sales (excluding non-firm)
for the second quarter and for the first six months of 1997, respectively.
Variations in Rates and Other. Increased revenues for the second quarter
and for the first six months of 1997 are primarily due to increased demand
charges received from certain retail and wholesale customers. Such demand
charges are based on historical usage by the customer.
Variations in Fuel and Purchased Power Cost Recovery. The revenue increase
in the current period is primarily due to the deferral for rate recovery of the
Thunder Basin judgment 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. Although kwh sales increased, the decrease in revenues for
the second quarter and the first six months of 1997 is due to the availability
of low cost power throughout the region.
13
<PAGE>
Other Revenues
Other operating revenues are comprised of revenue from the Company's
consolidated subsidiaries and from non-electric operations. The increase of $1.6
million is primarily attributable to increased activities at UE.
Operating Expenses and Non-Operating Items
Fuel and purchased power expense as a percentage of total operating
expenses approximated 60.1% and 57.8% for the second quarter of 1997 and 1996,
respectively. Although electric kwh sales decreased during the second quarter of
1997, as compared to the same period in 1996, fuel and purchased power expense
increased slightly primarily due to the higher costs recognized in connection
with the Thunder Basin judgment. The effect of the judgment for the second
quarter of 1997 was approximately 0.36 cents per net kwh generated. Overall,
fuel expense increased from 2.05 to 2.21 cents per net kwh generated; as lower
coal costs partially offset the effect of the judgment.
For the first six months of 1997 and 1996, fuel and purchased power as a
percentage of total operating expenses, approximated 59.5% and 56.5%,
respectively. As discussed above, although electric kwh sales decreased during
the first six months of 1997, as compared to the same period in 1996, fuel and
purchased power expense increased primarily due to the effects of the Thunder
Basin judgment. The effect of the judgment on the cost per kwh generated for the
first six months of 1997 was 0.19 cents. Overall, fuel expense increased from
2.04 to 2.17 cents per net kwh generated; as lower coal costs partially offset
the effect of the judgment.
Operating and maintenance costs increased $7.7 million for the second
quarter of 1997, as compared to the second quarter 1996, primarily due to higher
advertising costs and other general and administrative costs, and increased
operating costs at subsidiaries, offset, in part, by lower costs at the
Company's generation facilities.
Operating and maintenance expenses increased $1.3 million for the first
six months of 1997, as compared to the same period in 1996, primarily due to
higher operating costs at subsidiaries offset, in part, by lower maintenance
costs at the Company's generation facilities, lower labor costs and other
decreases attributable to the Company's overall costs containment efforts.
Income taxes decreased for the second quarter and for the first six months
of 1997, as compared to the same periods in 1996, primarily due to lower pre-tax
income principally attributable to the write-off of the investment in the
Carolina Energy Project. Lower 1997 non-deductible merger-related and business
integration expenses also contributed to the decrease.
Other Income and Deductions.
In June 1997, Quixx wrote-off its investment of approximately $13.64
million in the Carolina Energy Project, a waste-to-energy cogeneration facility
located in North Carolina after it was determined that restructuring of the
project on mutually agreeable terms was not likely to occur. Additionally, UE
wrote-off its net investment of approximately $2.42 million, comprised of
subordinated debt, interest receivable, and engineering services, in this same
partnership. This combined investment represents approximately $16.1 million, or
$0.25 per share, after tax (see Note 3 Commitments and Contingencies in Item 1.
FINANCIAL STATEMENTS).
Miscellaneous income and deductions - net decreased $2.6 million for the
second quarter of 1997 as compared to the second quarter of 1996 primarily due
to increased merger-related and business integration expenses. In the second
quarter of 1997, the Company incurred over $5.0 million of such costs, including
approximately $3.9 million of severance costs.
14
<PAGE>
Miscellaneous income and deductions - net decreased $2.7 million for the
first six months of 1997 as compared to the first six months of 1996 primarily
due to increased merger-related and business integration expenses. In the first
six months of 1997, the Company incurred over $8.0 million of such costs,
including approximately $5.3 million of severance costs.
Commitments and Contingencies
Issues relating to regulatory matters are discussed in Note 3 in Item 1.
FINANCIAL STATEMENTS. These matters and the future resolution thereof may impact
the Company's future results of operations, financial position or cash flows.
