-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MbnbuoyXLCwHLMre4iw9vOZBUXDLgnOLk8TX0iwqwrHG7UwqFZsHkgYgmo1dLM5D kbKQ4i4LF/iD+OdkAS28/w== 0001004858-98-000004.txt : 19980304 0001004858-98-000004.hdr.sgml : 19980304 ACCESSION NUMBER: 0001004858-98-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980303 SROS: AMEX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW CENTURY ENERGIES INC CENTRAL INDEX KEY: 0001004858 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 841334327 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12927 FILM NUMBER: 98556245 BUSINESS ADDRESS: STREET 1: 1225 17TH ST CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3035717511 MAIL ADDRESS: STREET 1: 1225 17TH ST CITY: DENVER STATE: CO ZIP: 80202 10-K 1 FORM 10-K FILING FOR NCE, PSCO AND SPS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 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 ____________ Exact name of registrant as specified in its charter, State or other jurisdiction of incorporation or organization, Address of principal executive offices and Registrant's Telephone Number, Commission including area code IRS Employer File Number Identification No. - ----------- ----------------- 1-12927 NEW CENTURY ENERGIES, INC. 84-1334327 (a Delaware Corporation) 1225 17th Street Denver, Colorado 80202 Telephone (303) 571-7511 1-3280 PUBLIC SERVICE COMPANY OF COLORADO 84-0296600 (a Colorado Corporation) 1225 17th Street Denver, Colorado 80202 Telephone (303) 571-7511 1-3789 SOUTHWESTERN PUBLIC SERVICE COMPANY 75-0575400 (a New Mexico Corporation) Tyler at Sixth Amarillo, Texas 79101 Telephone (303) 571-7511 ____________________ Southwestern Public Service Company meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format specified in General Instruction I (2) to such Form 10-K. Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Registrant Title of Each Class on Which Registered - ---------- ------------------- ------------------- New Century Energies, Inc. Common Stock, $1 par value per share New York Public Service Company of Colorado Cumulative Preferred Stock, par value $100 per share 4 1/4% Series American 7.15% Series New York Cumulative Preferred Stock ($25), par value per share 8.40% Series New York Southwestern Public Service Company 7.85% Trust Preferred Securities, Series A New York Securities registered pursuant to Section 12(g) of the Act: Registrant Title of Class - ---------- -------------- Public Service Company of Colorado Cumulative Preferred Stock par value $100 per share 4.20% series 4 1/2% series 4.64% series 4.90% series 4.90% 2nd series 7.50% series 8.40% series Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of February 19, 1998, 110,997,546 shares of New Century Energies, Inc. Common Stock were outstanding. The aggregate market value of New Century Energies, Inc. Common Stock, $1.00 par value (the only class of voting stock), held by non-affiliates was $5,050,388,343 based on the last sale price of such stock on the New York Stock Exchange on February 19, 1998. New Century Energies, Inc. is the sole holder of the Common Stock of PSCo and SPS. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement of New Century Energies, Inc. to be filed in connection with its Annual Meeting of Shareholders, to be held May 12, 1998, are incorporated by reference into Part III hereof. TABLE OF CONTENTS Page Definitions Number Part I Item 1. Business.............................................. 1 Item 2. Properties............................................ 23 Item 3. Legal Proceedings..................................... 27 Item 4. Submission of Matters to a Vote of Securities Holders. 27 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................................ 27 Item 6. Selected Financial Data............................... 29 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 31 Item 7A Quantitative and Qualitative Disclosures About Market Risk ............................................... NA Item 8. Financial Statements and Supplementary Data........... 39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 120 Part III Item 10.Directors and Executive Officers of the Registrants... 120 Item 11.Executive Compensation ............................... 124 Item 12.Security Ownership of Certain Beneficial Owners and Management ..................................... 130 Item 13.Certain Relationships and Related Transactions ....... 132 Part IV Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................................ 132 Experts ...................................................... 133 Consents of Independent Public Accountants.......................... 134 Signatures ...................................................... 136 Exhibit Index ...................................................... 143 This combined Form 10-K is separately filed by New Century Energies, Inc., Public Service Company of Colorado and Southwestern Public Service Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each registrant makes representations only as to itself and makes no other representations whatsoever as to information relating to the other registrants. This report should be read in its entirety. No one section of the report deals with all aspects of the subject matter. FORWARD LOOKING INFORMATION The following discussions include "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Investors and prospective investors are cautioned that the forward-looking statements contained herein with respect to the revenues, earnings, capital expenditures, resolution and impact of litigation, competitive performance, or other prospects for the business of New Century Energies, Inc., Public Service Company of Colorado and/or Southwestern Public Service Company or their affiliated companies, including any and all underlying assumptions and other statements that are other than statements of historical fact, may be influenced by factors that could cause actual outcomes and results to be materially different than projected. Such factors include, but are not limited to, the effects of weather, future economic conditions, the performance of generating units, fuel prices and availability, regulatory decisions and the effects of changes in state and federal laws, the pace of deregulation of domestic retail natural gas and electricity markets, the timing and extent of change in commodity prices for all forms of energy, capital spending requirements, the evolution of competition, earnings retention and dividend payout policies, changes in accounting standards, and other factors. From time to time, New Century Energies, Inc., Public Service Company of Colorado and Southwestern Public Service Company may publish or otherwise make available forward-looking statements. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of each company, are also expressly qualified by these cautionary statements. i DEFINITIONS The abbreviations or acronyms used in the text and notes are defined below: Abbreviation or Acronym Term - ----------------------- ---- AEP............................................American Electric Power Company AFDC..............................Allowance for Funds Used During Construction Arapahoe............................Arapahoe Steam Electric Generating Station BLM .................................................Bureau of Land Management Cameo .................................Cameo Steam Electric Generating Station CCT3 ................................................Clean Coal Technology III CERCLA ...Comprehensive Environmental Response, Compensation and Liability Act Cherokee........................... Cherokee Steam Electric Generating Station Cheyenne ...............................Cheyenne Light, Fuel and Power Company CIG ...........................................Colorado Interstate Gas Company Colorado Supreme Court..................Supreme Court of the State of Colorado Comanche ...........................Comanche Steam Electric Generating Station Company or NCE........................New Century Energies, Inc., a registrant CPCN...........................Certificate of Public Convenience and Necessity CPUC .....................Public Utilities Commission of the State of Colorado Craig..................................Craig Steam Electric Generating Station CWIP.............................................Construction Work in Progress CWQCD..................................Colorado Water Quality Control Division Cyprus/Amax...........................................Cyprus/Amax Coal Company Denver District Court..District Court in and for the City and County of Denver DOE..................................................U.S. Department of Energy DSM.....................................................Demand Side Management DSMCA...................................Demand Side Management Cost Adjustment Dth..................................................................Dekatherm e prime.........................................e prime, inc. and subsidiaries ECA.....................................................Energy Cost Adjustment EIS.............................................Environmental Impact Statement EPA.......................................U.S. Environmental Protection Agency EPAct.......................................National Energy Policy Act of 1992 EWG.................................................Exempt Wholesale Generator FASB......................................Financial Accounting Standards Board FERC......................................Federal Energy Regulatory Commission FERC Order 636.................................FERC Order Nos. 636-A and 636-B Fort St. Vrain ...........Fort St. Vrain Electric Generating Station, formerly a nuclear generating station Fuelco .......Fuel Resources Development Co., a dissolved Colorado corporation GCA .......................................................Gas Cost Adjustment Hayden ...............................Hayden Steam Electric Generating Station IBM .......................................................IBM Global Services ICA..................................................Incentive Cost Adjustment IPPF ....................................Independent Power Production Facility IRP ..................................................Integrated Resource Plan IRS...................................................Internal Revenue Service ISFSI..............................Independent Spent Fuel Storage Installation KN Energy......................................................KN Energy, Inc. Kwh..............................................................kilowatt-hour Merger...................... the business combination between the PSCo and SPS Merger Agreement.............Agreement and Plan of Reorganization by and among PSCo, SPS and NCE, as amended ii Mw....................................................................Megawatt NMPUC.....................................New Mexico Public Utility Commission Natural Fuels .......................................Natural Fuels Corporation NC Enterprises............................................NC Enterprises, Inc. NCI............................................New Century International, Inc. NCS.................................................New Century Services, Inc. New Century Cadence..................................New Century Cadence, Inc. NOPR.............................................Notice of Proposed Rulemaking NOx.............................................................Nitrogen Oxide NRC .............................................Nuclear Regulatory Commission OCC .......................................Colorado Office of Consumer Counsel OPEB ...................................Other Postretirement Employee Benefits PCB...................................................Polychlorinated biphenyl Pawnee ...............................Pawnee Steam Electric Generating Station Pawnee 2...........Pawnee Steam Electric Generating Station, Unit 2 (proposed) Pool ........................................................Inland Power Pool PRPs ..........................................Potentially Responsible Parties PSCCC...........................................PS Colorado Credit Corporation PSCo..........................Public Service Company of Colorado, a registrant PSRI ....................................................PSR Investments, Inc. PUHCA ..............................Public Utility Holding Company Act of 1935 PUCT........................................Public Utility Commission of Texas QF.........................................................Qualifying Facility QFCCA...........................Qualifying Facilities Capacity Cost Adjustment QSP....................................................Quality of Service Plan Quixx.......................................Quixx Corporation and subsidiaries SEC.........................................Securities and Exchange Commission SFAS...............................Statement of Financial Accounting Standards SFAS 71...................Statement of Financial Accounting Standards No. 71 - "Accounting for the Effects of Certain Types of Regulation" SFAS 106................Statement of Financial Accounting Standards No. 106 - "Employers' Accounting for Postretirement Benefits Other Than Pensions" SFAS 109................Statement of Financial Accounting Standards No. 109 - "Accounting for Income Taxes" SFAS 112................Statement of Financial Accounting Standards No. 112 - "Employers' Accounting for Postemployment Benefits" SFAS 123................Statement of Financial Accounting Standards No. 123 - "Accounting for Stock-Based Compensation" SO2.............................................................Sulfur Dioxide SPP.......................................................Southwest Power Pool SPS..........................Southwestern Public Service Company, a registrant TNP.............................................Texas-New Mexico Power Company TOG.......................................................Texas-Ohio Gas, Inc. TOP..................................................Texas-Ohio Pipeline, Inc. Transition PeriodFour month period September 1, 1996 through December 31, 1996 Tri-State..............Tri-State Generation and Transmission Association, Inc. TUCO................................................................TUCO, Inc. UE............................Utility Engineering Corporation and subsidiaries U.K. ...........................................................United Kingdom Valmont .............................Valmont Steam Electric Generating Station WGI ..................................................WestGas InterState, Inc. WPSC......................................Public Service Commission of Wyoming WSCC......................................Western Systems Coordinating Council WSPP................................................Western Systems Power Pool iii Young Storage..................................Young Gas Storage Company, Ltd. YGSC.................................................Young Gas Storage Company Yorkshire Electricity..........................Yorkshire Electricity Group plc Yorkshire Power.....................................Yorkshire Power Group Ltd. Zuni ...................................Zuni Steam Electric Generating Station iv PART I Item l. Business The Company NCE, incorporated under the laws of Delaware in 1995, is a public utility holding company registered under PUHCA. On August 1, 1997, PSCo and SPS combined to form NCE, with PSCo and SPS becoming wholly-owned subsidiaries of NCE. The common shareholders of PSCo and SPS received one and 0.95 of one share, respectively, of NCE common stock, par value $1.00 per share, and became common shareholders of NCE. The Merger was accounted for as a pooling-of-interests, and the Consolidated Financial Statements and statistical data in this Form 10-K are presented as if the Merger were consummated as of the beginning of the earliest period presented. The Company has no significant assets other than the stock of its subsidiaries. The revenues of NCE and its subsidiaries are derived substantially from the generation, purchase, transmission, distribution and sale of electricity and from the purchase, transmission, distribution, sale and transportation of natural gas. The utility subsidiaries serve approximately 1.6 million electric customers and approximately 1.0 million gas customers in their service territories which include portions of the states of Colorado, Texas, New Mexico, Wyoming, Kansas and Oklahoma. The Company owns all the outstanding common stock of PSCo, SPS, Cheyenne, WGI, NCS, and NC Enterprises. PSCo owns certain subsidiaries as described below. NC Enterprises, an intermediate holding company, owns the following subsidiaries: Quixx, e prime, UE, Natural Fuels Corporation (83.63% ownership) and NC Cadence. Refer to the non-utility section below for further discussion regarding the Company's non-utility operations. On April 22, 1997, SPS changed its fiscal year from a twelve-month period ending August 31 to a twelve-month period ending December 31. The 1995 financial and statistical data presented in Item 1. Business combines the historical financial and statistical data of PSCo as of and for the year ended December 31, 1995 with the historical financial and statistical data of SPS as of and for the year ended August 31, 1995 (See Note 1. Summary of Significant Accounting Policies in Item 8. Financial Statements And Supplementary Data). Information regarding industry segments is set forth in Note 14. Segments of Business in Item 8. Financial Statements And Supplementary Data. Utility Operations PSCo was incorporated through merger of predecessors under the laws of the State of Colorado in 1924. PSCo is an operating utility engaged principally in the generation, purchase, transmission, distribution and sale of electricity and in the purchase, transmission, distribution, sale and transportation of natural gas. PSCo serves approximately 1.2 million electric customers and approximately 1.0 million gas customers in the state of Colorado. PSCo owns the following direct subsidiaries: 1480 Welton, Inc., a real estate company which owns certain real estate interests of PSCo; PSRI which owns and manages permanent life insurance policies on certain past and present employees, the benefits from which are to provide future funding for general corporate purposes; PSCCC, a finance company that finances certain of PSCo's current assets; Green and Clear Lakes Company which owns water rights and storage facilities for water used at PSCo's Georgetown Hydroelectric station; and Fuelco, a dissolved Colorado corporation, which was primarily involved in the exploration and production of oil and natural gas. On July 1, 1996, Fuelco sold its remaining properties, the San Juan Basin Coal Bed Methane properties, at approximately book value and, effective October 31, 1996, Fuelco was dissolved. PSCo also holds a controlling interest in several other relatively small ditch and water companies whose capital requirements are not significant. 1 PSCo also owns all of the outstanding common stock of NCI. NCI was formed to hold PSCo's 50% interest in Yorkshire Electricity which was purchased in April 1997 by Yorkshire Power (a joint venture between PSCo and AEP) through Yorkshire Holdings plc. For a more detailed discussion regarding the acquisition of Yorkshire Electricity, refer to "Foreign Investments" below and Note 2. Acquisition of Yorkshire Electricity and U.K. Windfall Tax in Item 8. Financial Statements And Supplementary Data. SPS was incorporated in 1921 under the laws of the State of New Mexico. SPS is an operating utility engaged primarily in the generation, transmission, distribution and sale of electricity. SPS serves approximately 380,000 electric customers in portions of the states of Texas, New Mexico, Oklahoma and Kansas. Cheyenne was incorporated in 1900 under the laws of the State of Wyoming. Cheyenne is an operating utility engaged in the purchase, distribution and sale of electricity and natural gas primarily serving customers in Cheyenne, Wyoming. Cheyenne serves approximately 35,000 electric customers and 28,000 gas customers in the state of Wyoming. WGI was incorporated in 1990 under the laws of the State of Colorado. WGI is a natural gas transmission company engaged in transporting gas to Cheyenne, Wyoming via a thirteen mile connecting pipeline between Chalk Bluffs, Colorado and Cheyenne, Wyoming. Electric Utility Operations The Company's utility subsidiaries propose to use the following resources to meet their net dependable system capacity requirements: 1) the Company's electric generating stations (see Electric Generation Property in Item 2. Properties); 2) purchases from other utilities and from QFs and IPPFs; 3) renewables and demand-side management options and 4) new generation alternatives, including the phased repowering of Fort St. Vrain. Peak Load During 1998, net firm system peak demand and the net dependable system capacity for the Company's electric utility subsidiaries is projected to be as follows: 1998 Projected 1998 Projected Net Dependable System Reserve Operating company Net Firm System Peak Capacity* Margin - ----------------- -------------------- --------- ------ PSCo 4,401 Mw 4,960 Mw 13% SPS 4,058 Mw 4,595 Mw 13% Cheyenne 132 Mw 149 Mw ** - -------------- * Net dependable system capacity is the maximum net capacity available from both owned generating units and purchased power contracts to meet the net firm system peak demand. ** Reserve margin for Cheyenne is held by PacifiCorp. The net firm system peak demand for each of the last three years was as follows: Net Firm System Peak Demand (Mw) 1995 1996 1997 ---- ---- ---- PSCo*...................... 4,248 4,397 4,487 SPS........................ 3,952 3,694 3,715 Cheyenne **................ - - 132 - -------------- * Excludes station housepower, nonfirm electric furnace load and controlled interruptible loads (of which approximately 148 Mw, 122 Mw and 116 Mw in the years 1995-1997, respectively, was not interrupted at the time of the system peak). ** Prior to the Merger, Cheyenne was a subsidiary of PSCo; therefore, Cheyenne's coincidental peak demand is included with PSCo in 1995 and 1996. 2 The net firm system peak demand for PSCo for the years 1995-1997 occurred in the summer. The net firm system peak demand for 1997, which occurred on July 23, 1997, was 4,487 Mw. At that time, the net dependable system capacity totaled 5,001 Mw (generating capacity of 3,319 Mw, together with firm purchases of 1,682 Mw), which represented a reserve margin of approximately 12%). The net firm system peak demand for SPS for the years 1995 - 1997 also occurred in the summer. The net firm system peak demand for 1997, which occurred on July 28, 1997, was 3,715 Mw. At that time, the net dependable system capacity totaled approximately 4,443 Mw (including firm purchases), which represented a reserve margin of approximately 20%. Purchased Power The Company's electric utility subsidiaries have contractual arrangements with regional utilities as well as QFs and an IPPF in order to meet the energy needs of their customers. Capacity, typically measured in Kilowatts or Megawatts, is the measure of the rate at which a particular generating source produces electricity. Energy, typically measured in Kilowatt-hours or Megawatt-hours, is a measure of the amount of electricity produced from a particular generating source over a period of time. Purchase power contracts typically provide for a charge for the capacity from a particular generating source, together with a charge for the associated energy actually purchased from such generating source. 3 The Company's electric utility subsidiaries have contracted with the following sources for the firm purchase of capacity and energy at the time of the anticipated summer 1998 net firm system peak demand through the expiration of the contracts: Mw Contracted For at the Time of the Anticipated Generating Summer 1998 Net Firm Contract Company Source System Peak Demand Expiration - ------- ------ ------------------ ---------- PSCo Contracts: Basin Electric Power Coopera- Laramie River Station tive, Agreements 1 and 2(a)(b) Units 2 and 3 175 2016 PacifiCorp (c) PacifiCorp Resource Pool 176 2011 Platte River Power Authority (a) (f) Craig Units 1 and 2; 142 2004 Rawhide Unit 1 Tri-State 525 (f) Agreements 1, 2, 3 and 4 (a)(e)Laramie River Station Units 2 and 3; Craig Units 1, 2 and 3 Agreement 5 (a) (e) Laramie River Station Units 2 and 3; Craig Units 1, 2 and 3; Nucla Units 1, 2, 3 and 4 Various Owners (a) QFs & IPPF 623 Various dates --- Subtotal - PSCo 1,641 SPS Contract: Borger Energy Associates (g) QF 192 2023 Cheyenne Contract: PacifiCorp (d) PacifiCorp System 149 2000 --- 1,982 ===== ____________ (a) These contracts are contingent upon the availability of the units listed as the generating source. These contracts are take and pay contracts. Based upon the terms of these agreements, if the capacity is available from these units, then PSCo is obligated to pay for capacity whether or not it takes any energy. However, PSCo has historically satisfied the minimum energy requirements associated with these agreements and anticipates doing so in the future. Additionally, if these units are unavailable, the supplying company has no obligation to furnish capacity or energy and the capacity charge to PSCo is reduced accordingly. (b) PSCo has entered into two agreements with Basin Electric Power Cooperative. The first agreement is for 100 Mw of capacity through March 31, 2016. The second agreement is for 75 Mw of summer season capacity through March 31, 2016 and 25 Mw of winter season capacity through March 31, 2010. (c) The current agreement with PacifiCorp expires October 31, 2022. However, the agreement provides PSCo the opportunity to exercise an irrevocable option to terminate the agreement on December 31, 2011, provided PSCo gives notice to PacifiCorp no later than March 1, 2002. 4 (d) This contract, which expires in 2000, calls for PacifiCorp to sell to Cheyenne the total electric capacity and energy requirements associated with the operation of Cheyenne's service area. (e) PSCo has entered into five agreements with Tri-State. Agreements 1, 2 and 5 are contracts for 100 Mw each of capacity and expire in 2001, 2017 and 2011, respectively. Agreement 3 is a contract for 25 Mw of summer season capacity and 75 Mw of winter season capacity and expires in 2016. Agreement 4 expires in 2018 and the related capacity is for the following amounts: 1998 through 2000 - 200 Mw and 2001 through 2018 - 250 Mw; however, either party may elect to reduce the Agreement 4 capacity by up to 50 Mw each year, except for 2001, effective in the year 1999. If the full 50 Mw reduction is taken each year, the capacity associated with Agreement 4 from 1999 on would be as follows: 1999 - 150 Mw, 2000 through 2001 - 100 Mw, 2002 - 50 Mw with no commitments thereafter. PSCo has notified Tri-State of its intent to reduce the capacity associated with Agreement 4 to 150 Mw for 1999. (f) The amount of capacity to be made available for each summer and winter season is agreed upon prior to such season to the extent that Platte River Power Authority has excess capacity for such season. (g) SPS entered into an agreement with Borger Energy Associates in May 1997 for the purchase of capacity and energy. Power deliveries are expected to begin on or before September 15, 1998. Power purchases from Borger Energy Associates will be up to 192 MW of capacity for the 1998 summer season and 230 MW beginning October 1, 1998 through the remaining contract term. SPS has an option to extend the term of the agreement for an additional 10 years. See Note 10. Commitments and Contingencies - Purchase Requirements in Item 8. Financial Statements And Supplementary Data for information regarding the Company's financial commitments under these contracts. See Interconnections in Item 2. Properties for a discussion of the Company's interconnections with these sources. Based on present estimates, PSCo will purchase approximately 32% of the total electric system energy input for 1998. In addition, based on the capacity associated with the purchase power contracts described above, approximately 33% of the total net dependable system capacity for the estimated summer 1998 net firm system peak demand for PSCo will be provided by purchased power. All of the QF capacity purchased by PSCo, including approximately 4 Mw of additional capacity scheduled to come on line in the future, is being purchased under contracts entered into prior to January 1, 1988. The purchases of additional QF and IPPF capacity are currently based on a competitive bidding process. In 1997, approximately 14% of PSCo's summer net firm system peak demand was provided by QFs. In addition to long-term and QF and IPPF purchases, PSCo also made short-term and non-firm purchases throughout the year to replace generation from PSCo-owned units which were unavailable due to maintenance and unplanned outages, to provide PSCo's reserve obligation to the Pool, to obtain energy at a lower cost than that which could be produced by other resource options, including PSCo-owned generation and/or long-term purchase power contracts, and for various other operating requirements. Short-term and non-firm purchases accounted for approximately 3% of PSCo's total energy requirement in 1997. Based on current projections, PSCo expects that purchased capacity will continue to meet a significant portion of system requirements at least for the remainder of the 1990s. Such purchases neither require PSCo to make an investment nor afford PSCo an opportunity to earn a return. Further discussion related to recovery of purchased capacity costs can be found in "Regulations and Rates - Cost Recovery Mechanisms." SPS arranged seasonal short-term purchases for the summer of 1997 and may make additional short-term purchases for the 1998 summer season. PSCo is a member of the Pool which is composed of members each of which owns and/or operates electric generation and/or transmission systems which are interconnected to one or more other member systems. The objective of the Pool is to provide capacity which is categorized as: 1) immediately accessible; 2) accessible within ten minutes; and 3) accessible within twelve hours, as required. As a result of membership in the Pool, PSCo can supply and protect its electric system with less aggregate operating reserve capacity than otherwise would be necessary; emergency conditions can be met with less likelihood of curtailment or impairment of electric 5 service; and generation and transmission facilities and interconnections can be used more efficiently and economically. PSCo is in discussion with regional utilities to create a new reserve sharing arrangement that better meets the new FERC and WSCC requirements. This new sharing arrangement, when finalized, will replace the current Pool arrangement. Refer to Item 2. Properties-Electric Transmission Property for a discussion of SPS's activities with the SPP and the WSPP. Construction Program At December 31, 1997, the Company's subsidiaries estimated the cost of their total construction program, including AFDC, to be approximately $530 million in 1998, approximately $541 million in 1999, and approximately $450 million in 2000 (see Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations). Electric Fuel Supply The following tables present the delivered cost per million Btu of each category of fuel consumed by the system for electric generation during the years indicated, the percentage of total fuel requirements represented by each category of fuel and the weighted average cost of all fuels during such years: PSCo generating plants: Weighted Average Coal* Gas All Fuels** Cost $ % Cost $ % Cost $ ---------------------------------------- 1997............... 0.99 98 3.03 2 1.03 1996............... 1.03 98 2.42 2 1.05 1995............... 0.99 99 1.52 1 1.00 * The average cost per ton of coal, including freight, for years 1995 through 1997 shown above was $19.06, $20.17 and $18.96, respectively. ** Insignificant purchases of oil are included. SPS generating plants: Weighted Average Coal Gas All Fuels** Cost $ % Cost $ % Cost $ ---------------------------------------- 1997............... 1.84 69 2.55 31 2.06 1996............... 1.93 69 2.38 31 2.06 1995............... 1.81 64 1.63 36 1.75 * The average cost per ton of coal, including freight and other components, for years 1995 through 1997 shown above was $31.37, $33.26 and $31.97, respectively. ** Insignificant purchases of oil, steam and hot nitrogen are included. Coal PSCo's primary fuel for its steam electric generating stations is low-sulfur western coal. PSCo's coal requirements are purchased primarily under eight long-term contracts with suppliers operating in Colorado 6 and Wyoming. The largest contract tonnage is supplied by Cyprus/Amax Coal, which operates the Belle Ayr and Eagle Butte Mines near Gillette, Wyoming and the Foidel Creek mine in northwestern Colorado. Long-term contracts presently in existence provide for approximately 88% of 1998 coal requirements and more than 80% of future annual coal requirements through 2000. Any shortfall for 1998 will be provided by purchases on the spot market. During the year ended December 31, 1997, PSCo's coal requirements for existing plants were approximately 9,451,759 tons, a substantial portion of which was supplied pursuant to long-term supply contracts. Coal supply inventories at December 31, 1997 were approximately 40 days usage, based on the average burn rate for all of PSCo's coal-fired plants. The following table provides a summary of the basic supply provisions of PSCo's existing long-term contracts, which provide for a minimum delivery of approximately 78 million tons of low-sulfur coal over their remaining life (see Note 10. Commitments and Contingencies - Purchase Requirements in Item 8. Financial Statements And Supplementary Data ). 1998 1998 Contract Minimum Maximum maximum delivery delivery sulfur Coal Supplier and Delivery Year in tons in tons content - ------------------------------- ------- ------- ------- Cyprus/Amax (1)..................... 3,960,000 (2) (3) 0.50% Colowyo Coal Company................ 88,571 (4) 88,571 0.70% Twentymile Coal Company (10)........ 1,170,000 1,430,000 0.55 Mountain Coal Company............... 600,000 (5) 800,000 0.67% Powderhorn Coal Company............. 150,000 350,000 0.69% Seneca Coals, Ltd (6) .............. 439,800 (7) 1.00% Trapper Mining, Inc................. 179,427 (8) 179,427 (9) Kennecott Energy Company (10)....... 450,000 500,000 0.55 (1) The contract term is completed upon delivery of a fixed quantity regardless of the year in which delivery is completed. From January 1, 1976 through December 31, 1997, approximately 57.6% of the obligation has been delivered. (2) Coal requirements of Comanche and Pawnee. (3) Coal requirements of Pawnee and Pawnee 2 upon completion of Pawnee 2 through 2013. (4) The contract minimum quantity varies by year during the agreement. (5) The contract term is completed upon delivery of a fixed quantity. As of December 31, 1997, approximately 62.7% of the obligation has been delivered. (6) The contract term is completed upon total delivery of a fixed quantity to Hayden from and after January 1, 1983. As of December 31, 1997, approximately 71.1% of the obligation has been delivered. Delivery is expected to be completed in the year 2004. (7) Coal requirements of Hayden. (8) The contract minimum quantity varies by year during the agreement. (9) Not specified in the contract. (10) The contract maximum sulfur content as presented in the table is stated in pounds of sulfur per million Btu. Each coal contract contains adjustment clauses which permit periodic price increases or decreases. Powder River Basin coal supplies for PSCo's Arapahoe, Pawnee and Comanche stations are transported by the Burlington Northern Sante Fe Railway Company under two contracts which have remaining terms of one year for Arapahoe and three years for Pawnee and Comanche. Colorado origin coal supplies for PSCo's Cherokee and 7 Valmont stations are anticipated to be transported by the Union Pacific Railroad Company to Cherokee and by a joint haul of the Union Pacific Railroad Company and Burlington Northern Sante Fe Railway Company to Valmont under two contracts with remaining terms of five and two years, respectively. SPS purchases all of its coal requirements for Harrington and Tolk Stations from TUCO, in the form of crushed, ready-to-burn coal delivered by coal-handling facilities owned by Wheelabrator Coal Services Co. to the SPS's boiler bunkers located within SPS's coal-fueled stations where it is processed for burning. The contract for the Harrington station expires in 2016 and the contract for the Tolk station expires in 2017. The coal is transported for TUCO by rail, primarily from mines located in Wyoming, to TUCO's stockpiles which are adjacent to SPS's coal-burning generation stations. At December 31, 1997, TUCO's coal inventories at the Harrington and Tolk sites were approximately 41 days usage. TUCO has executed a long-term coal supply agreement with Kennecott Energy Company affiliated companies to supply approximately 55% of Harrington's projected requirements through 2001 from Cordero, Caballo Rojo and Antelope mines located in the Powder River Basin. In addition, TUCO has contracted for approximately 33% of Harrington's 1998 projected requirements with Kennecott's affiliate, Colowyo Coal Company, from its Colowyo mine located in western Colorado. The Colowyo agreement provides for delivery to Harrington station via the Union Pacific Railroad. TUCO has long term contracts with ARCO for supply of coal in sufficient quantities to meet all of SPS's needs for Tolk Station. Specific coal reserves in the Powder River Basin in Wyoming have been dedicated by ARCO to meet the contract quantities. The Powder River Basin coal supplies for both stations are currently transported for TUCO by the Burlington Northern Sante Fe Railway Company to Harrington Station near Amarillo, Texas and to Tolk Station near Muleshoe, Texas. Transportation charges for these Powder River Basin coal supplies make up more than 50% of the total cost of the coal delivered to the boiler. See Note 10. Commitments and Contingencies - Purchase Requirements in Item 8. Financial Statements And Supplementary Data for information regarding financial commitments under the coal supply contracts, as well as the coal transportation contracts. Natural Gas and Fuel Oil PSCo uses both firm and interruptible natural gas and standby oil in combustion turbines and certain boilers. Natural gas supplies for PSCo's power plants are procured under short- and intermediate-term contracts on a competitive basis to provide an adequate supply of fuel. SPS has a number of contracts of short and intermediate terms with natural gas suppliers operating in gas fields with long life expectancies in or near its service area. SPS also utilizes firm and interruptible transportation to minimize fuel costs during volatile market conditions and provide reliability of supply. To increase competition for natural gas supply, SPS attained three new interconnections between interstate and intrastate pipelines and various power plant supply headers during 1997. SPS maintains sufficient gas supplies under short and intermediate term contracts to meet all power plant requirements; however, due to flexible contract terms, approximately 40% of SPS's gas requirements were purchased under spot agreements. Natural Gas Utility Operations During the period 1993-1997, PSCo and Cheyenne have experienced growth in the number of residential and commercial customers ranging from 2.7% to 3.2% annually. Since 1993, residential and commercial gas volumes sold have averaged 132.9 million dekatherms ("MMDth") annually. The growth of residential and commercial sales has steadily improved due primarily to stronger economic conditions in Colorado and Wyoming. PSCo and Cheyenne offer transportation services to their large commercial and industrial customers, allowing these customers to purchase gas directly from their suppliers. The per-unit fee charged for transportation services, while significantly less than the per-unit fee charged for the sale of gas to a similar customer, provides an operating margin approximately equivalent to the margin earned on gas sold. Therefore, increases in such activities will not have as great an impact on gas revenues as increases in deliveries from the sale of gas, but will have a positive impact on operating margin. During 1997, transportation services generated revenues of $32.7 million compared to $28.5 million in 1996 and $23.8 million in 1995. 8 Natural Gas Supply and Storage PSCo and Cheyenne have attempted to maintain low cost, reliable natural gas supplies by optimizing a balance of long- and short-term gas purchase, firm transportation and gas storage contracts. During 1997, PSCo and Cheyenne purchased 151.0 MMDth from approximately 72 suppliers, including the following major suppliers: CIG (32.0 MMDth); Western Gas Resources (14.0 MMDth); Amoco Energy Trading Co. (11.6 MMDth); Barrett Resources (11.4 MMDth); and Duke Energy Trading & Marketing (6.1 MMDth). In 1997, the average delivered cost per one thousand dekatherms ("MDth") for PSCo and Cheyenne was $2.92 compared to $2.58 per MDth in 1996 and $2.22 per MDth in 1995 (see Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations). Purchased gas costs are recovered from customers through the GCA (see Note 9. Regulatory Matters in Item 8. Financial Statements And Supplementary Data). PSCo and Cheyenne have completed substantially all of their obligations related to gas supply transportation and storage contracts which resulted from FERC Order 636. During 1996, PSCo and Cheyenne entered into new contracts with CIG and others for firm transportation and gas storage services with terms of 5-10 years. Adequate supplies of natural gas are currently available for delivery within the Rocky Mountain region. PSCo and Cheyenne continually evaluate the natural gas markets and procure supplies, as needed, to meet current and anticipated customer demand. Regulation and Rates Regulation General The NCE system is subject to the jurisdiction of the SEC under the PUHCA. The PUHCA generally limits the operations of a registered holding company to a single integrated public utility system, plus such additional businesses as are functionally related to such system. PUHCA rules require that transactions between associated companies in a registered holding company system be performed at cost, with limited exceptions. PSCo PSCo is subject to the jurisdiction of the CPUC with respect to its facilities, rates, accounts, services and issuance of securities. The CPUC consists of three full-time members appointed by the Governor and approved by the Colorado Senate. Only two members may be from the same political party. PSCo is subject to the jurisdiction of the DOE through the FERC with respect to its wholesale electric operations and accounting practices and policies. PSCo is also subject to the jurisdiction of the NRC in connection with its ownership, decommissioning and defueling of Fort St. Vrain, which has been repowered as a gas fired combined cycle steam plant. PSCo holds a FERC certificate which allows it to transport natural gas in interstate commerce pursuant to the provisions of the Natural Gas Act, the Natural Gas Policy Act of 1978 and FERC Order Nos. 436 and 500 without PSCo becoming subject to full FERC jurisdiction. SPS The PUCT has jurisdiction over SPS's Texas operations as an electric utility, and original and appellate jurisdiction over its retail rates and services. The Texas municipalities exercise original jurisdiction over rates within their respective city limits. The NMPUC, the Oklahoma Corporation Commission and the Kansas Corporation Commission have jurisdiction with respect to retail rates and services in their respective states. The FERC has jurisdiction over SPS's rates for sales of electricity for resale. 9 Other Cheyenne is subject to the jurisdiction of the WPSC. WGI and TOP are subject to FERC jurisdiction. WGI and TOP each hold a FERC certificate which allows them to transport natural gas in interstate commerce pursuant to the provisions of the Natural Gas Act. e prime and TOG have authorization from FERC to act as power marketers. Cost Recovery Mechanisms PSCo At December 31, 1997, PSCo has four adjustment clauses: the ICA (which replaced the ECA in 1996), GCA, DSMCA and QFCCA. These adjustment clauses allow certain costs to be passed through to retail customers. PSCo is required to file applications with the CPUC for approval of adjustment mechanisms in advance of the proposed effective date. The applications must be acted upon before becoming effective. The CPUC decision on the Merger modified and replaced the ECA with the ICA. The ICA, which became effective October 1, 1996, allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders. PSCo, through its GCA, is allowed to recover the difference between its actual costs of purchased gas and the amount of these costs recovered under its base rates. The GCA rate is revised annually on October 1 and otherwise as needed, to coincide with changes in purchased gas costs. Purchased gas costs and revenues received to recover such gas costs are compared on a monthly basis and differences, including interest, are deferred. The QFCCA was implemented on December 1, 1993. Under the QFCCA, all purchased capacity costs from new QF projects, not otherwise reflected in base electric rates, are recoverable. PSCo, in a collaborative process with public interest groups, consumers and industry, has developed DSM programs (programs designed to reduce peak electricity demand, shift on-peak demand to off-peak hours and provide for more efficient operation of the electric generation system), including incentive and cost recovery mechanisms. The CPUC approved the programs in 1993 along with a schedule to be implemented over a three-year period. Effective July 1, 1993, PSCo implemented a DSMCA clause which permits it to recover deferred DSM costs over seven years while non-labor incremental expenses, carrying costs associated with deferred DSM costs and certain incentives associated with the approved DSM programs are recovered on an annual basis. The CPUC subsequently opened a separate docket to investigate issues involving alternative annual revenue reconciliation mechanisms and incentive mechanisms related to PSCo's DSM programs. The investigation was completed in 1995 and a final order was issued. The major provisions of the final order, effective December 27, 1995, included: 1) not to proceed with any of the proposed mechanisms; 2) to reduce the recovery period for certain costs of PSCo's DSM programs from seven to five years for expenditures made on or after January 1, 1995; 3) not to establish DSM targets for 1997 and 1998; 4) not to adopt a penalty for failure to achieve DSM targets; and 5) to approve PSCo's proposal to forego incentive payments for DSM programs. Under a separate CPUC order issued in December 1992, PSCo has implemented a Low-Income Energy Assistance Program. The costs of this energy conservation and weatherization program for low-income customers are recoverable through the DSMCA. SPS Fuel and purchased power costs are recoverable in Texas through a fixed fuel factor which is part of SPS's rates. If it appears that the factor will materially over-recover or under-recover these costs, the factor may be revised upon application by SPS or action by the PUCT. The rule requires refunding and surcharging under/over-recovery amounts including interest when