Common Stock Dividend
The Board of Directors approved a partial dividend payable to shareholders
of the Company covering the period May 16, 1997 through July 31, 1997, the day
prior to the Merger effective date, based on the quarterly dividend rate of
$0.55, but prorated for the number of days in the interim period (approximately
46.0 cents per share). As a result of the consummation of the Merger, effective
August 1, 1997, dividends will be paid to NCE as the holder of all of the
Company's common stock.
Liquidity and Capital Resources
Cash Flows - Six Months Ended June 30
1997 1996 Decrease
---- ---- --------
Net cash provided by operating activities
(in millions) ......................... $21.9 $69.9 $(48.0)
Cash provided by operating activities decreased in the first six months of
1997, when compared to the same period in 1996, primarily due to the lower
earnings and the payment in April 1997 of the Thunder Basin judgment.
1997 1996 Increase
---- ---- --------
Net cash used in investing activities
(in millions) ......................... $(69.4) $(59.1) $10.3
Cash used in investing activities increased during the six months ended
June 30, 1997, when compared to the same period in 1996, primarily due to higher
construction expenditures.
1997 1996 Increase
---- ---- --------
Net cash provided by financing activities
(in millions) ......................... $30.5 $0.7 $29.8
Cash provided by financing activities increased (indicating that there
were more borrowings) in the first six months of 1997, when compared to the same
period in 1996, primarily due to the increase in short-term borrowings which
were used to finance capital expenditures and operating activities.
OTHER MATTERS
Electric utilities have historically operated in a highly regulated
environment in which they have an obligation to provide electric service to
their customers in return for an exclusive franchise within their service
territory with an opportunity to earn a regulated rate of return. This
regulatory environment is changing. The generation sector has experienced
competition from nonutility power producers and the FERC is requiring utilities,
including the Company, to provide wholesale transmission service to others and
may order electric utilities to enlarge their transmission systems to facilitate
transmission services without impairing reliability. State regulatory
authorities are in the process of changing utility regulations in response to
federal and state statutory changes and evolving markets, including
consideration of providing open access to retail customers. All of the Company's
jurisdictions continue to evaluate utility regulations with respect to
competition. The Company is
15
<PAGE>
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.
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 Consolidated Earnings to Consolidated Fixed
Charges for the six months ended June 30, 1997
15 Letter from Arthur Andersen LLP regarding unaudited interim information.
27 Financial Data Schedule UT
(b) Reports on Form 8-K:
Item reported - Item 5. Other Events
Financial Statements filed - None
Date of report - June 30, 1997, reporting a recorded charge related to the
write-off of the Carolina Energy project
Item reported - Item 4. Changes in Registrant's Certifying Accountant
Financial Statements filed - None Date of report - April 22, 1997 and filed
August 8, 1997, reporting the completion of the December 31, 1996 audit
of the Company's consolidated financial statements by Deloitte & Touche
LLP
16
<PAGE>
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 /s/ Doyle R. Bunch II
---------------------------------
Doyle R. Bunch II
Executive Vice-President
Accounting and Corporate Development
DATE: August 14, 1997
17
<PAGE>
EXHIBIT 12
SOUTHWESTERN PUBLIC SERVICE COMPANY
AND SUBSIDIARIES
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS
TO CONSOLIDATED FIXED CHARGES
(not covered by Report of Independent Public Accountants)
Six Months Ended
June 30, 1997
-------------
(Thousands of Dollars,
except ratios)
Fixed charges:
Interest on long-term debt...................... $22,057
Dividends on SPS obligated mandatorily redeemable
preferred securities of subsidiary trust..... 3,925
Amortization of debt discount and expense less premium 1,123
Other interest.................................. 2,747
Interest component of rental expense............ 623
---
Total ........................................ $30,475
=======
Earnings (before fixed charges and taxes on income):
Net income...................................... $24,598
Fixed charges as above.......................... 30,475
Provisions for Federal and state taxes on income,
net of investment tax credit amortization....... 16,078
-------
Total......................................... $71,151
=======
Ratio of earnings to fixed charges................. 2.33
====
18
<PAGE>
EXHIBIT 15
August 8, 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, Registration
Statement No. 33-64951 on Form S-4 and Registration Statements No. 33-27452 and
33-57869 on Form S-8, its Form 10-Q for the quarter ended June 30, 1997, which
includes our report dated August 8, 1997, covering the unaudited consolidated
condensed financial statements contained therein. Pursuant to Regulation C of
the Securities Act of 1933, that report is not considered a part of the
registration statement prepared or certified by our Firm or a report prepared or
certified by our Firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
19
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<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SOUTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997 AND CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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