they exceed 4% of the utility's annual fuel and purchased power costs, as allowed by the PUCT, if this condition is expected to continue. Under the PUCT's regulations, SPS is required to file an application for the PUCT to retrospectively review at least every three years the operations of SPS's electricity generation and fuel management activities. SPS will file a reconciliation in 1998 10 for the generation and fuel management activities of approximately $690 million for the three year period ended December 31, 1997. On October 24, 1997, the NMPUC approved a fixed fuel factor for SPS's New Mexico retail jurisdiction, effective January 1998. This will employ an over/under fuel collection calculation made on a monthly basis. SPS will petition for a change in the fixed fuel factor if the over/under recovery balance reaches $5 million. In addition, on an annual basis SPS will file the utility's electric generation and fuel management activities. The methodology of the over/under calculation, plus interest, is similar to the Texas fixed fuel factor calculation discussed above. In all other jurisdictions, SPS currently recovers substantially all increases and refunds substantially all decreases in fuel and purchased power costs pursuant to monthly adjustment and clauses. Cheyenne Purchased power and gas costs are recoverable in Wyoming. Cheyenne is required to file applications with the WPSC for approval of adjustment mechanisms in advance of the proposed effective date. See Note 9. Regulatory Matters in Item 8. Financial Statements And Supplementary Data for additional discussion. Environmental Matters Certain of the Company's subsidiary facilities are regulated by federal and state environmental agencies. These agencies have jurisdiction over air emissions, water quality, wastewater discharges, solid wastes and hazardous substances. Various Company activities require registrations, permits, licenses, inspections and approvals from these agencies. The Company has received all necessary authorizations for the construction and continued operation of its generation, transmission and distribution systems. Company facilities have been designed and constructed to operate in compliance with the environmental standards. During 1997, the EPA issued new regulations regarding particulate emissions. The Company is currently evaluating the impact of these new regulations on its operations. The Company's utility subsidiaries have applied for an early election of annual NOx emission limits for eleven units including six PSCo units: Cherokee Units 3 and 4, Valmont Unit 5, Pawnee Unit 1, and Comanche Units 1 and 2 and five SPS units: Harrington Station Units 1, 2 and 3 and Tolk Station Units 1 and 2. In 1997, the Company met early emission limits for these eleven units. Early election limit is applicable until the year 2008. The Company and its subsidiaries continue to strive to achieve compliance with all environmental regulations currently applicable to its operations. However, it is not possible at this time to determine when or to what extent additional facilities or modifications of existing or planned facilities will be required as a result of changes to environmental regulations, interpretations or enforcement policies or, generally, what effect future laws or regulations may have upon the Company's operations. See Note 10. Commitments and Contingencies - Environmental Issues in Item 8. Financial Statements And Supplementary Data for additional discussion. At December 31, 1997, the estimated 1998, 1999 and 2000 expenditures for environmental air and water emission control facilities were $57.9 million, $24.3 million and $14.7 million, respectively (see Item 7. Management's Discussion and analysis of Financial Condition and Results of Operations). 11 Competition Industry Outlook Unprecedented change is continuing to occur in the electric utility industry nationwide, furthering the development of a competitive environment. In general, the economics of the electric generation business have fundamentally changed with open transmission access and the increased availability of electric supply alternatives. Such alternatives will likely serve to lower customer prices, particularly in areas where only higher cost energy is currently provided. Customer demands for lower prices and supplier choices, the availability of alternative supplies (IPPFs, QFs, EWGs and power marketers), and open access to the utility transmission grid have resulted in a commodity market for bulk electric supply. The EPAct directly addressed this issue by giving the FERC the authority to require utilities to provide non-discriminatory open access to the transmission grid for purposes of providing wholesale customers with direct access. In response to such authority, in early 1996, the FERC issued new rules on open access transmission services. A number of states have recently adopted or are pursuing plans for competition in the electric utility industry. Legislative and regulatory initiatives are likely to result in even greater competition at both the wholesale and retail level in the future. The presence of competition and the associated pressure on prices may ultimately lead to the unbundling of products and services similar to what has evolved in the natural gas industry. Today's market view of the future envisions an unbundled electric utility industry consisting of at least four major business segments: energy supply, transmission, distribution and energy services. PUHCA The SEC has also responded to increasing competition in the utility industry and changes in state and federal utility regulation. In June 1995, the SEC issued its report which focused on both legislative and administrative options for the reform of public utility holding company regulation. The report presented three possible recommendations for legislative reform of PUHCA: 1) conditional repeal of PUHCA, 2) unconditional repeal of PUHCA, and 3) PUHCA remains unmodified, but grants the SEC broader exemptive authority under PUHCA. Any changes in regulation will be determined by Congress. In early 1997, legislation was introduced in Congress that would have repealed PUHCA and transferred certain federal authority to the FERC as recommended in the SEC report as part of broader legislation regarding changes in the electric industry. This legislation is likely to be debated on the Senate floor in April 1998. This legislation was not passed; however, the Company expects that a number of bills regarding the restructuring of the electric utility industry will continue to be considered in the current Congress. Retail Electric Business Today, the retail electric business faces increasing competition from industrial and large commercial customers who have the ability to own or operate facilities to generate their own electric energy requirements. In addition, customers may have the option of substituting fuels, such as natural gas for heating, cooling and manufacturing purposes rather than electric energy, or the option of relocating their facilities to a lower cost environment. While each of the Company's utility subsidiaries face these challenges, these subsidiaries believe their rates are competitive with currently available alternatives. The Company's utility subsidiaries are taking actions to lower operating costs and are working with their customers to analyze the feasibility of various options, including energy efficiency, load management and cogeneration in order to better position the Company's utility subsidiaries to more effectively operate in a competitive environment. State Regulatory and Legislative Environments - Electric Business Below is a discussion on the regulatory and legislative initiatives currently being addressed in each of the Company's retail jurisdictions related to the electric business. 13 Colorado - Colorado law permits the CPUC to authorize rates negotiated with individual electric and gas customers who have threatened to discontinue using the services of PSCo, so long as the CPUC finds that such authorization: 1) in the case of electric rates, will not adversely affect PSCo's remaining customers and 2) in the case of gas rates, will not affect PSCo's remaining customers as adversely as would the alternative. In response to the increasingly competitive operating environment for utilities, the regulatory climate is also changing. In 1996, the CPUC opened an inquiry docket related to electric utility restructuring. PSCo submitted a response to a CPUC sponsored restructuring questionnaire which was followed by the CPUC issuing a report on a comprehensive survey on electric industry restructuring. The CPUC is currently working with the Colorado General Assembly in its investigation and implementation of public policy. The CPUC has no electric restructuring authority without legislative mandate. During December 1997, PSCo submitted a draft bill relating to electric utility industry restructuring and customer choice. The principles of the proposed bill include: all customers must have the opportunity to benefit; the reliability of electric service must be maintained; all energy suppliers must be subject to the same laws and regulations; the price of electric energy and electric generation capacity must be determined solely by market forces; generation, transmission and distribution may be functionally separated and the transmission and distribution functions will remain subject to regulation; and each electric utility must have a good reasonable opportunity to recover its stranded costs. PSCo will continue to participate in regulatory proceedings which could change or impact current regulation. PSCo believes it will continue to be subject to Colorado rate regulation that will allow for the recovery of all of its deferred costs (see Note 1. Summary of Significant Accounting Policies - Business, Utility Operation and Regulation - Regulatory Assets and Liabilities and Note 9. Regulatory Matters in Item 8. Financial Statements And Supplementary Data). Texas - Texas legislation enacted in 1995 recognizes the movement to a more competitive market-place by requiring the PUCT to issue new regulations relating to, among other things, allowance of less than fully costed rates in wholesale and retail markets; recognition of and essentially waiving all Texas utility regulation of EWGs and power marketers; and implementation of transmission access comparable to the owning utility's use of its transmission system for non-FERC regulated utilities. In the 1997 session, Texas introduced legislative proposals relating to retail wheeling; however, the Texas legislature adjourned without adopting any legislation on this issue. There will be no general session in 1998 in Texas. A Senate Interim Committee on Electric Utility Restructuring began a series of statewide hearings in late 1997. The hearings will continue in 1998 in order to solicit public input on a series of statewide issues relating to retail competition in Texas. This information will be used by the Committee to make recommendations on restructuring legislation for the 1999 session. SPS believes it will continue to be subject to rate regulation that will allow for recovery of all of its deferred costs (see Note 1. Summary of Significant Accounting Policies - Business, Utility Operations and Regulation - Regulatory Assets and Liabilities and Note 9. Regulatory Matters in Item 8. Financial Statements And Supplementary Data). New Mexico - In 1997 the NMPUC approved Case 2718, "Texas-New Mexico Power Company's TNP's Community Choice Plan." The plan calls for all TNP customers to be able to choose their energy supplier by April 1, 2003. The New Mexico legislature rejected all retail wheeling proposals in 1997. Following the 1997 session, the NMPUC initiated Case 2681, the "Investigation of Electric Utility Restructuring", which called for a "collaborative process" that involved utilities, consumer groups, environmental groups, and other interested stakeholders. The NMPUC encouraged the parties to attempt to reach a consensus on a retail choice plan for New Mexico, but the effort was unsuccessful. On January 28, 1998, the NMPUC issued its final report in case 2681. The NMPUC found that it is in the public interest for the State of New Mexico to advance changes in the structure and regulation of the electric industry, and recommends that restructuring proposals should continue to be brought before the legislature. The New Mexico legislature has a 30 day budget session in 1998. Wyoming - In January 1998, the Joint Minerals, Business and Economic Development Interim Committee voted against moving forward with draft legislation entitled the "Wyoming Electric Restructuring 13 Act." The 9-5 vote inhibits the progress of the draft during the brief 1998 legislative session of 20 days, unless further acted upon by individual legislators. The draft was a collaborative effort which included the Legislative Subcommittee on Electric Industry Re-regulation, the WPSC, utilities and consumer interest groups. The 1998 legislative session began in February. A joint committee of the Wyoming legislature began a series of hearings on restructuring in June of 1997. On September 15, 1997, a report entitled the "Study of the Potential Economic Impacts of Electric Restructuring on the State of Wyoming," which was prepared for the WPSC by an external consultant, was made public. The report analyzed four different restructuring scenarios and concluded overall that restructuring would have only a small impact on rates. Kansas -- In December 1997, the Task Force On Retail Wheeling presented its final report to the 1998 Kansas Legislature. The report culminated a study that was authorized by House Bill 2600 which was signed by the Governor on April 26, 1996. Additionally, this legislation imposed a three-year freeze on retail electric wheeling. The task force, which consisted of lawmakers and utility industry representatives, studied numerous issues, including the actions of the FERC; the obligation of electric utilities to serve customers; the recovery of stranded costs; the unbundling of generation, transmission, and distribution services. The report concluded with draft legislation entitled the "Electric Utility Restructuring Act." A 90-day legislative work session, which began January 12, 1998, will also be looking at three other comprehensive electric restructuring bills, along with two other related measures, which were held over from the 1997 session. Oklahoma - The Electric Restructuring Act of 1997 was signed by the Governor of Oklahoma on April 25, 1997. This legislation directs a series of studies which will define the orderly transition to consumer choice of electric energy supplier by July 1, 2002. The studies include: Taxation Issues, Independent System Operator ("ISO"), Technical Issues, Financial Issues, and Consumer Issues. The Joint Electric Utility Force, a legislative entity, is in place to oversee the actions of the Oklahoma Corporation Commission, which is the state's regulatory agency. The Oklahoma Corporation Commission has been granted the authority to work alongside electric utilities and other industry interests and consumer groups in order to examine several key concerns. Unbundling of Rates and Services; Ceiling for Rates; Stranded Cost Recovery; Reliability and Safety; Transition Costs are included in the focus. Results and recommendations derived from the studies will direct any further legislative action that may be necessary in order for the Electric Restructuring Act of 1997 to be fully implemented. The ISO study report was presented on January 27, 1998. It is expected that the Taxation Issues study, which began in April 1997, and the Technical Issues study will conclude by December 31, 1998. Wholesale Electric The wholesale electric business faces increasing competition in the supply of bulk power due to provisions of the EPAct and Federal and state initiatives with respect to providing open access to utility transmission systems. Under the FERC rules issued in early 1996, utilities are required to provide wholesale open-access transmission services consistent with what is provided for in their own operations. The Company's utility subsidiaries are operating with the tariffs approved by the FERC under these rules. To date, these provisions have not had a material impact on the Company's utility subsidiaries operations. For 1997, the Company's consolidated wholesale revenues totaled approximately 15% of total electric revenues. A substantial portion of these revenues related to firm sales contracts, which are expected to continue at current levels for a minimum of 10 years. Natural Gas Changes in regulatory policies and market forces have begun to shift the industry from traditional cost-based regulation involving gas sales, transportation, storage and other related services on a bundled basis toward market-based sales on an unbundled basis. In 1993, the FERC accelerated the process of unbundling the commodity supply component from the physical delivery component of natural gas retail sales service. In recent years, numerous state initiatives have been developed to continue this unbundling process down to the residential and small commercial customers. The goal of unbundling is to offer customers choice of gas suppliers. In 1996, 14 the CPUC opened an investigatory docket concerning the issue of unbundling natural gas services. At this time, no formal action is expected from the CPUC mandating the unbundling of gas utilities. PSCo expects that a gas unbundling bill will be proposed in the Colorado Legislature in 1998 providing the CPUC the authority to allow for full unbundling at the retail level. PSCo plans to participate fully in any such legislative efforts and in any other regulatory proceedings which could change or impact current regulation. The natural gas delivery or transportation business has remained competitive as industrial and large commercial customers have the ability to "by-pass" the local gas utility through the construction of interconnections directly with, and the purchase of gas directly from, interstate pipelines, thereby avoiding the delivery charges added by the local gas utility. PSCo and Cheyenne have and will continue to aggressively pursue the retention of all of these customers on their systems. PSCo and Cheyenne extend and operate their distribution system primarily by virtue of non-exclusive franchises granted by the various cities and towns. Such franchise agreements are approved by their respective state commissions. Because the franchises are non-exclusive, PSCo and Cheyenne can be faced with the threat of intrusion into their gas territory by third parties. PSCo and Cheyenne hold territorial certificates for a portion of their gas service territory giving them the exclusive right to extend their distribution system and provide natural gas sales and transportation service. However, for the majority of their gas service territory, no such territorial certificates exist. Franchises PSCo held nonexclusive franchises to provide electric or gas service or both services in approximately 121 incorporated cities and towns at December 31, 1997. These franchises consist of 69 combined gas and electric service franchises, 28 electric service franchises and 24 gas service franchises. In 1998, PSCo expects to re-negotiate three of the franchise agreements which will be expiring. PSCo's franchise with the City of Denver will expire in 2006. PSCo supplies electric or gas service or both services in about 114 unincorporated communities. SPS held franchises to provide electric service in approximately 104 cities and towns at December 31, 1997. Foreign Investments Yorkshire Electricity On April 1, 1997, Yorkshire Power, a subsidiary equally owned by PSCo and AEP, indirectly acquired substantially all of the outstanding ordinary shares of Yorkshire Electricity, a United Kingdom regional electricity company. PSCo holds its investment in Yorkshire Power through its wholly-owned subsidiary, NCI. The total consideration paid by Yorkshire Power was approximately $2.4 billion (1.5 billion pounds sterling). Yorkshire Electricity's main businesses are the distribution and supply of electricity and the supply of gas and its service territory is one of the region's largest with approximately 2.1 million customers. In July 1997, the U.K. government enacted a windfall tax on certain privatized business entities which is payable in two installments. The windfall tax was a retroactive adjustment to the privatization value based on post-privatization profits during the 1992 - 1995 period. During the third quarter of 1997, Yorkshire Power recorded an extraordinary charge of approximately $221 million (135 million pounds sterling) for this windfall tax. PSCo's share of this tax is approximately $110.6 million. See Note 2. Acquisition of Yorkshire Electricity and U.K. Windfall Tax in Item 8. Financial Statements and Supplementary Data for summary financial information on Yorkshire Power. 15 Other foreign investments The Company owns other foreign investments through various non-regulated subsidiaries; however, at this time, these investments are not significant to the Company's consolidated assets. See Non-Utility Operations below for a more detailed discussion on the Company's non-utility subsidiaries. Service Company NCS, a wholly-owned subsidiary of NCE, was incorporated in 1997 under the laws of the State of Delaware. NCS is the service company for the NCE system and provides a variety of administrative, management, engineering, construction, environmental and support services. NCS provides its services to the NCE system generally at cost, pursuant to service agreements approved by the SEC under PUHCA. Non-Utility Operations NC Enterprises, a wholly-owned subsidiary of NCE, was incorporated in 1997 under the laws of the State of Delaware. NC Enterprises was incorporated to serve as a holding company for non-utility subsidiaries of NCE. NC Enterprises currently has the following five subsidiaries: Quixx, UE, e prime, Natural Fuels and New Century Cadence. The table presented below provides certain financial information regarding each subsidiary of NC Enterprises, followed by a discussion of the operations of the subsidiaries. New Natural Century Quixx UE e prime Fuels Cadence ----- -- ------- ----- ------- (Millions of Dollars) Operating revenues $ 14.8 $ 52.3 $196.7 $ 6.9 $ - Total assets 79.8 55.5 73.5 10.2 2.2 NC Enterprise's Net investment at 12/31/97 77.1 42.0 21.1 4.8 1.9 Quixx: Quixx was incorporated in 1985 under the laws of the State of Texas. Quixx's primary business is investing in and developing cogeneration and energy-related projects. Quixx also holds water rights and certain other nonutility assets. Quixx operates, as a division, Amarillo Railcar Services, a railcar maintenance facility that provides inspection, light and heavy maintenance, and storage for unit trains. A majority of these services are provided for railcars that transport coal for use by SPS. Quixx also finances sales of heat pumps and markets other non-utility goods and services. Quixx currently has the following wholly-owned subsidiaries, most of which hold partnership interests in various energy-related limited partnerships: Quixx Jamaica, Inc., a wholly-owned subsidiary of Quixx, holds a 99% limited partnership interest in KES Jamaica, L.P. which owns a facility consisting of two-oil fired combustion turbines located in Montego Bay, Jamaica, W.I. The remaining 1% general partnership interest is owned by KES Montego, Inc. a wholly-owned subsidiary of Quixx. As of December 31, 1997, Quixx is in the process of winding up operations of this subsidiary. Quixx Jamaica Power, Inc., a wholly-owned subsidiary of Quixx, is currently inactive. Quixx Mustang Station, Inc., a wholly-owned subsidiary of Quixx, was created to hold Quixx's 0.5% interest in Denver City Energy Associates, L.P., a partnership which owns a 50% interest in Mustang Station, a 488 MW combined cycle generating facility which is scheduled for completion in 1998. Quixx will also hold a 49.5% interest in Denver City Energy Associates, LP through Quixx Resources, Inc. a wholly-owned subsidiary of Quixx. 16 Quixxlin Corp, a wholly-owned subsidiary of Quixx, was created to hold a 0.5% general partnership interest in Quixx Linden, L.P., which will construct a 23 MW natural gas fired cogeneration facility located in Linden, New Jersey. It is estimated that this facility will be completed in mid-1998. Quixx also directly holds a 49.5% limited partnership interest in Quixx Linden, L.P. Quixx Borger Cogen, Inc., a wholly-owned subsidiary of Quixx, will hold a 0.5% general partnership interest in Borger Energy Associates, L.P., which will own a cogeneration plant that will be located at the Phillips Petroleum Refinery Complex near Borger, Texas. Quixx Resources, Inc., a wholly-owned subsidiary of Quixx, will hold a 49.5% limited partnership interest in this same partnership. Quixx WPP94, Inc., a wholly-owned subsidiary of Quixx, holds a 0.33% general partnership interest in Windpower Partners, 1994 L.P. Windpower Partners, 1994 L.P. owns a 35 MW wind generation facility in Culberson County, Texas. Quixx also directly holds a 24.67% limited partnership interest in Windpower Partners, 1994 L.P. Quixx Louisville, L.L.C., a wholly-owned subsidiary of Quixx, owns a facility consisting of two gas-fired boilers providing steam to a DuPont plant in Louisville, Kentucky. Quixx Power Services, Inc., a wholly-owned subsidiary of Quixx, operates and maintains certain cogeneration facilities. Quixx WRR, L.P., a wholly-owned subsidiary of Quixx, holds Quixx's water rights located in Roberts, Gray, Hutchinson and Carson Counties, Texas. Quixx holds a 1% general partnership interest and through Quixx Resources, Inc. a 99% limited partnership interest in Quixx WRR, L.P. Quixx holds a 50% interest in Mosbacher Power Group and Mosbacher Power International, which are independent power development companies with interests in the development stage in Cambodia and Colombia. Quixx Carolina, Inc., a wholly-owned subsidiary of Quixx, holds a 1% general partnership interest in Carolina Energy Limited Partnership, a waste-to-energy cogeneration facility. Quixx also holds a 32.33% limited partnership interest in this same partnership. In June 1997, Quixx wrote off its investment of approximately $13.64 million in the Carolina Energy Limited Partnership (see Note 3. Acquisition and Divestiture of Investments in Item 8. Financial Statements And Supplementary Data). Quixx holds a 49% limited partnership interest in BCH Energy Limited Partnership, a waste-to-energy facility located near Fayetteville, North Carolina. In December 1996, Quixx wrote off its entire investment in this project of approximately $16 million (See Note 3. Acquisition and Divestiture of Investments in Item 8. Financial Statements And Supplementary Data). UE: UE was incorporated in 1985 under the laws of the State of Texas. UE is engaged in engineering, design, construction management and other miscellaneous services. UE currently has two wholly-owned subsidiaries - - Universal Utility Services Company and Precision Resource Company. Universal Utility Services Company provides cooling tower maintenance and repair, certain other industrial plant improvement services, and engineered maintenance of high voltage plant electric equipment. Precision Resource Company provides contract professional and technical resources for customers in the energy industrial sectors. UE also owns a 49% interest in Vista Environmental Services, LLC, which performs environmental consulting for energy and industrial customers in both the private and government sectors, primarily in the southwestern United States. e prime: e prime was incorporated in 1995 under the laws of the state of Colorado. e prime provides energy related products and services which include, but are not limited to, electric and gas brokering, marketing and trading, and energy consulting. e prime has also pursued international energy investment opportunities. In March of 1996, e prime received authorization from the FERC to act as a power marketer. In September of 1996, e prime acquired TOG, a gas marketing company, with headquarters in Houston and an office in Boston. e prime and TOG have merged operations and together they provide value-added energy related products and services to 17 over 2,200 end use customers and utilities nationwide. Additionally, e prime currently owns the following subsidiaries (subsidiaries formed, but inactive have been excluded): TOP is a small pipeline company which connects two major interstate pipelines. YGSC owns a 47.5% general partnership interest in Young Storage which owns and operates an underground gas storage facility in northeastern Colorado. e prime Projects International, Inc. and e prime Operating, Inc. were formed to hold and operate investments in EWG's and foreign utility companies, which in 1997 included the purchase and subsequent sale of a 25% interest in a 608 mw coal-fired electric power plant near Topar, Karaganda, the Republic of Kazakstan. e prime also holds a 50% ownership interest in Johnstown Cogeneration, a limited liability company. Natural Fuels: Natural Fuels was incorporated in 1990 under the laws of the State of Colorado. Natural Fuels sells compressed natural gas as a transportation fuel to retail markets, converts vehicles for natural gas usage, constructs fueling facilities, and sells miscellaneous fueling facility equipment. Natural Fuels has a 50% ownership interest in Natural/Total Limited Liability Company, which owns and operates natural gas fueling stations located at Total Petroleum Gas Stations in Colorado. Natural Fuels has a 25% ownership interest in Natural/Peoples Limited Liability Company which owns and operates one natural gas fueling station located in Castle Rock, Colorado. Additionally, Natural Fuels has a 67% ownership interest through Natural/Total in Natural/Total/KN Limited Partnership, a partnership which owns the profits interest in the natural gas fueling stations located at Total Petroleum sites in the Colorado towns of Grand Junction and Glenwood Springs. New Century Cadence: New Century Cadence was incorporated in 1997 under the laws of the State of Colorado. New Century Cadence was created to hold a 1/3 interest in Cadence Network LLC, an energy-related company which provides energy management and consulting services, as well as brokering and marketing of energy commodities. Specifically, Cadence Network LLC will provide a single source for both energy management services and products designed to lower energy costs for national companies that operate at multiple locations. Cadence Network LLC is equally owned by New Century Cadence, Cinergy-Cadence, Inc. (a subsidiary of Cinergy, Inc.) and Progress Holdings, Inc. (a subsidiary of Florida Progress Holdings, Inc.) Employees The number of employees in the NCE system at December 31, 1997 is presented in the table below. Of the employees listed below, approximately 2,938, or 47%, are covered under collective bargaining agreements. For further information, see Note 10. Commitments and Contingencies - Union Contracts in Item 8. Financial Statements and Supplementary Data. NCE System Employees -------------------- PSCo 3,160 SPS 1,332 NCS 1,325 Cheyenne 100 NC Enterprises 373 --- Total 6,290 ===== 18 Consolidated Electric Operating Statistics (NCE) Year Ended December 31, ----------------------- 1997 1996 1995(2) ---- ---- ------- Energy Generated, Received & Sold (Thousands of Kwh): Net Generated: Steam, Fossil.................. 33,278,721 32,116,961 37,067,838 Combustion Turbine............. 6,595,055 6,351,117 151,294 Pumped Storage................. 193,834 178,205 68,400 Hydro.......................... 224,898 197,660 208,104 ------- ------- ------- Total Net Generation......... 40,292,508 38,843,943 37,495,636 Energy Used for Pumping........ 300,649 276,983 109,632 ------- ------- ------- Total Net System Input....... 39,991,859 38,566,960 37,386,004 Purchased Power and Net Interchange 11,985,546 10,295,074 10,145,620 ---------- ---------- ---------- Total System Input........... 51,977,405 48,862,034 47,531,624 Used by Company................ 77,734 88,304 1,239,914 Other (1)...................... 1,677,085 1,352,843 1,526,358 --------- --------- --------- Total Energy Sold............ 50,222,586 47,420,887 44,765,352 ========== ========== ========== Electric Sales (Thousands of Kwh): Residential.................... 9,730,390 9,530,275 8,991,000 Commercial..................... 13,223,936 12,832,091 12,094,269 Industrial..................... 13,789,814 13,729,777 13,433,472 Public Authorities............. 773,656 780,251 736,375 Wholesale - Regulated ......... 11,494,742 10,129,788 9,510,236 Wholesale Energy Services - Non-Regulated .............. 1,210,048 418,705 - --------- ------- ---- Total Energy Sold............ 50,222,586 47,420,887 44,765,352 ========== ========== ========== Number of Customers at End of Period: Residential.................... 1,285,307 1,269,322 1,237,218 Commercial..................... 185,911 183,928 177,607 Industrial..................... 12,888 12,830 12,274 Public Authorities............. 81,994 80,486 79,819 Wholesale - Regulated ......... 279 235 191 Wholesale Energy Services - Non-Regulated .............. 12 6 - -- ---- ---- Total Customers ........... 1,566,391 1,546,807 1,507,109 ========= ========= ========= Electric Revenues (Thousands of Dollars): Residential.................... $ 692,886 $ 682,966 $ 638,972 Commercial..................... 735,636 738,266 701,135 Industrial..................... 532,276 521,843 526,349 Public Authorities............. 58,235 55,608 50,441 Wholesale - Regulated.......... 412,088 376,315 341,265 Wholesale Energy Services - Non-Regulated .............. 22,861 7,806 - Other Electric Revenues........ 19,377 33,735 25,017 ------ ------ ------ Total Electric Revenues...... $2,473,359 $2,416,539 $2,283,179 ========== ========== ========== Average Annual Kwh Sales per Residential Customer 7,570 7,508 7,267 Average Annual Revenue per Residential Customer $539.08 $538.06 $516.46 Average Residential Revenue per Kwh .0712 .0717 .0711 Average Commercial Revenue per Kwh .0556 .0575 .0580 Average Industrial Revenue per Kwh .0386 .0380 .0392 Average Wholesale - Regulated Revenue per Kwh .0359 .0371 .0359 _________________________ (1) Primarily includes net distribution and transmission line losses. (2) Reflects the combined historical information of PSCo as of and for the year ended December 31, 1995 with the historical information of SPS as of and for the year ended August 31, 1995. 19 Consolidated Electric Operating Statistics (PSCo) (1) Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- Energy Generated, Received & Sold (Thousands of Kwh): Net Generated: Steam, Fossil.................. 17,586,343 17,099,890 16,053,928 Combustion Turbine............. 154,019 121,079 5,251 Pumped Storage................. 193,834 178,205 68,400 Hydro.......................... 224,898 197,660 208,104 ------- ------- ------- Total Net Generation......... 18,159,094 17,596,834 16,335,683 Energy Used for Pumping........ 300,649 276,983 109,632 ------- ------- ------- Total Net System Input....... 17,858,445 17,319,851 16,226,051 Purchased Power and Net Interchange 11,470,535 10,349,298 9,794,968 ---------- ---------- --------- Total System Input........... 29,328,980 27,669,149 26,021,019 Used by Company................ 45,492 57,603 64,885 Other (2)...................... 1,659,347 1,352,843 1,526,358 --------- --------- --------- Total Energy Sold............ 27,624,141 26,258,703 24,429,776 ========== ========== ========== Electric Sales (Thousands of Kwh): Residential.................... 6,662,679 6,606,601 6,281,911 Commercial..................... 10,109,615 9,880,502 9,284,577 Industrial..................... 5,511,722 5,791,608 5,747,534 Public Authorities............. 189,141 200,070 188,363 Wholesale - Regulated ......... 4,490,895 3,361,217 2,927,391 Wholesale Energy Services - Non-Regulated .............. 660,089 418,705 - ------- ------- ---- Total Energy Sold............ 27,624,141 26,258,703 24,429,776 ========== ========== ========== Number of Customers at End of Period: Residential.................... 976,629 959,249 936,759 Commercial..................... 128,593 126,426 123,277 Industrial..................... 339 380 378 Public Authorities............. 81,209 79,725 79,154 Wholesale - Regulated ......... 33 26 17 Wholesale Energy Services - Non-Regulated .............. 12 6 - ---- ---- ---- Total Customers ........... 1,186,815 1,165,812 1,139,585 ========= ========= ========= Electric Revenues (Thousands of Dollars): Residential.................... $ 503,727 $ 507,233 $ 477,740 Commercial..................... 563,439 571,536 552,905 Industrial..................... 228,925 249,774 257,189 Public Authorities............. 26,778 25,798 23,029 Wholesale - Regulated.......... 145,561 120,478 114,514 Wholesale Energy Services - Non-Regulated .............. 10,448 7,806 - Other Electric Revenues........ 6,318 6,365 23,719 ----- ----- ------ Total Electric Revenues...... $1,485,196 $1,488,990 $1,449,096 ========== ========== ========== Average Annual Kwh Sales per Residential Customer 6,822 6,965 6,794 Average Annual Revenue per Residential Customer $515.78 $534.79 $516.70 Average Residential Revenue per Kwh .0756 .0768 .0761 Average Commercial Revenue per Kwh .0557 .0578 .0596 Average Industrial Revenue per Kwh .0415 .0431 .0447 Average Wholesale - Regulated Revenue per Kwh .0324 .0358 .0391 _________________________ (1) Includes year-to-date amounts through July 31, 1997 for the subsidiaries transferred in connection with the Merger. (2) Primarily includes net distribution and transmission line losses. 20
Consolidated Electric Operating Statistics (SPS) Year ended September 1 - December 31 December 31 Year ended August 31 ----------------------- -------------------- 1997 1996 1996 1995 ---- ---- ---- ---- Energy Generated, Received & Sold (Thousands of Kwh): Net Generated: Steam, Fossil.................. 15,692,378 4,994,294 14,895,995 21,013,910 Combustion Turbine............. 6,441,036 1,747,556 6,186,155 146,043 --------- --------- --------- ------- Total Net Generation......... 22,133,414 6,741,850 21,082,150 21,159,953 Purchased Power and Net Interchange (402,504) 332,644 1,226,976 350,652 -------- ------- --------- ------- Total System Input........... 21,730,910 7,074,494 22,309,126 21,510,605 Used by Company, Other......... 31,862 438,190 1,420,687 1,175,029 ------ ------- --------- --------- Total Energy Sold.............. 21,699,048 6,636,304 20,888,439 20,335,576 ========== ========= ========== ========== Electric Sales (Thousands of Kwh) (1): Residential.................... 2,986,815 891,695 2,868,982 2,709,089 Commercial..................... 2,990,488 989,580 2,886,807 2,809,692 Industrial..................... 8,135,280 2,661,642 7,813,433 7,685,938 Public Authorities............. 582,618 190,439 571,579 548,012 Wholesale - Regulated ......... 7,003,847 1,902,948 6,747,638 6,582,845 --------- --------- --------- --------- Total Energy Sold............ 21,699,048 6,636,304 20,888,439 20,335,576 ========== ========= ========== ========== Number of Customers at End of Period(1): Residential.................... 308,439 310,073 308,554 300,459 Commercial..................... 57,298 57,502 57,204 54,330 Industrial..................... 12,549 12,450 12,418 11,896 Public Authorities............. 785 761 750 665 Wholesale - Regulated ......... 246 209 197 174 --- --- --- --- Total Customers ........... 379,317 380,995 379,123 367,524 ======= ======= ======= ======= Electric Revenues (Thousands of Dollars)(1): Residential.................... $ 184,372 $ 54,109 $ 172,214 $ 161,231 Commercial..................... 166,572 54,033 154,653 148,231 Industrial..................... 298,754 95,494 274,117 269,160 Public Authorities............. 31,249 10,090 29,220 27,412 Wholesale - Regulated.......... 266,527 71,663 252,145 226,751 Other Electric Revenues........ 12,881 10,190 17,048 1,298 ------ ------ ------ ----- Total Electric Revenues...... $ 960,355 $ 295,579 $ 899,397 $ 834,083 ========== ========= ========== ============ Average Kwh Sales per Residential Customer 9,684 2,876 9,298 9,017 Average Revenue per Residential Customer $597.76 $174.50 $558.13 $536.62 Average Residential Revenue per Kwh .0617 .0607 .0600 .0595 Average Commercial Revenue per Kwh .0557 .0546 .0536 .0528 Average Industrial Revenue per Kwh .0367 .0359 .0351 .0350 Average Wholesale - Regulated Revenue per Kwh .0381 .0377 .0374 .0344 _________________________ (1) Presentation of electric revenues by class has been changed to include unbilled revenue in other electric revenue to conform with the current year presentation. 21
Consolidated Gas Operating Statistics (NCE and PSCo) Year Ended December 31, NCE PSCo NCE and PSCo 1997 1997 (3) 1996 1995 ---- ---- ---- ---- Natural Gas Purchased and Sold (Thousands of Dth): Purchased from CIG............. 32,035 32,035 39,924 38,687 Purchased from Others.......... 119,652 118,128 107,374 101,259 Purchased for Non-regulated Gas Marketing (1) ........... 61,248 35,189 22,807 237 ------ ------ ------ --- Total Purchased............ 212,935 185,352 170,105 140,183 Company Use.................... 1,213 1,211 520 1,330 Other (2)...................... 17,236 15,461 10,000 5,657 ------ ------ ------ ----- Total Gas Sold............... 194,486 168,680 159,585 133,196 ======= ======= ======= ======= Gas Deliveries (Thousands of Dth): Residential.................... 87,386 86,634 86,102 82,188 Commercial .................... 47,471 46,857 51,655 50,771 Non-regulated Gas Marketing (1) 59,629 35,189 21,828 237 ------ ------ ------ --- Total Gas Sold............. 194,486 168,680 159,585 133,196 Transportation................. 93,271 86,831 90,304 75,704 Other Gas Deliveries........... 73 73 1,141 1,391 -- -- ----- ----- Total Deliveries............. 287,830 255,584 251,030 210,291 ======= ======= ======= ======= Number of Customers at End of Period: Residential.................... 928,134 902,759 902,078 872,777 Commercial..................... 91,937 89,229 90,761 89,034 Non-regulated Gas Marketing (1) 2,190 - 1,255 2 ----- --- ----- --- Total........................ 1,022,261 991,988 994,094 961,813 Transportation and Other....... 2,215 2,205 1,794 952 ----- ----- ----- --- Total Customers.............. 1,024,476 994,193 995,888 962,765 ========= ======= ======= ======= Gas Revenues (Thousands of Dollars): Residential.................... $410,406 $407,004 $362,481 $383,719 Commercial..................... 186,248 184,192 176,328 205,275 Non-regulated Gas Marketing (1) 172,524 99,273 64,389 399 Transportation................. 32,646 32,465 28,549 23,769 Other Gas Revenues............. 14,772 10,157 8,750 11,423 ------ ------ ----- ------ Total Gas Revenues......... $816,596 $733,091 $640,497 $624,585 ======== ======== ======== ======== Average Annual Dth Sales per Residential Customer .......... 94.15 95.97 97.14 95.65 Average Annual Revenue per Residential Customer .......... $442.18 $450.85 $408.93 $446.58 Average Revenue per Dekatherm: Residential ................... $4.697 $4.698 $4.210 $4.669 Commercial .................... $3.923 $3.931 $3.459 $3.970 Transportation ................ $0.352 $0.375 $0.316 $0.314 _________________________
(1) Includes purchases and sales by e prime and TOG. (2) Primarily includes distribution and transmission line losses and net changes to gas in storage. (3) Includes year-to-date amounts through July 31, 1997 for the subsidiaries transferred in connection with the Merger. 22 Item 2. Properties PSCo Electric Generation Property The PSCo electric generating stations expected to be available at the time of the anticipated 1998 net firm system peak demand during the summer season are as follows:
Net Dependable Capacity Installed (Mw) Gross at Time of Anticipated Major Name of Station Capacity 1998 Net Firm System Fuel and Location (Mw) Peak Demand* Source ------------ ---- ------------ ------ Steam: Arapahoe-Denver.................... 262.00 246.00 Coal Cameo-near Grand Junction ......... 77.00 72.70 Coal Cherokee-Denver.................... 784.00 723.00 Coal Comanche-near Pueblo............... 725.00 660.00 Coal Craig-near Craig................... 86.90 (a) 83.20 Coal Hayden-near Hayden................. 259.00 (b) 237.00 Coal Pawnee-near Brush.................. 530.00 511.00 Coal Valmont-near Boulder (Unit 5)...... 188.00 178.00 Coal Zuni-Denver........................ 115.00 107.00 Gas/Oil ------ ------ Total............................ 3,026.90 2,817.90 Fort St. Vrain Combustion Turbine - near Platteville ......................... 141.45 126.75 Gas Combustion turbines (6 units-various locations) .......................... 209.00 171.00 Gas Hydro (14 units-various locations) (c). 53.35 36.55 (d) Hydro Cabin Creek Pumped Storage-near Georgetown 324.00 (e) 162.00 Hydro Cherokee Diesel generators (2 units)... 5.50 5.50 Oil ---- ---- Total............................ 3,760.20 3,319.70 ======== ======== ________________ * A measure of the unit capability planned to be available at the time of the system peak load net of seasonal reductions in unit capability due to weather, stream flow, fuel availability and station housepower, including requirements for air and water quality control equipment. (a) The gross maximum capability of Craig Units No. 1 and No. 2 is 894 Mw, of which the Company has a 9.72% undivided ownership interest. (b) The gross maximum capability of Hayden Units No. 1 and No. 2 is 202.01 Mw and 285.96 Mw, respectively, of which the Company has a 75.5% and 37.4% undivided ownership interest, respectively. (c) Includes one station (two units) not owned by the Company but operated under contract. (d) Seasonal Hydro Plant net dependable capabilities are based upon average water conditions and limitations for each particular season. The individual plant seasonal capabilities are sometimes limited by less than design water flow. (e) Capability at maximum load.
23 SPS Electric Generation Property The SPS electric generating stations expected to be available at the time of the anticipated 1998 net firm system peak demand during the summer season are as follows:
Net Dependable Capacity Installed (Mw) Gross at Time of Anticipated Major Name of Station Capacity 1998 Net Firm System Fuel and Location (Mw) Peak Demand* Source ------------ ---- ------------ ------ Steam: Harrington- near Amarillo, TX...... 1,137.00 1,066.00 Coal Tolk - near Muleshoe, TX .......... 1,130.00 1,080.00 Coal Jones - near Lubbock, TX........... 512.00 486.00 Gas Plant X - near Earth, TX........... 465.00 444.00 Gas Nichols - near Amarillo, TX........ 479.00 457.00 Gas Cunningham - near Hobbs, NM........ 489.00 475.00 Gas Maddox - near Hobbs, NM............ 123.00 118.00 Gas CZ-2 - near Pampa, TX.............. 26.00 26.00 Purch. steam Moore County - near Sunray, TX..... 51.00 48.00 Gas ----- ----- Total............................ 4,412.00 4,200.00 Gas Turbine: Carlsbad - near Carlsbad, NM....... 16.00 16.00 Gas CZ-1 - near Pampa, TX.............. 13.00 13.00 Hot nitrogen Maddox - near Hobbs, NM............ 76.00 76.00 Gas Riverview - near Borger, TX........ 25.00 25.00 Gas Diesel Engine (1 unit) - Tucumcari, NM. 13.00 13.00 Diesel ----- ----- Total............................ 4,555.00 4,343.00 ======== ======== ________________ * A measure of the unit capability planned to be available at the time of the system peak load net of seasonal reductions in unit capability due to weather, stream flow, fuel availability and station housepower, including requirements for air and water quality control equipment.
Nuclear Generation Property Fort St. Vrain, near Platteville, PSCo's only former nuclear generating station, ceased operations on August 29, 1989 and on March 22, 1996 the physical decommissioning of the station was completed. The initial phase of the repowered gas fired combined cycle steam electric generating station began commercial operations on May 1, 1996 (see Note 10. Commitments and Contingencies in Item 8. Financial Statements And Supplementary Data). Electric Transmission Property PSCo: On December 31, 1997, PSCo's transmission system consisted of approximately 112 circuit miles of 345 Kv overhead lines; 1,942 circuit miles of 230 Kv overhead lines; 15 circuit miles of 230 Kv underground lines; 65 circuit miles of 138 Kv overhead lines; 999 circuit miles of 115 Kv overhead lines; 22 circuit miles of 115 Kv underground lines; 331 circuit miles of 69 Kv overhead lines; 139 circuit miles of 44 Kv overhead lines; and 1 circuit mile of 44 Kv underground lines. PSCo jointly owns with another utility approximately 342 circuit miles of 345 Kv overhead lines and 360 miles of 230 Kv overhead lines, of which PSCo's share is 112 miles and 147 miles, respectively, which shares are included in the amounts listed above. SPS: On December 31, 1997, SPS's transmission system consisted of approximately 319 circuit miles of 345 Kv overhead lines; 1,598 circuit miles of 230 Kv overhead lines; 2,540 circuit miles of 115 Kv overhead lines; 1,755 circuit miles of 69 Kv overhead lines; 1 circuit mile of 115 Kv underground line; and 5 circuit miles of 69 Kv underground lines. 24 Interconnections PSCo: PSCo's transmission facilities are located wholly within Colorado. The system is interconnected with the systems of the following utilities with which PSCo has major firm purchase power contracts; capacity and energy are provided primarily by generating sources in the locations indicated: Utility Location ------- -------- Basin Electric Power Cooperative................ Southeast Wyoming PacifiCorp ..................................... West & Northwest U.S. Northwest Colorado Platte River Power Authority.................... Northcentral Colorado Tri-State....................................... Southeast Wyoming and Northwest Colorado PSCo has wheeling agreements with the above, and with other utilities and public power agencies, which are utilized to provide capacity and energy to PSCo's system from time to time. PSCo is a member of the WSCC, an interstate network of transmission facilities which are owned by public entities and investor-owned utilities. WSCC is the regional reliability coordinating organization for member electric power systems in the western United States. PSCo is also a member of the Western Systems Power Pool which is an economic power pool that operates an electronic bulletin board and acts as a clearinghouse for bulk power transactions among over 90 member utilities and marketers. SPS: SPS's transmission system is located in parts of Texas, New Mexico, Oklahoma and Kansas. SPS is connected with utilities west of its service territory through two HVDC interconnections in New Mexico and has four interconnecting transmission lines with utilities of the SPP. These interconnections are described in the following table: Utility Location ------- -------- El Paso Electric Company and Texas-New Mexico Power Company .................................Near Artesia, NM Public Service Company of New Mexico .............Near Clovis, NM Public Service Company of Oklahoma................Near Oklaunion, TX and near Elk City, OK West Texas Utilities..............................Near Shamrock, TX and near Groom TX WestPlains Energy.................................Near Guymon, OK SPS is a member of the SPP. Transactions with the SPP are handled through interties near Elk City and Guymon, Oklahoma, and Shamrock and Oklaunion, Texas. These interties allow the Company to sell or to purchase energy from the eastern electrical grid. HVDC interconnections link SPS with the western electrical grid of the United States. SPS purchases and sells energy through HVDC interties near Artesia and Clovis, New Mexico. SPS is a participant in the FERC approved WSPP bulk power market. This arrangement provides for short-term energy and capacity exchanges, transmission services, flexible pricing, and electronic bulletin board posting of available power and energy. It is presently anticipated that a tie line between Amarillo, Texas and southeastern Colorado will be constructed by the year 2001. The tie line would be approximately 300 miles and the voltage would be 345 Kv. PSCo and SPS have agreed with other utilities to comprehensive procedures for regional planning of the new transmission interconnection. Following the completion of the line, the PSCo and SPS systems will be operated as a single interconnected system. 25 Electric Distribution Property The distribution system of the Company's electric subsidiaries consists of both overhead lines and underground distribution systems. PSCo owns approximately 220 substations (30 of which are jointly owned) having an aggregate transformer capacity of 19,167,000 Kva, of which 4,145,827 Kva is step-up transformer capacity at generating stations. SPS owns approximately 348 substations having an aggregate transformer capacity of 19,277,000 Kva, of which 5,951,000 Kva is step-up transformer capacity. Gas Property The gas property of PSCo at December 31, 1997 consisted chiefly of approximately 15,362 miles of distribution mains ranging in size from 0.50 to 30 inches and related equipment. The Denver distribution system consisted of 8,888 miles of mains. Pressures in the system are varied to meet load requirements and individual house regulators are installed on each customer's premises to provide uniform flow of gas to appliances. PSCo also owns and operates four gas storage facilities. Other Property PSCo's steam heating property at December 31, 1997 consisted of 10.5 miles of transmission, distribution and service lines in the central business district of Denver, including a steam transmission line connecting the steam heating system with Zuni. Steam is supplied from boilers installed at PSCo's Denver Steam Plant which has a capability of 295,000 pounds of steam per hour under sustained load and an additional 300,000 pounds of steam per hour is available from Zuni on a peak demand basis. An additional 80,000 pounds per hour can be supplied as emergency backup through operation of a leased steam heat boiler housed at the State of Colorado. PSCo also owns service and office facilities in Denver and other communities strategically located throughout its service territory. Property of Subsidiaries Unregulated subsidiary property is approximately 1% of the total net book value of the properties of the Company and consolidated subsidiaries combined. 1480 Welton, Inc. owns two buildings that are used by PSCo. Character of Ownership The steam electric generating stations, the majority of major electric substations owned by the Company and its subsidiaries are on land owned in fee. Approximately half of the compressor stations and a limited number of town border and meter stations are also on land owned in fee. The remaining major electric substations, compressor stations and the majority of gas regulator stations and town border and meter stations are wholly or partially on land leased from others or on or along public highways or on streets or public places within incorporated towns and cities (under franchises or other rights). PSCo's Cabin Creek Pumped Storage Hydroelectric Generating Station, its Shoshone Hydroelectric Generating Station and a portion of the related intake tunnel are located on public lands of the United States. As to substantially all property on or across public lands of the United States, the Company or its subsidiaries hold licenses or permits issued by appropriate Federal agencies or departments. The Leyden gas storage facility is located largely on leased property under leases expiring December 31, 2040. The Company and its utility subsidiaries have the power of eminent domain pursuant to State law to acquire property for their electric and gas facilities. The electric and gas transmission and distribution facilities are for the most part located on land owned by the Company or its subsidiaries pursuant to easements obtained from the record holders of title or are over or under streets, public highways or other public places and on public lands under franchises or other rights. The water rights of the Company and its subsidiaries are owned subject to divestment to the extent of any abandonment thereof. Substantially all of the utility plant and other physical property owned by the Company's utility subsidiaries is subject to the liens of the respective indentures securing the mortgage bonds of the Company's utility subsidiaries. 26 Item 3. Legal Proceedings See Note 9. Regulatory Matters and Note 10. Commitments and Contingencies in Item 8. Financial Statements And Supplementary Data. Item 4. Submission of Matters to a Vote of Security Holders NCE: None. PSCo: None. SPS: Omitted pursuant to General Instruction I(2)(c). PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock is listed on the New York stock exchange. On August 1, 1997 following the receipt of all required State and Federal regulatory approvals, PSCo and SPS combined to form NCE with the result that the common shareholders of PSCo and SPS became the common shareholders of NCE. Pursuant to the Merger Agreement, each outstanding share of PSCo common stock, par value $5.00 per share, was canceled and converted into one share of NCE common stock and each outstanding share of SPS common stock, $1.00 par value per share, was canceled and converted into 0.95 of one share of NCE common stock. Prior to the Merger, PSCo and SPS common stock was listed on the New York, Chicago and Pacific Stock Exchanges. The following table sets forth for the periods indicated the dividends declared per share of common stock and the high and low sale prices of the common stock on the consolidated tape as reported by The Wall Street Journal for NCE, PSCo and SPS in 1997 and by the National Quotations Bureau, Inc. for SPS in 1996. Dividends Price Range NCE Year and Quarter Declared High Low -------------------- -------- ---- --- 1997 Third Quarter (from August 1, 1997).......... $ .58 $43 3/16 $ 39 Fourth Quarter............................... .58 49 5/8 40 1/4 --- $ 1.16 PSCo Year and Quarter --------------------- 1997 First Quarter................................ $ .525 $40 1/8 $38 1/4 Second Quarter............................... .525 41 3/4 37 3/4 Third Quarter (to August 1, 1997) (1)........ .115 42 3/16 40 1/8 ---- $1.165 1996 First Quarter................................ $ .525 $36 1/2 $33 3/4 Second Quarter............................... .525 36 3/4 32 3/8 Third Quarter................................ .525 36 7/8 34 3/4 Fourth Quarter............................... .525 39 1/2 35 1/4 ---- $ 2.10 SPS Year and Quarter -------------------- 1997 First Quarter................................ $ .55 $37 1/8 $35 3/4 Second Quarter............................... .55 39 1/2 37 3/8 Third Quarter (to August 1, 1997) (2)........ .46 40 1/8 37 5/8 --- $ 1.56 1996 - Transition Period Fiscal Quarter ended November 30, 1996....... $ .55 $36 3/4 $31 3/4 Month ended December 31, 1996................ - 35 7/8 34 3/8 --- $ .55 27 Dividends Price Range SPS Year and Quarter Declared High Low -------------------- -------- ---- --- 1996 - Fiscal Year Fiscal Quarter ended November 30, 1995....... $ .55 $33 7/8 $ 30 Fiscal Quarter ended February 29, 1996....... .55 33 7/8 32 18 Fiscal Quarter ended May 31, 1996............ .55 34 1/8 30 5/8 Fiscal Quarter ended August 31, 1996......... .55 33 3/8 30 1/4 --- $ 2.20 (1) A partial dividend payable to shareholders covering the period July 12, 1997 through July 31, 1997, the day prior to the Merger effective date, based on the quarterly dividend rate of $0.525, but prorated for the number of days in the interim period. (2) A partial dividend payable to shareholders 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. At December 31, 1997, the book value of the Company's common equity was $21.25 per share. At February 19, 1998, there were 83,124 holders of record of the Company's common stock and the market price of the stock was $45.50. In November 1997, the Company filed a Registration Statement on Form S-3 to sell 9 million shares of common stock. In December 1997, the Company sold 5.9 million shares of common stock. See Note 4. Capital Stock for a discussion of the shareholders' rights plan. The Company anticipates declaring quarterly dividends at an annualized rate of $2.32 per share. However, the dividend level is dependent upon the Company's results of operations, financial position and other factors and is evaluated quarterly by the Board of Directors. See Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations (NCE). 28 Item 6. Selected Financial Data (NCE) The NCE selected financial data for 1997 and 1996 has been prepared from the combination of the historical information of PSCo and SPS as of and for the years ended December 31, 1997 and 1996. The 1995, 1994, and 1993 selected financial data has been prepared from the combination of PSCo information as of and for the years ended December 31, 1995, 1994 and 1993 with the SPS information as of and for the years ending August 31, 1995, 1994 and 1993. Income statement and cash flow information for SPS for the four months ended December 31, 1995 is presented in SPS's Transition Period statements in Item 8. Financial Statements and Supplementary Data. This following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the management's discussion and analysis of financial condition and results of operations appearing elsewhere herein.
Year ended December 31, ----------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- NCE (In Thousands, except per share data & ratio) - --- Operating revenues: Electric.................. $2,473,359 $2,416,539 $2,283,179 $2,243,284 $2,146,806 Gas....................... 816,596 640,497 624,585 624,922 628,324 Other..................... 52,570 39,998 54,444 42,092 27,975 ------ ------ ------ ------ ------ Total.................. 3,342,525 3,097,034 2,962,208 2,910,298 2,803,105 Total operating expenses..... 2,713,300 2,461,451 2,345,264 2,413,704 2,282,714 Operating income............. 629,225 635,583 616,944 496,594 520,391 Income before extraordinary item 261,487 272,341 281,492 255,545 244,574 Extraordinary item - U.K. windfall tax (110,565) - - - - Net income................... 150,922 272,341 281,492 255,545 244,574 Per share data applicable to common stock (a): Basic and diluted earnings per share (c) ........... $2.50 $2.64 $2.77 $2.54 $2.48 Dividends declared (b).... $2.53 $2.18 $2.15 $2.13 $2.13 Rate of return earned on average common equity (income before extraordinary item to common) 11.6% 12.8% 14.0% 13.3% 13.4% Total assets................. $7,310,281 $6,617,442 $6,260,794 $6,027,106 $5,775,110 Total construction expenditures 475,497 454,968 380,407 409,485 385,830 Total common equity.......... 2,353,245 2,170,040 2,064,397 1,963,654 1,873,085 Preferred stock of subsidiaries: Not subject to mandatory redemption ............... 140,002 140,008 212,688 212,688 212,688 Subject to mandatory redemption at par(including amounts due within one year) 39,253 39,913 41,289 42,665 45,454 SPS obligated mandatorily redeemable preferred securities 100,000 100,000 - - - Long-term debt of subsidiaries (including amounts due within one year) 2,245,424 2,050,189 1,854,737 1,703,808 1,742,440 Notes payable & commercial paper 588,343 298,561 288,050 339,794 276,875 _________________ (a) Earnings per share are based on the weighted average number of shares of common stock outstanding. (b) The 1997 amount includes dividends declared by PSCo and SPS for the period January 1, 1997 through July 31, 1997 and dividends declared by NCE for the period August 1, 1997 through December 31, 1997. The Company is currently declaring quarterly dividends at an annualized rate of $2.32 per share. See Item 5 Market for Registrant's Common Equity and Related Stockholder Matters. (c) The 1997 amount is before the $1.06 extraordinary loss per share related to the U.K. windfall tax.
29
Year ended December 31, ----------------------- 1997(a) 1996 1995 1994 1993 ------- ---- ---- ---- ---- PSCo (In Thousands, except per share data & ratio) - ---- Operating revenues: Electric.................. $1,485,196 $1,488,990 $1,449,096 $1,399,836 $1,337,053 Gas....................... 733,091 640,497 624,585 624,922 628,324 Other..................... 11,356 7,951 7,010 7,517 11,548 ------ ----- ----- ----- ------ Total.................. 2,229,643 2,137,438 2,080,691 2,032,275 1,976,925 Operating income............. 337,353 324,536 295,907 245,683 259,173 Income before extraordinary item 204,042 190,346 178,856 170,269 157,360 Extraordinary item - U.K. windfall tax .............. (110,565) - - - - Dividend requirements on preferred stock ........... 11,752 11,848 11,963 12,014 12,031 Earnings available for common stock ..................... 81,725 178,498 166,893 158,255 145,329 Net income................... 93,477 190,346 178,856 170,269 157,360 Total assets................. 4,994,733 4,572,648 4,351,789 4,207,832 4,057,600 Total common equity.......... 1,621,399 1,438,288 1,343,645 1,267,482 1,184,183 Preferred stock: Not subject to mandatory redemption ............. 140,002 140,008 140,008 140,008 140,008 Subject to mandatory redemption at par (including amounts due within one year) 39,253 42,489 43,865 45,241 45,454 Long-term debt (including amounts due within one year) ...... 1,595,298 1,414,558 1,278,389 1,180,580 1,193,668 Notes payable & commercial paper 348,555 244,725 288,050 324,800 276,875 ______________ (a) The 1997 information includes Cheyenne, WGI, e prime and Natural Fuels through July 31, 1997. These subsidiaries were transferred to NCE in connection with the Merger.
SPS Selected financial data omitted pursuant to General Instruction I(2)(a). 30 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (NCE,PSCo and SPS) Competition and Industry Outlook Electric utilities in the U. S. 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 territories with an opportunity to earn a regulated rate of return. This regulatory environment is changing. Retail competition for electric service is now a reality in a few states and many other states have either passed or proposed legislation that will allow all customers to choose their energy supplier in the future. Competition within the wholesale electric energy market has intensified with open-access transmission and an increase in marketing and trading activities by utilities and power marketers. Convergence, consolidation and globalization of the gas and electric industries is continuing as companies position themselves for deregulation and competition in an unbundled energy industry with energy supply, transmission, distribution and energy services business segments. Electric prices in the Company's service territories are relatively low in comparison to other parts of the U.S., lessening the need for immediate legislative and regulatory change. State legislatures and state utility commissions in the retail jurisdictions served by the Company's utility subsidiaries have begun to address the restructuring of the electric utility industry, but so far no actions have been taken that are expected to significantly impact the Company. Overall, the Company believes that the prices its utility subsidiaries charge for electricity and the quality and reliability of their service currently place them in a position to compete effectively in the energy market. Accomplishing a smooth transition to a competitive electric utility industry requires the resolution of several important and complex issues, including, but not limited to: 1) what segments of the business will be open to competition and what will the rules of competition be; 2) how to transition from traditional cost-of-service regulation to performance-based regulation or market-based pricing; 3) who will pay for the costs of prudent utility investments or past commitments (i.e. stranded costs) that will be uneconomic in a competitive environment; 4) what environmental impacts will result from deregulation and 5) how to ensure safe and reliable electric service. The resolution of these and other issues will likely impact the Company and its utility subsidiaries in the future. The potential negative financial impacts could include an impairment of assets, a loss of retail customers, lower profit margins and increased costs of capital (see Note 1. Summary of Significant Accounting Policies in Item 8. Financial Statements and Supplementary Data). At this time, the Company and its utility subsidiaries cannot predict when they will be subject to changes in legislation or regulation, nor can they predict the impacts of such changes on their financial position, results of operations or cash flows. The Company agrees with the need for change in the industry and will proactively support legislation and participate in regulatory proceedings to protect the interests of its shareholders and its customers. Corporate Overview - 1997 After two years of work, the merger of PSCo and SPS was completed effective August 1, 1997, creating a larger and more geographically diverse combined service territory and reducing business risks related to changes in economic, competitive and/or climatic conditions. The Company can now begin to derive benefits from the more efficient and economic utilization of combined facilities and personnel. Obtaining all of the regulatory approvals to effect the Merger and transitioning NCE into a post-merger organization took longer than anticipated and, accordingly, the Company did not realize the synergy savings that it had initially hoped to achieve in 1997. The Company has organized into business units as part of its strategy for future growth. The business units, structured to focus on specific customer markets, consist of: Commodity Services, Retail Services, Delivery Services, including transmission and distribution and International Investments. The Company intends to build upon the core competencies brought together with the Merger. NCE expanded its international presence with its 50% investment in Yorkshire Power, which acquired Yorkshire Electricity, a United Kingdom regional electricity company whose service territory is one of the region's largest with approximately 2.1 million customers. Domestically, the Company has invested in Cadence Network LLC, an energy-related company which will provide a single source for both energy management 31 services and products designed to lower energy costs for national companies that operate at multiple locations. The Company has continued to develop and expand its gas and power marketing activities to serve customers within and outside of markets served by its utility subsidiaries. The Company's operating priorities in 1997 continued to focus on maintaining quality and reliable service, while reducing costs and business risks. This approach resulted in positive earnings for the Company and a customer refund obligation to PSCo customers in connection with the sharing of electric department earnings in excess of 11% return on equity. Earnings Earnings per share were $1.44 ($2.50 before the extraordinary item), $2.64 and $2.77 during 1997, 1996 and 1995, respectively. Earnings for 1995 include the results of SPS for its fiscal year ending August 31. The significant decrease in 1997 was primarily attributable to the recognition of an extraordinary item related to the one-time U.K. windfall tax of approximately $110.6 million, or $1.06 per share, for its 50% ownership in Yorkshire Power. However, ongoing operations of Yorkshire Power positively impacted the Company's 1997 earnings by approximately $25.4 million net of borrowing costs and income taxes, or $0.24 per share. Earnings during 1997 and 1996 were negatively impacted by the write-offs of certain investments in waste-to-energy cogeneration facilities, higher merger and business integration costs resulting from the August 1, 1997 closing of the Merger and electric rate decreases instituted in 1996 and 1997. Management anticipates that future operating results will benefit from the synergies from the Merger and other growth initiatives discussed above. See Forward Looking Information. Electric Operations The following table details the annual change in electric operating revenues and energy costs as compared to the preceding year (in thousands of dollars). Increase (Decrease) From Prior Year --------------- 1997 1996 ---- ---- Electric operating revenues: Retail .................................... $ 20,350 $ 81,786 Wholesale.................................. 35,773 35,050 Non-regulated power marketing.............. 15,055 7,806 Other (including unbilled revenues)........ (14,358) 8,718 ------- ----- Total revenues............................ 56,820 133,360 Fuel used in generation..................... 36,525 83,233 Purchased power............................. 20,905 23,383 ------ ------ Net increase (decrease) in electric margin $ (610) $ 26,744 ======== ======== The following table summarizes electric Kwh sales by major customer classes. % Change * Millions of Kwh Sales From Prior Year ------------------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Residential ............................... 9,730 9,530 2.1% 6.0% Commercial and Industrial ................ 27,014 26,562 1.7 4.1 Public Authority .......................... 774 780 (0.8) 6.0 --- --- Total Retail............................. 37,518 36,872 1.8 4.6 Wholesale.................................. 11,495 10,130 13.5 6.5 Non-regulated Power Marketing.............. 1,210 419 ** ** ----- --- Total...................................... 50,223 47,421 5.9 5.9 ====== ====== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful 32 Electric margin decreased slightly during 1997, when compared to 1996. PSCo's retail rate reductions (approximately $15.4 million) implemented in October 1996 and February 1997 and the recognition at PSCo of an estimated customer refund obligation (approximately $16.4 million) in connection with the earnings sharing in excess of 11% return on equity which resulted from the settlement of the Merger proceedings in Colorado (see Note 9. Regulatory Matters in Item 8. Financial Statements and supplementary data) were primary contributors to the decrease. Electric margin was also negatively impacted by the recognition at SPS of an estimated customer refund obligation (approximately $1.8 million) related to the guaranteed merger savings, as well as interruptible rates available to certain classes of retail and wholesale customers. An overall increase of approximately 1.8% in electric Kwh sales to retail customers resulting from customer growth of 1.3% minimized the impact of these rate reductions. Higher wholesale electric sales and power marketing activities by non-regulated subsidiaries also contributed to increased operating revenues, however, the margin on such sales is minimal. Electric margin increased in 1996, when compared to 1995, primarily due to an overall 4.6% increase in retail sales resulting primarily from customer growth of 2.6%. The hotter than normal late spring and early summer 1996 in the SPS territory also favorably impacted retail and firm wholesale sales. Customer growth and higher economy sales by the Company's utility subsidiaries and power marketing activities of non-regulated subsidiaries contributed to increased wholesales revenues, but had little impact on electric margin. The Company's regulated subsidiaries have cost adjustment mechanisms which recognize the majority of the effects of changes in fuel used in generation and purchased power costs and allow recovery of such costs on a timely basis. As a result, the changes in revenues associated with these mechanisms in 1997 and 1996, when compared to the respective preceding year, had little impact on net income. In its decision on the Merger, the CPUC replaced PSCo's ECA with an ICA, effective October 1, 1996, which allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders. For 1997, the ICA did not significantly impact electric margin (see Note 9. Regulatory Matters in Item 8. Financial Statements and Supplementary data). Fuel used in generation expense increased approximately 5.8% during 1997, as compared to 1996, primarily due to increased generation levels at PSCo and SPS power plants and higher natural gas costs at SPS. Fuel used in generation expense increased 15.1% during 1996, as compared to the prior year, primarily due to the increased natural gas and coal costs. Purchased power expense increased 4.1% and 4.8% during 1997 and 1996, respectively, as compared to the previous year. These increases are primarily due to the amount of power purchased by PSCo to meet increased wholesale requirements and other customer demands, as well as an increase in power marketing activities, which were initiated in the third quarter of 1996. Gas Operations The following table details the annual change in revenues from gas sales and gas purchased for resale as compared to the preceding year (in thousands of dollars). Increase (Decrease) From Prior Year --------------- 1997 1996 ---- ---- Revenues from gas sales (including unbilled revenues) $172,340 $ 11,211 Gas purchased for resale.................... 150,128 483 ------- --- Net increase in gas sales margin........... $ 22,212 $ 10,728 ======== ======== 33 The following table compares gas dekatherm (Dth) deliveries by major customer classes. Millions of % Change * Dth Deliveries From Prior Year -------------- --------------- 1997 1996 1997 1996 ---- ---- ---- ---- Residential............................ 87.4 86.1 1.5% 4.8% Commercial............................. 47.5 51.7 (8.1) (1.7) Non-regulated gas marketing............ 59.6 21.8 ** ** ---- ---- Total Sales.......................... 194.5 159.6 21.9 19.8 Transportation, gathering and processing 93.3 91.4 2.1 18.6 ---- ---- Total................................ 287.8 251.0 14.7 19.4 ===== ===== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful Gas sales margin increased in 1997, when compared to 1996, primarily due to an increase in PSCo's base revenues associated with the higher rates effective February 1, 1997, resulting from the 1996 rate case and an increase in gas marketing activities by non-regulated subsidiaries. Gas costs were higher during 1997, as compared to 1996, as a result of higher per-unit gas prices throughout the year. Gas sales margin increased in 1996, when compared to 1995, primarily due to higher retail gas sales resulting from customer growth of 3.4% and slightly colder weather. Gas transportation, gathering and processing revenues increased $3.8 million during 1997, when compared to 1996, primarily due to an increase in deliveries and higher transportation rates effective February 1, 1997, resulting from PSCo's 1996 rate case. In addition, the shifting of various commercial customers to firm transport customers of PSCo, some of which became retail customers of the Company's non-regulated subsidiaries, contributed to the increase in 1997 and 1996, when compared to the preceding year. PSCo and Cheyenne have in place GCA mechanisms for natural gas sales, which recognize the majority of the effects of changes in the cost of gas purchased for resale and adjust revenues to reflect such changes in cost on a timely basis. As a result, the changes in revenues associated with these mechanisms during 1997 and 1996 had little impact on net income. However, the fluctuations in gas sales impact the amount of gas the Company's gas utilities must purchase and, therefore, along with the increases and decreases in the per-unit cost of gas, affect total gas purchased for resale. Non-Fuel Operating Expenses and Other Income and Deductions Other operating and maintenance expenses increased $25.8 million during 1997, as compared to 1996, primarily due the favorable impact on 1996 earnings of the settlement agreement with the DOE resolving all spent nuclear fuel storage and disposal issues at Fort St. Vrain (approximately $16 million) and the recognition in operating and maintenance expenses of the Texas jurisdictional portion of the Thunder Basin judgment (approximately $12 million) in accordance with the PUCT order received by SPS in December 1997. The recognition of the Thunder Basin judgment did not impact earnings as the costs were included in the calculation of deferred revenue. The Company expects to recover these costs through SPS's fixed fuel factor (see Note 9. Regulatory Matters in Item 8 Financial Statements and Supplementary data). Higher operating costs from non-regulated operations were offset, in part, by lower labor and employee benefit costs and other general decreases attributable to the Merger and the Company's overall cost containment efforts. Other operating and maintenance expenses decreased $14.0 million in 1996, primarily due to the settlement with the DOE, lower labor and employee benefit costs resulting from the hiring freeze instituted in late 1995 and other general cost reductions, offset, in part by higher operating costs from certain non-regulated operations that were, for the most part, initiated during 1996. Depreciation and amortization expense increased $18.2 million in 1997 and $19.3 million in 1996 primarily due to the higher depreciation expenses from property additions and amortization of software costs. 34 Other income and deductions increased $7.3 million in 1997 and decreased $30.5 million in 1996, when compared to the preceding year. Other income and deductions was favorably impacted in 1997 by the recognition of equity earnings in Yorkshire Power ($34.9 million), of which approximately $10 million related to the change in the U.K. corporate income tax rate from 33% to 31% (see Note 2. Acquisition of Yorkshire Power and U.K. Windfall Tax in Item 8. Financial Statements and supplementary data). Other income and deductions was negatively impacted by the write-offs in June 1997 and December 1996 of certain investments in waste-to-energy cogeneration facilities and the recognition of merger and business integration costs incurred over the past two years. Additionally in 1996, the Company recognized a gain on the sale by Quixx of certain water rights (see Note 3. Acquisition and Divestiture of Investments in Item 8. Financial Statements and supplementary data). Interest charges and preferred dividends increased $31.5 million during 1997, as compared to 1996, primarily due to interest on borrowings utilized to finance capital expenditures and the April 1997 investment in Yorkshire Power. These financings included PSCo's issuance of medium-term notes and an increased level of short-term borrowings by NCE and its subsidiaries. Additionally, dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust increased due to the October 1996 issuance of $100 million of SPS Obligated Mandatorily Redeemable Preferred Securities of a Subsidiary Trust. An increase in long-term debt used to finance capital expenditures and other corporate cash requirements served to increase interest charges and preferred dividends during 1996, when compared to 1995. Commitments and Contingencies Issues relating to regulatory and environmental matters are discussed in Notes 9 and 10 in Item 8. Financial Statements and Supplementary Data. These matters and the future resolution thereof may impact the Company's future results of operations, financial position or cash flows. Based on a preliminary analysis, the Company expects to incur costs of approximately $50-65 million over the next two years to modify its computer software, hardware and other automated systems used in operations enabling proper data processing relating to the year 2000 and beyond. The majority of these costs will be incurred by or allocated to the Company's operating utilities. The costs recognized by PSCo and SPS are anticipated to be slightly less than two-thirds and one-third, respectively, of the total estimated costs. The Company continues to evaluate appropriate courses of corrective action, including the replacement of certain systems. A significant portion of these costs will represent the redeployment of existing information technology resources. If such modifications and conversions are not completed timely, the year 2000 problem may have a material impact on the operations of the Company. Management does not anticipate these activities will have a material adverse impact on the financial position, results of operations or cash flows of the Company or its subsidiaries. Common Stock Dividend During 1997, the Company and its subsidiaries declared four full quarterly dividends (two by NCE and two by PSCo and SPS prior to the Merger) and a partial dividend by PSCo and SPS covering the stub period up through the day prior to the Merger effective date. The partial dividends declared by PSCo, covering the period July 12, 1997 through July 31, 1997, and SPS, covering the period May 16, 1997 through July 31, 1997, were based on the respective quarterly dividend rate, but prorated for the number of days in the interim period. It is currently anticipated that the Company will pay dividends on its common stock of $2.32 per share annually. The Company's common stock dividend level is dependent upon the Company's results of operations, financial position, cash flows and other factors. The Board of Directors of the Company will continue to evaluate the common stock dividend on a quarterly basis. 35 Liquidity and Capital Resources Cash Flows 1997 1996 1995 ---- ---- ---- Net cash provided by operating activities (in millions) $344.4 $481.2 $558.4 Cash provided by operating activities decreased in 1997, when compared to 1996, primarily due to the SPS payment in April 1997 of the Thunder Basin judgment and an increase in payments to gas suppliers resulting from the higher gas costs in late 1996 and early 1997. A portion of these higher gas costs have been deferred through PSCo's GCA and will be recovered from customers in the future. Cash provided by operating activities decreased $77.2 million in 1996 primarily due to the undercollection of purchased gas and electric energy costs ($62.5 million) and lower cash receipts because of a PSCo gas refund that was applied directly to customers' accounts in late 1995. 1997 1996 1995 ---- ---- ---- Net cash used in investing activities (in millions) $856.4 $443.2 $407.5 Cash used in investing activities increased during 1997, when compared to 1996, primarily due to the acquisition of a 50% equity interest in Yorkshire Power for approximately $360 million and the 1996 sale by Quixx of certain water rights. Construction expenditures also increased in 1997 and 1996, when compared to the preceding year. 1997 1996 1995 ---- ---- ---- Net cash provided by (used in) financing activities (in millions) $534.6 $(16.3) $(126.0) Cash provided by financing activities increased during 1997, when compared to 1996, primarily due to NCE's issuance of common stock in December 1997 and PSCo's issuance of medium-term notes. The proceeds from the $75 million financing by PSCo in January 1997 were used to fund its construction program. The proceeds from the issuance of $250 million medium-term notes by PSCo in March 1997, together with additional borrowings of approximately $110 million on its short-term lines of credit, were used to fund the investment in Yorkshire Power. As a result of the increase in recoverable purchased gas and electric energy costs and reduced cash flows resulting from lower electric rates, coupled with increased merger and business integration costs, PSCo has utilized the proceeds from additional short-term borrowings to finance ongoing construction expenditures. With the consummation of the Merger effective August 1, 1997, management anticipates that future operating results and related cash flows will benefit from synergies resulting from the Merger. Cash used in financing activities decreased in 1996, as compared to 1995, primarily due to the issuance of additional long-term debt. Additionally, proceeds of $100 million were received in October 1996 from the issuance of SPS obligated mandatorily redeemable preferred securities of a subsidiary trust. These combined proceeds were used to fund the Company's subsidiaries' construction programs, for other general corporate purposes and to repay short-term indebtedness incurred for such purposes. 36 Prospective Capital Requirements The estimated cost as of December 31, 1997 of the construction programs of the Company and its subsidiaries and other capital requirements for the years 1998, 1999 and 2000 are shown in the table below (in millions of dollars): 1998 1999 2000 ---- ---- ---- Electric Production *........................ $ 192 $ 128 $ 71 Transmission........................ 56 107 137 Distribution........................ 130 166 138 Gas .................................... 84 73 70 General................................. 68 67 34 -- -- -- Total construction expenditures... 530 541 450 Less: AFDC.............................. 15 13 10 Add: Sinking funds and debt maturities and refinancings .................. 252 131 131 --- --- --- Total capital requirements.............. $ 767 $ 659 $ 571 ======= ====== ====== * Capital requirements for 1998 Electric Production include approximately $59 million for Fort St. Vrain repowering and approximately $58 million for emission control equipment and environmental projects. The construction programs of the Company's subsidiaries are subject to continuing review and modification. In particular, actual construction expenditures may vary from the estimates due to changes in the electric system projected load growth, the desired reserve margin and the availability of purchased power, as well as alternative plans for meeting the Company's long-term energy needs. In addition, the Company's ongoing evaluation of merger, acquisition and divestiture opportunities to support corporate strategies and future requirements to install emission control equipment may impact actual capital requirements (see Note 10. Commitments and Contingencies - Environmental Issues in Item 8. Financial Statements and Supplementary data). Capital Sources At December 31, 1997, the Company and its subsidiaries estimate that their 1998-2000 capital requirements will be met with a combination of funds from external sources and funds from operations. The Company and its subsidiaries may meet their external capital requirements through the sale of common stock by NCE, the sale of utility obligated mandatorily redeemable preferred securities, the issuance of secured and unsecured long-term debt, including first mortgage bonds of NCE subsidiaries, and the issuance of short-term debt by NCE and its subsidiaries. The financing needs are subject to continuing review and can change depending on market and business conditions and changes, if any, in the construction programs and other capital requirements of the Company and its subsidiaries. Registration Statements The Company has an effective registration statement covering the issuance of 10 million shares of common stock to be issued under the Company's Dividend Reinvestment and Cash Payment Plan. Any proceeds received by the Company will be used for general corporate purposes. This program allows for either the purchase of shares on the open market or the issuance of new shares. The Dividend Reinvestment Plan allows the Company's shareholders to purchase additional shares of the Company's common stock through the reinvestment of cash dividends and the purchase of additional shares of common stock with optional cash payments. NCE also has an effective registration statement covering the issuance of 9 million shares of Common Stock ($1 par value). On December 10, 1997, NCE sold 5.9 million shares under this registration statement. The net proceeds from this sale were approximately $251.4 million. The Company expects to issue the remaining 3.1 million shares in late 1998. 37 Subsidiary Registration Statements In 1996 and in early 1997, PSCo established a $250 million Secured Medium-Term Note Program, Series B and a $150 million Secured Medium-Term Note Program, Series C pursuant to a registration statement for the issuance of $400 million of First Collateral Trust Bonds. All securities under these Medium-Term Note Programs have been issued. SPS has an effective shelf registration statement under which $220 million of debt securities and/or preferred stock are available for issuance, a portion of which is still subject to state utility commission approval. Short-Term Borrowing Arrangements NCE has a $225 million credit facility with several banks that provides for $100 million of direct borrowings by NCE until the outstanding stock of PSCCC, a wholly-owned subsidiary of PSCo, is transferred to NCE. After the transfer NCE will have access to $225 million of direct borrowings under the credit facility. PSCo and its subsidiaries have available committed and uncommitted lines of credit to meet their short-term cash requirements. PSCo and its subsidiaries have a credit facility with several banks which provides $300 million in committed bank lines of credit and is used primarily to support the issuance of commercial paper by PSCo and PSCCC, and to provide for direct borrowings thereunder. At December 31, 1997, $13.4 million remained unused under this facility. Generally, the banks participating in the credit facility would have no obligation to continue their commitments if there has been a material adverse change in the consolidated financial condition, operations, business or otherwise that would prevent PSCo and its subsidiaries from performing their obligation under the credit facility. This facility expires on November 17, 2000. PSCo also has available a $125 million line of credit which expires on April 30, 1998. At December 31, 1997, the entire amount of the facility remained unused. In addition, PSCo has individual arrangements for uncommitted bank lines of credit which totaled $50 million, and all were used at December 31, 1997. These individual arrangements expire on December 31, 1998. PSCo may borrow under uncommitted preapproved lines of credit upon request; however, the banks have no firm commitment to make such loans. PSCo's charter allows for unsecured borrowings without the consent of the holders of preferred stock to the extent the total of such borrowings does not exceed 15% of total capitalization (as defined therein) except in the case of certain refinancings (see Note 7. Short-term Borrowing Arrangements in Item 8. Financial Statements and Supplementary Data). PSCCC may periodically issue medium-term notes (in addition to the short-term debt discussed above) to supplement the financing/purchase of PSCo's customer accounts receivable and fossil fuel inventories. As of December 31, 1997, PSCCC had issued and had outstanding $100 million in medium-term notes. The level of financing of PSCCC is tied directly to daily changes in the level of PSCo's outstanding customer accounts receivable and monthly changes in fossil fuel inventories and will vary minimally from year-to-year although seasonal fluctuations in the level of assets will cause corresponding fluctuations in the level of associated financing. Arrangements by SPS for committed lines of credit, which provide $180 million, are maintained by a combination of fee payments and compensating balances. At December 31, 1997, $171 million of such balances were maintained through a fee and $9 million required account deposits of 1 1/2% of the unused portion of the loan commitment. At December 31, 1997, $24 million remained unused under these lines of credit. Accounting Pronouncements Issued But Not Yet Effective SFAS No. 130, Reporting Comprehensive Income ("SFAS 130"), and SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information ("SFAS 131"), address disclosure issues and were issued during 1997. They are effective for fiscal years beginning after December 15, 1997. SFAS 130 requires disclosure of all changes in equity that result from transactions and other economic events of the period other than transactions with owners. SFAS 131 requires a public company to report selected information about its reportable operating segments. Operating segments are components of an enterprise for which discrete financial information is available, that is evaluated regularly by the chief operating decision-maker within a company for making operating decisions and assessing performance. The Company adopted these standards effective January 1, 1998. 38 Item 8. Financial Statements and Supplementary Data REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS The Board of Directors of the Company addresses its oversight responsibility for the consolidated financial statements through its Audit Committee. The Audit Committee meets regularly with the independent public accountants and the internal auditor to discuss results of their audit work and their evaluation of the adequacy of the internal controls and the quality of financial reporting. In fulfilling its responsibilities in 1997, the Audit Committee recommended to the Board of Directors, subject to shareholder approval, the selection of the Company's independent public accountants. The Audit Committee reviewed the overall scope and specific plans of the independent public accountants' and internal auditor's respective audit plans, and discussed the independent public accountants' management letter recommendations, approved their general audit fees, and reviewed their non-audit services to the Company. The committee meetings are designed to facilitate open communications among Company management, internal auditing, independent public accountants, and the Audit Committee. To ensure auditor independence, both the independent public accountants and internal auditor have full and free access to the Audit Committee. /s/ Danny H. Conklin Danny H. Conklin, Chairman Audit Committee February 24, 1998 39 REPORT OF MANAGEMENT The accompanying financial statements of New Century Energies, Inc. and subsidiaries have been prepared by Company personnel in conformity with generally accepted accounting principles consistent with the Uniform System of Accounts of the Federal Energy Regulatory Commission. The integrity and objectivity of the data in these financial statements are the responsibility of management. Financial information contained elsewhere in this Annual Report on Form 10-K is consistent with that in the financial statements. The accompanying financial statements have been audited by independent public accountants. Management has made available to its independent public accountants all the Company's and its subsidiaries' financial records and related data and has provided to them representations we believe to be valid and appropriate. The Company maintains a system of internal control over financial reporting, including the safeguarding of assets against unauthorized acquisition, use or disposition, which is designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation of reliable published financial statements and such asset safeguarding. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a code of conduct to foster a strong ethical climate, which are communicated throughout the Company, and the careful selection, training and development of our people. Internal auditors monitor the operation of the internal control system and report findings and recommendations to management and the Audit Committee of the Board of Directors, and corrective actions are taken to address control deficiencies and other opportunities for improving the system as they are identified. The board, operating through its Audit Committee, which is composed entirely of directors who are not officers or employees of the Company, provides oversight to the financial reporting process. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control system effectiveness may vary over time. The Company assessed its internal control system as of December 31, 1997 in relation to criteria for effective internal control over financial reporting described in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of its assessment, the Company believes that, as of December 31, 1997, the Company's system of internal control over external financial reporting, including the safeguarding of assets against unauthorized acquisition, use or disposition, met those criteria. /s/ Teresa S. Madden /s/ Bill D. Helton Teresa S. Madden Bill D. Helton Principal Accounting Officer Chief Executive Officer February 13, 1998 40 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO NEW CENTURY ENERGIES, INC.: We have audited the consolidated balance sheets of New Century Energies, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the consolidated financial statements of Southwestern Public Service Company for the years ended December 31, 1996 and August 31, 1995, included in the consolidated financial statements of New Century Energies, Inc., which statements reflect total assets constituting 31% in 1996 and total revenues constituting 31% and 30% in 1996 and 1995, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Southwestern Public Service Company, is based solely upon the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based upon our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of New Century Energies, Inc. and its subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Denver, Colorado February 13, 1998 41 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) December 31, 1997 and 1996 ASSETS 1997 1996 ---- ---- Property, plant and equipment, at cost: Electric .......................................... $6,703,863 $6,448,993 Gas................................................ 1,136,231 1,035,394 Steam and other.................................... 120,322 115,766 Common to all departments.......................... 437,636 418,262 Construction in progress........................... 318,124 260,943 ------- ------- 8,716,176 8,279,358 Less: accumulated depreciation .................... 3,182,800 2,990,275 --------- --------- Total property, plant and equipment.............. 5,533,376 5,289,083 --------- --------- Investments, at cost: Investment in Yorkshire Power and other unconsolidated subsidiaries (Note 2) ............ 295,316 29,672 Other.............................................. 71,411 51,324 ------ ------ Total investments................................. 366,727 80,996 ------- ------ Current assets: Cash and temporary cash investments................ 72,623 50,015 Accounts receivable, less reserve for uncollectible accounts ($5,355 at December 31, 1997; $6,623 at December 31, 1996) . ............................ 315,539 285,912 Accrued unbilled revenues.......................... 110,877 106,198 Recoverable purchased gas and electric energy costs - net .......................................... 129,292 47,003 Materials and supplies, at average cost............ 68,411 66,748 Fuel inventory, at average cost.................... 23,162 27,059 Gas in underground storage, at cost (LIFO)......... 47,394 42,826 Prepaid expenses and other......................... 56,868 46,773 ------ ------ Total current assets.............................. 824,166 672,534 ------- ------- Deferred charges: Regulatory assets (Note 1)......................... 430,475 466,111 Unamortized debt expense .......................... 20,833 20,839 Other.............................................. 134,704 87,879 ------- ------ Total deferred charges............................ 586,012 574,829 ------- ------- $7,310,281 $6,617,442 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these financial statements. 42 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) December 31, 1997 and 1996 CAPITAL AND LIABILITIES 1997 1996 ---- ---- Common stock (Note 4)................................. $1,694,195 $1,396,849 Retained earnings..................................... 659,050 773,191 ------- ------- Total common equity............................... 2,353,245 2,170,040 Preferred stock of subsidiaries (Note 4): Not subject to mandatory redemption................ 140,002 140,008 Subject to mandatory redemption at par............. 39,253 39,913 SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS (Note 5) ........... 100,000 100,000 Long-term debt of subsidiaries (Note 6)............... 1,987,955 1,879,928 - --------- --------- 4,620,455 4,329,889 --------- --------- Noncurrent liabilities: Employees' postretirement benefits other than pensions (Note 12) ................................ 62,716 58,551 Employees' postemployment benefits (Note 12)....... 27,953 27,551 ------ ------ Total noncurrent liabilities...................... 90,669 86,102 ------ ------ Current liabilities: Notes payable and commercial paper (Note 7)........ 588,343 298,561 Long-term debt due within one year................. 257,469 170,261 Preferred stock subject to mandatory redemption within one year ................................... 2,576 2,576 Accounts payable................................... 298,469 317,260 Dividends payable.................................. 68,296 36,973 Customers' deposits................................ 27,993 27,283 Accrued taxes...................................... 66,587 78,989 Accrued interest................................... 52,615 46,948 Current portion of accumulated deferred income taxes (Note 13) ....................................... 27,391 8,143 Other.............................................. 87,380 106,464 ------ ------- Total current liabilities......................... 1,477,119 1,093,458 --------- --------- Deferred credits: Customers' advances for construction............... 53,041 50,635 Unamortized investment tax credits ................ 106,147 111,647 Accumulated deferred income taxes (Note 13)........ 922,341 906,354 Other.............................................. 40,509 39,357 ------ ------ Total deferred credits............................ 1,122,038 1,107,993 --------- --------- Commitments and contingencies (Notes 9 and 10)........ --------- ---------- $7,310,281 $6,617,442 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these financial statements. 43 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands of Dollars, Except per Share Data) Years ended December 31, 1997, 1996 and 1995 (Note 1) 1997 1996 1995 Operating revenues: Electric................................... $2,473,359 $2,416,539 $2,283,179 Gas........................................ 816,596 640,497 624,585 Other...................................... 52,570 39,998 54,444 ------ ------ ------ 3,342,525 3,097,034 2,962,208 Operating expenses: Fuel used in generation.................... 671,805 635,280 552,047 Purchased power............................ 531,487 510,582 487,199 Cost of gas sold........................... 543,291 393,163 392,680 Other operating and maintenance expenses... 594,359 568,581 582,608 Depreciation and amortization.............. 243,078 224,865 205,584 Taxes (other than income taxes) ........... 129,280 128,980 125,146 ------- ------- ------- 2,713,300 2,461,451 2,345,264 --------- --------- --------- Operating income............................. 629,225 635,583 616,944 Other income and deductions: Merger expenses............................ (34,088) (21,107) (4,827) Write-off of investments in cogeneration projects (Note 3) ....................... (16,052) (15,546) - Equity in earnings of Yorkshire Power and other unconsolidated subsidiaries (Note 2) 34,166 389 (47) Miscellaneous income and deductions - net.. (11,215) 1,771 930 ------- ----- --- (27,189) (34,493) (3,944) Interest charges and preferred dividends of subsidiaries: Interest on long-term debt................. 165,560 144,067 132,331 Other interest............................. 32,389 23,479 25,107 Allowance for borrowed funds used during construction ............................ (10,921) (5,945) (5,776) Dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS .......... 7,850 1,526 - Dividend requirements on preferred stock of subsidiaries ............................ 11,752 11,969 16,841 ------ ------ ------ 206,630 175,096 168,503 ------- ------- ------- Income before income taxes and extraordinary item ....................................... 395,406 425,994 444,497 Income taxes (Note 13)........................ 133,919 153,653 163,005 ------- ------- ------- Income before extraordinary item.............. 261,487 272,341 281,492 Extraordinary item -U.K. windfall tax (Note 2) (110,565) - - -------- --- ---- Net income.................................... $150,922 $272,341 $281,492 ======== ======== ======== Weighted average common shares outstanding.... 104,805 103,059 101,804 Basic and diluted earnings per share of common stock outstanding: Income before extraordinary item........... $ 2.50 $ 2.64 $ 2.77 Extraordinary item......................... (1.06) - - ----- --- --- Net income................................. $ 1.44 $ 2.64 $ 2.77 ======= ======= ======= The accompanying notes to consolidated financial statements are an integral part of these financial statements. 44
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Thousands of Dollars, Except Share Information) Years ended December 31, 1997, 1996 and 1995 (Note 1) Common Stock, $1 par value Paid in Retained Shares Amount Capital Earnings Total ------ ------ ---------- -------- ----- Balance at January 1, 1995.. 101,026,607 $ 101,027 $1,205,535 $ 657,092 $1,963,654 Net income.................. - - - 281,492 281,492 Dividends declared on common stock .................... - - - (218,606) (218,606) Issuance of common stock Employees' Savings Plan... 310,546 310 9,395 - 9,705 Dividend Reinvestment Plan 889,331 889 27,133 - 28,022 Management Incentive Plans 3,657 4 107 - 111 Other....................... - - - 19 19 SPS transitional period to calendar year-end (Note 1) Net income................ - - - 28,573 28,573 Dividends declared on common stock .................... - - - (22,505) (22,505) Other..................... - - 1,108 - 1,108 --- --- ----- --- ----- Balance at December 31, 1995 102,230,141 102,230 1,243,278 726,065 2,071,573 Net income.................. - - - 272,341 272,341 Dividends declared on common stock ..................... - - - (225,130) (225,130) Issuance of common stock Employees' Savings Plan... 274,934 275 9,519 - 9,794 Dividend Reinvestment Plan 809,603 810 27,818 - 28,628 Management Incentive Plans 58,346 58 1,661 - 1,719 Acquisitions (Note 3)..... 317,748 318 10,882 - 11,200 Other....................... - - - (85) (85) --- --- ---- --- --- Balance at December 31, 1996 103,690,772 103,691 1,293,158 773,191 2,170,040 Net income.................. - - - 150,922 150,922 Dividends declared on common stock .................... - - - (264,957) (264,957) Issuance of common stock Employees' Savings Plan... 250,058 250 9,518 - 9,768 Dividend Reinvestment Plan 818,783 819 32,512 - 33,331 Management Incentive Plans 89,688 89 2,765 - 2,854 Stock offering proceeds, net (Note 4) ............ 5,900,000 5,900 245,493 - 251,393 Other....................... - - - (106) (106) --- --- --- ---- ---- Balance at December 31, 1997 110,749,301 $ 110,749 $1,583,446 $ 659,050 $2,353,245 =========== ========= ========== ========= ========== Authorized shares of common stock were 260 million at December 31, 1997, 1996 and 1995.
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 45 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands of Dollars) Years ended December 31, 1997, 1996 and 1995 (Note 1) 1997 1996 1995 ---- ---- ---- Operating activities: Net income................................... $150,922 $272,341 $281,492 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary item - U.K. windfall tax (Note 2) ................................. 110,565 - - Depreciation and amortization.............. 253,263 225,264 206,439 Amortization of investment tax credits..... (5,501) (7,506) (5,598) Deferred income taxes...................... 52,211 78,962 48,887 Write-off of investments in cogeneration projects (Note 3) ........................ 16,052 15,546 - Equity in earnings of Yorkshire Power and other unconsolidated subsidiaries, net.... (31,168) (389) 47 Allowance for equity funds used during construction ............................. 1 (936) (4,011) Change in accounts receivable.............. (29,627) (92,600) 34,829 Change in inventories...................... (2,334) 23,479 837 Change in other current assets............. (97,063) (47,226) 2,475 Change in accounts payable................. (18,791) 141,771 (21,756) Change in other current liabilities........ (15,356) (85,321) 33,628 Change in deferred amounts................. (46,134) (34,617) (20,385) Change in noncurrent liabilities........... 4,567 (9,725) (5,367) Other...................................... 2,832 2,139 6,858 ----- ----- ----- Net cash provided by operating activities 344,439 481,182 558,375 Investing activities: Construction expenditures.................... (475,497) (454,968)(380,407) Allowance for equity funds used during construction .............................. (1) 936 4,011 Proceeds from disposition of property, plant and equipment ............................. 2,117 24,292 2,470 Payment for purchase of companies, net of cash acquired (Note 3) ......................... - 3,649 - Investment in Yorkshire Power (Note 2)....... (362,342) - - Purchase of other investments................ (32,560) (17,790) (38,468) Sale of other investments.................... 11,844 664 4,898 ------ --- ----- Net cash used in investing activities.... (856,439) (443,217)(407,496) Financing activities: Proceeds from sale of common stock (Note 4).. 286,869 30,115 28,030 Proceeds from sale of long-term notes and bonds (Note 6) ............................ 419,819 359,715 178,064 Proceeds from sale of SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS - 100,000 - Redemption of long-term notes and bonds...... (227,577) (175,298) (61,593) Short-term borrowings - net.................. 289,782 (105,739) (51,744) Retirement of preferred stock of subsidiaries (665) (1,636) (1,376) Dividends on common stock.................... (233,620) (223,413)(217,372) -------- -------- -------- Net cash provided by (used in) financing activities ............................. 534,608 (16,256)(125,991) ------- ------- -------- Net increase in cash and temporary cash investments ............................ 22,608 21,709 24,888 Cash and temporary cash investments at beginning of year ...................... 50,015 51,553 26,665 Net decrease in cash and temporary cash investments for SPS for the transition period (Note 1)......................... - (23,247) - --- ------- --- Cash and temporary cash investments at end of year ............................ $ 72,623 $ 50,015 $ 51,553 ======== ======== ======== The accompanying notes to consolidated financial statements are an integral part of these financial statements. 46 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (PSCo) Discussion related to PSCo's Commitments and Contingencies is covered within NCE's Management's Discussion and Analysis of Financial Condition and Results of Operations. See Forward Looking Information. Merger Effective August 1, 1997, following receipt of all required state and Federal regulatory approvals, PSCo and SPS merged in a tax-free "merger of equals" transaction and became wholly-owned subsidiaries of NCE, which is a registered holding company under PUHCA. This transaction was accounted for as a pooling of interests for accounting purposes. Effective with the Merger, Cheyenne, WGI, e prime and Natural Fuels were transferred by a declaration of a dividend of the subsidiaries' stock, at net book value, aggregating approximately $49.9 million, to NCE. NCE subsequently made a capital contribution of the e prime and Natural Fuels common stock, at net book value, aggregating approximately $29.5 million, to NC Enterprises. See Note 1. Summary of Significant Accounting Policies in Item 8. Financial Statements and supplementary data for additional discussion regarding PSCo, the Merger and the transfer of Cheyenne, WGI, e prime and Natural Fuels. The consolidated statements of income and cash flows reflect the results of operations of Cheyenne, WGI, e prime and Natural Fuels through July 31, 1997. Where relevant, additional information has been presented to discuss the impact of the transfer of these subsidiaries. Earnings Available for Common Stock Earnings were $81.7 million, $178.5 million and $166.9 million during 1997, 1996 and 1995, respectively. The significant decrease in 1997 was primarily attributable to the recognition of an extraordinary item related to the one-time U.K. windfall tax of approximately $110.6 million for its 50% ownership in Yorkshire Power. Income before the extraordinary item increased $13.7 million as a result of continued customer growth contributing to increased electric and gas sales, lower operating and maintenance expenses resulting from the Merger and cost containment efforts, as well as the equity earnings in ongoing operations at Yorkshire Power. Earnings in 1996 were favorably impacted by the effects of the February 9, 1996 settlement agreement with the DOE resolving all spent nuclear fuel storage and disposal issues at Fort St. Vrain (see Note 10. Commitments and Contingencies - Fort St. Vrain in Item 8. Financial Statements and Supplementary Data), increased electric and gas sales and lower operating and maintenance expenses resulting from PSCo's cost containment efforts. Electric Operations The following table details the annual change in electric operating revenues and energy costs as compared to the preceding year (in thousands of dollars). Increase (Decrease) From Prior Year 1997 1996 ---- ---- Cheyenne PSCo & e prime Total ---- --------- ----- Electric operating revenues: Retail........................... $(15,167) $(16,305) $(31,472) $ 43,478 Wholesale - regulated............ 25,083 - 25,083 5,964 Non-regulated power marketing.... - 2,642 2,642 7,806 Other (including unbilled revenues) (25) (22) (47) (17,354) --- --- --- ------- Total revenues.................. 9,891 (13,685) (3,794) 39,894 Fuel used in generation........... 3,264 - 3,264 13,447 Purchased power................... 13,340 (9,866) 3,474 8,470 ------ ------ ----- ----- Net increase (decrease)in electric margin ....................... $(6,713) $ (3,819) $(10,532) $ 17,977 ======= ======== ======== ======== 47 The following table compares electric Kwh sales by major customer classes. Millions of Kwh Sales % Change From Prior Year * --------------------- -------------------------- 1997 1996 ---- ---- 1997 1996 Consolidated PSCo Only ---- ---- ------------ --------- Residential .............. 6,663 6,607 0.8% 2.1% 5.2% Commercial and Industrial 15,621 15,672 (0.3) 1.3 4.3 Public Authority ......... 189 200 (5.5) (4.6) 6.2 --- --- Total Retail............ 22,473 22,479 - 1.5 4.5 Wholesale - Regulated..... 4,491 3,361 33.6 33.6 14.8 Non-regulated Power Marketing ............... 660 419 57.7 - - --- --- Total..................... 27,624 26,259 5.2 5.8 7.5 ====== ====== * Percentages are calculated using unrounded amounts Electric margin decreased in 1997, when compared to 1996, primarily due to the retail rate reductions (approximately $15.4 million) implemented in October 1996 and February 1997 and the recognition of an estimated customer refund obligation (approximately $16.4 million) in connection with the earnings sharing in excess of 11% return on equity, which resulted from the settlement of the Merger proceedings in Colorado (see Note 9. Regulatory Matters in Item 8. Financial Statements and Supplementary Data). Electric margin, however, was favorably impacted by an overall increase in PSCo's retail sales of 1.5% resulting primarily from customer growth of 1.8%. Higher wholesale electric sales also contributed to increased operating revenues, however, the margin on such sales is minimal. Electric operating revenues increased in 1996, when compared to 1995, primarily due to an overall 4.5% increase in retail sales resulting primarily from customer growth of 2.3%. Higher economy sales by PSCo and power marketing activities of non-regulated subsidiaries contributed to the increase in wholesale revenues but had little impact on electric margin. PSCo has cost adjustment mechanisms which recognize the majority of the effects of changes in fuel used in generation and purchased power costs and allow recovery of such costs on a timely basis. In its decision on the Merger, the CPUC replaced PSCo's ECA with an ICA, effective October 1, 1996, which allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders. For 1997, the ICA did not significantly impact electric margin (see Note 9. Regulatory Matters in Item 8. Financial Statements and Supplementary Data). Fuel used in generation expense increased slightly during 1997, as compared to 1996, due to increased generation levels at PSCo's power plants offset, in part, by lower coal supply costs. Fuel used in generation expense increased $13.4 million during 1996, as compared to the prior year, primarily due to higher generation levels. Purchased power expense increased slightly during 1997 and 1996, when compared to the respective preceding year, primarily due to purchases to meet increased wholesale requirements, other customer demands and non-regulated power marketing sales commitments. The increase in 1997 was, offset, in part, by the recognition of only seven months of Cheyenne and e prime costs in 1997. 48 Gas Operations The following table details the annual change in revenues from gas sales and gas purchased for resale as compared to the preceding year (in thousands of dollars). Increase (Decrease) From Prior Year ----------------------------------- 1997 1996 ---- ---- Cheyenne Natural Fuels WGI & PSCo e prime Total ---- ------- ----- Revenues from gas sales (including unbilled revenues) ........ $62,504 $26,538 $89,042 $11,211 Gas purchased for resale............... 44,500 30,082 74,582 483 ------ ------ ------ --- Net increase (decrease) in gas sales margin ............................. $18,004 $(3,544) $14,460 $10,728 ======= ======= ======= ======= The following table compares gas dekatherm (Dth) deliveries by major customer classes. Millions of % Change From Prior Year* ------------------------- Dth Deliveries 1997 1996 -------------- ---- ---- 1997 1996 Consolidated PSCo Only ---- ---- ---------------------- Residential................... 86.6 86.1 0.6% 1.5% 4.8% Commercial.................... 46.9 51.7 (9.3) (7.1) 1.7 Non-regulated gas marketing... 35.2 21.8 61.2 - ** ---- ---- Total sales................. 168.7 159.6 5.7 (1.7) 19.8 Transportation, gathering and processing ................. 86.9 91.4 (5.0) 3.1 18.6 ---- ---- Total....................... 255.6 251.0 1.8 - 19.4 ===== ===== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful Gas sales margin increased in 1997, when compared to 1996, primarily due to an increase in PSCo's base revenues associated with the higher rates effective February 1, 1997, resulting from the 1996 rate case. Gas marketing activities by non-regulated subsidiaries favorably contributed to the increase in gas sales margin. Gas sales margin increased during 1996, as compared to the prior year, primarily due to higher retail gas sales resulting from customer growth of 3.4% and slightly colder weather. Increased gas marketing activities by non-regulated subsidiaries also favorably impacted gas sales margin. Gas transportation, gathering and processing revenues increased $3.6 million during 1997, when compared to 1996, primarily due to an increase in transport deliveries and higher transportation rates effective February 1, 1997, resulting from the Company's 1996 rate case. Transportation, gathering and processing revenues increased $4.7 million in 1996 primarily due to an increase in transport deliveries resulting from the shifting of various commercial customers to firm transport customers which accelerated in October 1995 with the implementation of the new gas rates. PSCo has in place a GCA mechanism for natural gas sales, which recognizes the majority of the effects of changes in the cost of gas purchased for resale and adjusts revenues to reflect such changes in cost on a timely basis. As a result, the changes in revenues associated with these mechanisms in 1997 and 1996, when compared to the respective preceding year, had little impact on net income. However, the fluctuations in gas sales impact the amount of gas PSCo must purchase and, therefore, along with the increases and decreases in the per-unit cost of gas, affect total gas purchased for resale. The higher per-unit average cost of gas throughout 1997, along with an increase in the quantity of gas purchased, contributed to the increase in cost of gas purchased for resale. In 1996, the increase in the quantity of gas purchased was offset substantially by the lower per-unit average cost of gas for the year. 49 Non-Fuel Operating Expenses and Other Income and Deductions Other operating and maintenance expenses decreased $8.8 million during 1997 as compared to 1996, primarily due to lower labor and employee benefit costs, the recognition in 1997 of only seven months of costs from the subsidiaries that were transferred to NCE effective with the Merger and other general reductions resulting from the Merger and cost containment efforts. These decreases were offset, in part, by the favorable impact of the February 9, 1996 settlement agreement with the DOE resolving all spent nuclear fuel storage and disposal issues at Fort St. Vrain (See Note 10. Commitments and Contingencies - Fort St. Vrain in Item 8. Financial Statements and Supplementary Data). In addition to the settlement, other operating and maintenance expenses for 1996 were favorably impacted by lower labor and employee benefit costs resulting from the hiring freeze instituted in August 1995 and other general cost reductions offset, in part, by higher operating costs from non-regulated operations that were, for the most part, initiated during 1996. Depreciation and amortization expense increased $13.8 million in 1997 and $13.3 million in 1996 primarily due to the depreciation of property additions and the higher amortization of software costs. Income taxes decreased $5.5 million in 1997, as compared to 1996, primarily due to lower pre-tax income. Additional income tax expense was recognized in 1997 due to higher non-deductible merger and executive severance costs. The increase in income taxes in 1996, as compared to 1995, was primarily due to higher pre-tax income, offset, in part, by the write-off of additional investment tax credits for retired property and additional tax benefits at PSRI. Other income and deductions increased $27.4 million during 1997, when compared to 1996, primarily due to the recognition of equity earnings in Yorkshire Power ($34.9 million), of which approximately $10 million is related to the change in the U.K. corporate income tax rate from 33% to 31%. See Note 2. Acquisition of Yorkshire Electricity and U.K. Windfall Tax in Item 8. Financial Statements and Supplementary Data. Merger and business integration costs increased in 1997 and 1996 $7.5 million and $7.1 million, respectively, when compared to the preceding year. The 1997 amount included executive severance costs and other costs which resulted from the closing of the Merger effective August 1, 1997. While costs associated with the Merger, transition planning and implementation have negatively impacted earnings during 1997 and 1996, management anticipates that future operating results will benefit from synergies resulting from the Merger. Interest charges increased $26.5 million during 1997, when compared to 1996, primarily due to interest on borrowings utilized to finance capital expenditures and the April 1997 investment in Yorkshire Power. These financings included the issuance of medium-term notes and an increased level of short-term borrowings. Liquidity and Capital Resources Cash Flows 1997 1996 1995 ---- ---- ---- Net cash provided by operating activities (in millions) ........................... $263.9 $327.6 $385.7 Cash provided by operating activities decreased in 1997, when compared to 1996, primarily due to the increase in payments to gas suppliers resulting from the higher gas costs in late 1996 and early 1997. A portion of these higher gas costs have been deferred through the GCA and will be recovered from customers in the future. Cash provided by operating activities decreased $58.1 million in 1996 primarily due to the undercollection of purchased gas and electric energy costs ($40.8 million) and lower cash receipts because of a gas refund that was applied directly to customers' accounts in late 1995. 1997 1996 1995 ---- ---- ---- Net cash used in investing activities (in millions) ........................... $721.7 $307.1 $284.6 Cash used in investing activities increased during 1997, when compared to 1996, primarily due to the acquisition of a 50% equity interest in Yorkshire Power for approximately $360 million. Construction 50 expenditures also increased in 1997 and 1996, when compared to the preceding year. Proceeds from the sale of certain Fuelco properties in 1996 reduced the net cash used in investing activities. 1997 1996 1995 ---- ---- ---- Net cash provided by (used in) financing activities (in millions) $467.3 $(25.8) $(92.3) Cash provided by financing activities increased during 1997, when compared to 1996, primarily due to PSCo's issuance of medium term notes and capital contributions by NCE. The proceeds from the $75 million financing in January 1997 were used to fund its construction program. The proceeds from the issuance of $250 million medium term notes in March 1997, together with additional borrowings of approximately $110 million on its short-term lines of credit, were used to fund the acquisition of Yorkshire Power. As a result of the increase in recoverable purchased gas and electric energy costs and reduced cash flows resulting from lower electric rates, coupled with increased merger and business integration costs, PSCo has utilized the proceeds from additional short-term borrowings to finance ongoing construction expenditures. With the consummation of the Merger effective August 1, 1997, management anticipates that future operating results and related cash flows will benefit from synergies resulting from the Merger. Cash used in financing activities decreased in 1996, as compared to 1995, primarily due to the issuance of additional long-term debt. These combined proceeds were used to fund PSCo's construction program, for other general corporate purposes and to repay short-term indebtedness incurred for such purposes. Prospective Capital Requirements The estimated cost as of December 31, 1997 of the construction programs of PSCo and its subsidiaries and other capital requirements for the years 1998, 1999 and 2000 are shown in the table below (in millions of dollars): 1998 1999 2000 ---- ---- ---- Electric Production *........................ $ 162 $ 107 $ 61 Transmission........................ 26 23 20 Distribution........................ 96 125 100 Gas .................................... 80 70 67 General................................. 60 60 29 -- -- -- Total construction expenditures... 424 385 277 Less: AFDC.............................. 12 11 7 Add: Sinking funds and debt maturities and refinancings .................. 252 41 131 --- -- --- Total capital requirements.............. $ 664 $ 415 $ 401 ======= ====== ====== * Capital requirements for 1998 Electric Production include approximately $59 million for Fort St. Vrain repowering and approximately $52 million for emission control equipment and environmental projects. The construction programs of PSCo and its subsidiaries are subject to continuing review and modification. In particular, actual construction expenditures may vary from the estimates due to changes in the electric system projected load growth, the desired reserve margin and the availability of purchased power, as well as alternative plans for meeting PSCo's long-term energy needs. In addition, PSCo's ongoing evaluation of merger, acquisition and divestiture opportunities to support corporate strategies and future requirements to install emission control equipment may impact actual capital requirements (see Note 10. Commitments and Contingencies - Environmental Issues in Item 8. Financial Statements and Supplementary Data). 51 Capital Sources At December 31, 1997, PSCo and its subsidiaries estimate that their 1998-2000 capital requirements will be met with a combination of funds from external sources and funds from operations. PSCo and its subsidiaries may meet their external capital requirements through the sale of utility obligated mandatorily redeemable preferred securities, the issuance of secured or unsecured long-term debt, including first collateral trust bonds, and the issuance of short-term debt by PSCo and its subsidiaries. The financing needs are subject to continuing review and can change depending on market and business conditions and changes, if any, in the construction programs and other capital requirements of PSCo and its subsidiaries. Registration Statements In 1996 and in early 1997, PSCo established a $250 million Secured Medium-Term Note Program, Series B, and a $150 million Secured Medium-Term Note Program, Series C, pursuant to a registration statement for the issuance of $400 million of First Collateral Trust Bonds. All securities under these Medium-Term Note Programs have been issued. Indentures PSCo's Indenture dated as of December 1, 1939 (the "1939 Indenture"), which is a mortgage on its electric and gas properties, permits the issuance of additional first mortgage bonds to the extent of 60% of the value of net additions to PSCo's utility property, provided net earnings before depreciation, taxes on income and interest expense for a recent twelve month period are at least 2.5 times the annual interest requirements on all bonds to be outstanding. The 1939 Indenture also permits the issuance of additional bonds on the basis of retired first mortgage bonds, in some cases with no requirement to satisfy such net earnings test. At December 31, 1997, the amount of net additions would permit (and the net earnings test would not prohibit) the issuance of approximately $455 million of new bonds at an assumed annual interest rate of 6.70%. At December 31, 1997, the amount of retired bonds would permit the issuance of $669.5 million of new bonds. PSCo's Indenture dated as of October 1, 1993 (the "1993 Indenture") is a second mortgage on its electric properties. Generally, so long as PSCo's 1939 Indenture remains in effect, first collateral trust bonds will be issued under the 1993 Indenture on the basis of the deposit with the trustee of an equal principal amount of first mortgage bonds issued under the 1939 Indenture. If the bonds issued under the 1939 Indenture are to be issued on the basis of property additions, first collateral trust bonds may be issued under the 1993 Indenture only if net earnings before depreciation, taxes on income, interest expenses and non-recurring charges for a recent twelve-month period are at least 2 times annual interest requirements on all first mortgage bonds (other than bonds held by the trustee under the 1993 Indenture) and all first collateral trust bonds to be outstanding. As of December 31, 1997, coverage under the net earnings test was 4.9 times such annual interest requirements. Restated Articles of Incorporation PSCo's Restated Articles of Incorporation prohibit the issuance of additional preferred stock without preferred shareholder approval, unless the gross income available for the payment of interest charges for a recent twelve month period is at least 1.5 times the total of: 1) the annual interest requirements on all indebtedness to be outstanding for more than one year; and 2) the annual dividend requirements on all preferred stock to be outstanding. At December 31, 1997, gross income available under this requirement would permit PSCo, if allowed under provisions of its Restated Articles of Incorporation, to issue approximately $2.6 billion of additional preferred stock at an assumed annual dividend rate of 6.00%. Coverage of gross income to interest charges was 5.38 at December 31, 1997. PSCo's Restated Articles of Incorporation also prohibit, without preferred shareholder approval, the issuance or assumption of unsecured indebtedness, other than for refunding purposes, greater than 15% of the aggregate of: 1) the total principal amount of all bonds or other securities representing secured indebtedness of PSCo, then outstanding; and 2) the total of the capital and surplus of PSCo, as then recorded on its books. At 52 December 31, 1997, PSCo had outstanding unsecured indebtedness, including subsidiary indebtedness with the credit support of PSCo, in the amount of $261.6 million. The maximum amount permitted under this limitation was approximately $483.6 million at December 31, 1997. Short-Term Borrowing Arrangements PSCo and its subsidiaries have available committed and uncommitted lines of credit to meet their short-term cash requirements. PSCo and its subsidiaries have a credit facility with several banks which provides $300 million in committed bank lines of credit and is used primarily to support the issuance of commercial paper by PSCo and PSCCC, and to provide for direct borrowings thereunder. At December 31, 1997, $13.4 million remained unused under this facility. Generally, the banks participating in the credit facility would have no obligation to continue their commitments if there has been a material adverse change in the consolidated financial condition, operations, business or otherwise that would prevent PSCo and its subsidiaries from performing their obligation under the credit facility. This facility expires on November 17, 2000. PSCo also has available a $125 million line of credit which expires on April 30, 1998. At December 31, 1997, the entire amount of the facility remained unused. In addition, PSCo has individual arrangements for uncommitted bank lines of credit which totaled $50 million, and all were used at December 31, 1997. These individual arrangements expire on December 31, 1998. PSCo may borrow under uncommitted preapproved lines of credit upon request; however, the banks have no firm commitment to make such loans. PSCo's charter allows for short-term borrowings to the extent the total of such borrowings does not exceed 15% of total capitalization. (see Note 7. Short-term Borrowing Arrangements in Item 8. Financial Statements and Supplementary Data). PSCCC may periodically issue medium-term notes (in addition to the short-term debt discussed above) to supplement the financing/purchase of PSCo's customer accounts receivable and fossil fuel inventories. As of December 31, 1997, PSCCC had issued and had outstanding $100 million in medium-term notes. The level of financing of PSCCC is tied directly to daily changes in the level of PSCo's outstanding customer accounts receivable and monthly changes in fossil fuel inventories and will vary minimally from year to year although seasonal fluctuations in the level of assets will cause corresponding fluctuations in the level of associated financing. 53 Item 8. Financial Statements and Supplementary Data (PSCo) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO PUBLIC SERVICE COMPANY OF COLORADO: We have audited the accompanying consolidated balance sheets and statements of capitalization of Public Service Company of Colorado (a Colorado corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Public Service Company of Colorado and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Denver, Colorado February 13, 1998 54 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) December 31, 1997 and 1996 ASSETS 1997 1996 ---- ---- Property, plant and equipment, at cost: Electric .......................................... $4,088,447 $3,931,413 Gas................................................ 1,100,003 1,035,394 Steam and other.................................... 78,740 78,225 Common to all departments.......................... 432,840 418,262 Construction in progress........................... 170,503 181,597 ------- ------- 5,870,533 5,644,891 Less: accumulated depreciation .................... 2,145,673 2,045,996 --------- --------- Total property, plant and equipment.............. 3,724,860 3,598,895 --------- --------- Investments, at cost: Investment in Yorkshire Power (Note 2)............. 286,703 - Other.............................................. 43,311 46,550 ------ ------ Total investments................................. 330,014 46,550 ------- ------ Current assets: Cash and temporary cash investments................ 18,909 9,406 Accounts receivable, less reserve for uncollectible accounts ($2,272 at December 31, 1997; $4,049 at December 31, 1996) ............................... 183,063 218,132 Accrued unbilled revenues ......................... 94,284 85,894 Recoverable purchased gas and electric energy costs - net ........................................... 103,197 31,288 Materials and supplies, at average cost............ 48,030 48,972 Fuel inventory, at average cost.................... 20,862 24,739 Gas in underground storage, at cost (LIFO)......... 46,576 42,826 Prepaid expenses and other......................... 47,686 41,790 ------ ------ Total current assets.............................. 562,607 503,047 ------- ------- Deferred charges: Regulatory assets (Note 1)......................... 310,658 348,566 Unamortized debt expense .......................... 10,800 10,975 Other.............................................. 55,794 64,615 ------ ------ Total deferred charges............................ 377,252 424,156 ------- ------- $4,994,733 $4,572,648 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these financial statements. 55 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) December 31, 1997 and 1996 CAPITAL AND LIABILITIES 1997 1996 ---- ---- Common stock (Notes 1 and 4).......................... $1,302,119 $1,048,447 Retained earnings..................................... 319,280 389,841 ------- ------- Total common equity............................... 1,621,399 1,438,288 Preferred stock (Note 4): Not subject to mandatory redemption................ 140,002 140,008 Subject to mandatory redemption at par............. 39,253 39,913 Long-term debt (Note 6)............................... 1,338,138 1,259,528 --------- --------- 3,138,792 2,877,737 --------- --------- Noncurrent liabilities: Employees' postretirement benefits other than pensions (Note 12) ............................... 58,695 55,677 Employees' postemployment benefits (Note 12)....... 25,031 25,182 ------ ------ Total noncurrent liabilities...................... 83,726 80,859 ------ ------ Current liabilities: Notes payable and commercial paper (Note 7)........ 348,555 244,725 Long-term debt due within one year................. 257,160 155,030 Preferred stock subject to mandatory redemption within one year ................................. 2,576 2,576 Accounts payable................................... 189,998 254,256 Dividends payable.................................. 40,975 36,973 Customers' deposits................................ 21,888 21,441 Accrued taxes...................................... 42,549 58,990 Accrued interest................................... 39,177 33,797 Current portion of accumulated deferred income taxes (Note 13) ....................................... 19,872 4,560 Other.............................................. 88,655 77,868 ------ ------ Total current liabilities......................... 1,051,405 890,216 --------- ------- Deferred credits: Customers' advances for construction............... 51,830 50,269 Unamortized investment tax credits ................ 99,355 105,928 Accumulated deferred income taxes (Note 13)........ 534,246 539,082 Other.............................................. 35,379 28,557 ------ ------ Total deferred credits............................ 720,810 723,836 ------- ------- Commitments and contingencies (Notes 9 and 10)........ ---------- ---------- $4,994,733 $4,572,648 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these financial statements. 56 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPTALIZATION (Thousands of Dollars, Except Share Information) December 31, 1997 and 1996 1997 1996 ---- ---- Common shareholder's equity: Common stock, $5 par value, authorized 100 shares in 1997 and 160,000,000 shares in 1996, outstanding 100 shares in 1997 and 64,818,759 shares in 1996 (Note 1) ......................... $ 1 $ 324,094 Paid in capital.................................... 1,302,118 724,353 Retained earnings.................................. 319,280 389,841 ------- ------- Total common shareholder's equity................. 1,621,399 1,438,288 --------- --------- Preferred stock (Note 4): Shares Issued and Outstanding ----------------------------- 1997 1996 ---- ---- $100 Par Value, Authorized 3,000,000 Shares Not subject to mandatory redemption 4.20% series 100,000 100,000 10,000 10,000 4.25% series(includes $7,500 premium) 174,997 175,000 17,507 17,508 4.50% series 65,000 65,000 6,500 6,500 4.64% series 159,950 160,000 15,995 16,000 4.90% series 150,000 150,000 15,000 15,000 4.90% 2nd series 150,000 150,000 15,000 15,000 7.15% series 250,000 250,000 25,000 25,000 ------- ------- ------ ------ 1,049,947 1,050,000 105,002 105,008 --------- --------- ------- ------- Subject to mandatory redemption 7.50% series 216,000 216,000 21,600 21,600 8.40% series 202,294 208,892 20,229 20,889 ------- ------- ------ ------ 418,294 424,892 41,829 42,489 Less: Preferred stock subject to mandatory redemption within one year (25,760) (25,760) (2,576) (2,576) ------- ------- ------ ------ 392,534 399,132 39,253 39,913 ------- ------- ------ ------ $25 Par Value, Authorized 4,000,000 Shares Not subject to mandatory redemption 8.40% series 1,400,000 1,400,000 35,000 35,000 --------- --------- ------ ------ Total preferred stock 2,842,481 2,849,132 179,255 179,921 --------- --------- ------- ------- Long-term debt (Note 6): Public Service Company of Colorado: First Mortgage Bonds 5-7/8% retired July 1, 1997....................... - 35,000 6-3/4% due July 1, 1998........................... 25,000 25,000 6% due January 1, 2001............................ 102,667 102,667 8-1/8% due March 1, 2004.......................... 100,000 100,000 Pollution Control Series A and B, 5-7/8% due March 1, 2004 ................................... 22,000 22,500 6-3/8% due November 1, 2005....................... 134,500 134,500 7-1/8% due June 1, 2006........................... 125,000 125,000 Pollution Control Series G, 5-5/8% due April 1, 2008 18,000 18,000 Pollution Control Series F, 7-3/8% due November 1, 2009 27,250 27,250 Pollution Control Series G, 5-1/2% due June 1, 2012 50,000 50,000 Pollution Control Series G, 5-7/8% due April 1, 2014 61,500 61,500 9-7/8% due July 1, 2020........................... 75,000 75,000 8-3/4% due March 1, 2022.......................... 150,000 150,000 7-1/4% due January 1, 2024........................ 110,000 110,000 Secured Medium-Term Notes, Series A and B, 6.02% - 9.25%, due August 1, 1997 - March 5, 2007 ........ 423,500 183,500 Unamortized premium................................ 4 13 Unamortized discount............................... (4,670) (5,032) Capital lease obligations, 6.68% - 11.21% due in installments through May 31, 2025............... 44,392 49,070 ------ ------ $1,464,143 $1,263,968 ---------- ---------- The accompanying notes to consolidated financial statements are an integral part of these financial statements. 57 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPTALIZATION (continued) (Thousands of Dollars, Except Share Information) December 31, 1997 and 1996 1997 1996 ---- ---- Long-term debt (continued) Cheyenne Light, Fuel and Power Company (Note 1): First Mortgage Bonds 7-7/8% due April 1, 2003........................... $ - $ 4,000 7-1/2% due January 1, 2024......................... - 8,000 Industrial Development Revenue Bonds, 7-1/4% due September 1, 2021 ............................... - 7,000 PS Colorado Credit Corporation, Inc.: Unsecured Medium-Term Notes, Series A 5.91% - 6.14%% due November 24, 1997 - December 15, 1998 ........................................ 100,000 100,000 1480 Welton, Inc.: 13.25% secured promissory note, due in installments through October 1, 2016 .......................... 31,155 31,506 Natural Fuels Corporation (Note 1): Capital lease obligations, 4.21% - 11.11% due in installments through November 5, 2000............. - 84 --- -- 1,595,298 1,414,558 Less: maturities due within one year................. 257,160 155,030 ------- ------- Total long-term debt.............................. 1,338,138 1,259,528 --------- --------- Total capitalization.................................. $3,138,792 $2,877,737 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these financial statements. 58 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands of Dollars) Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Operating revenues: Electric.................................. $1,485,196 $1,488,990 $1,449,096 Gas........................................ 733,091 640,497 624,585 Other...................................... 11,356 7,951 7,010 ------ ----- ----- 2,229,643 2,137,438 2,080,691 Operating expenses: Fuel used in generation.................... 198,706 195,442 181,995 Purchased power............................ 493,902 490,428 481,958 Gas purchased for resale................... 467,745 393,163 392,680 Other operating and maintenance expenses... 391,177 400,008 410,095 Depreciation and amortization.............. 168,451 154,631 141,380 Taxes (other than income taxes) ........... 81,496 82,899 81,319 Income taxes (Note 13) .................... 90,813 96,331 95,357 ------ ------ ------ 1,892,290 1,812,902 1,784,784 --------- --------- --------- Operating income.............................. 337,353 324,536 295,907 Other income and deductions: Merger expenses............................ (18,661) (11,210) (4,067) Equity earnings in Yorkshire Power (Note 2) 34,926 - - Miscellaneous income and deductions - net.. (13,374) (13,260) (3,794) ------- ------- ------ 2,891 (24,470) (7,861) Interest charges: Interest on long-term debt................. 118,438 95,826 89,110 Other interest............................. 24,117 17,238 23,393 Allowance for borrowed funds used during construction ............................ (6,353) (3,344) (3,313) ------ ------ ------ 136,202 109,720 109,190 ------- ------- ------- Income before extraordinary item.............. 204,042 190,346 178,856 Extraordinary item -U.K. windfall tax (Note 2) (110,565) - - -------- --- --- Net income.................................... 93,477 190,346 178,856 Dividend requirements on preferred stock...... 11,752 11,848 11,963 ------ ------ ------ Earnings available for common stock........... $ 81,725 $ 178,498 $ 166,893 ========== ========== ========== The accompanying notes to consolidated financial statements are an integral part of these financial statements. 59
PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (Thousands of Dollars, Except Share Information) Years ended December 31, 1997, 1996 and 1995 Common Stock, $5 par value Paid in Retained Shares Amount Capital Earnings Total ------ ------ ------- -------- ----- Balance at January 1, 1995.. 62,154,594 $310,772 $648,496 $308,214 $1,267,482 Net income.................. - - - 178,856 178,856 Dividends declared Common stock.............. - - - (128,587) (128,587) Preferred stock, $100 par value .................... - - - (9,004) (9,004) Preferred stock, $25 par value .................... - - - (2,940) (2,940) Issuance of common stock Employees' Savings Plan... 310,546 1,553 8,152 - 9,705 Dividend Reinvestment Plan 889,331 4,447 23,575 - 28,022 Management Incentive Plan. 3,657 19 92 - 111 ----- -- -- --- --- Balance at December 31, 1995 63,358,128 316,791 680,315 346,539 1,343,645 Net income.................. - - - 190,346 190,346 Dividends declared Common stock.............. - - - (135,111) (135,111) Preferred stock, $100 par value .................... - - - (8,889) (8,889) Preferred stock, $25 par value .................... - - - (2,940) (2,940) Issuance of common stock Employees' Savings Plan... 274,934 1,374 8,420 - 9,794 Dividend Reinvestment Plan 809,603 4,048 24,580 - 28,628 Management Incentive Plan. 58,346 292 1,427 - 1,719 Acquisitions (Note 4)..... 317,748 1,589 9,611 - 11,200 Other....................... - - - (104) (104) --- --- --- ---- ---- Balance at December 31, 1996 64,818,759 324,094 724,353 389,841 1,438,288 Net income.................. - - - 93,477 93,477 Dividends declared Common stock, prior to August 1, 1997 Merger .... - - - (76,202) (76,202) Common stock, to NCE...... - - - (76,093) (76,093) Preferred stock, $100 par value .................... - - - (8,803) (8,803) Preferred stock, $25 par value .................... - - - (2,940) (2,940) Issuance of common stock Employees' Savings Plan... 250,058 1,250 8,518 - 9,768 Dividend Reinvestment Plan 488,224 2,441 16,899 - 19,340 Management Incentive Plan. 40,404 202 993 - 1,195 Merger with SPS Exchange of common stock for NCE stock ........... (65,597,345) (327,986) 327,986 - - Dividend of subsidiaries' stock to NCE ............ - - (49,912) - (49,912) Contribution of capital by NCE (Note 4) ............. - - 273,300 - 273,300 Other....................... - - (19) - (19) --- --- --- --- --- Balance at December 31, 1997 100 $ 1 $ 1,302,118 $ 319,280 $1,621,399 === ========== ============= ========== ========== Authorized shares of common stock were 100 at December 31, 1997 and 160 million at December 31, 1996 and 1995.
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 60 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands of Dollars) Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Operating activities: Net income................................... $ 93,477 $190,346 $ 178,856 Adjustments to reconcile net income to net cash provided by operating activities (Note 1): Extraordinary item - U.K. windfall tax (Note 2) 110,565 - - Depreciation and amortization.............. 173,047 159,400 145,370 Amortization of investment tax credits..... (5,219) (7,256) (5,348) Deferred income taxes...................... 37,390 60,899 39,170 Equity in earnings in Yorkshire Power...... (34,926) - - Allowance for equity funds used during construction ............................. 6 (757) (3,782) Change in accounts receivable.............. (15,378) (88,680) 38,734 Change in inventories...................... (2,163) 20,542 4,246 Change in other current assets............. (52,914) (31,169) 7,618 Change in accounts payable................. (5,413) 88,473 (20,922) Change in other current liabilities........ (15,870) (36,615) 24,230 Change in deferred amounts................. (21,913) (19,550) (20,385) Change in noncurrent liabilities........... 3,367 (9,779) (5,367) Other...................................... (144) 1,760 3,279 ---- ----- ----- Net cash provided by operating activities 263,912 327,614 385,699 Investing activities: Construction expenditures.................... (352,273) (321,162) (285,516) Allowance for equity funds used during construction .............................. (6) 757 3,782 Proceeds from disposition of property, plant and equipment ............................. 3,187 20,454 2,470 Investment in Yorkshire Power (Note 2)....... (362,342) - - Payment for purchase of companies, net of cash acquired (Note 3) ......................... - 3,649 - Transfer of subsidiaries to NCE (Note 1)..... (2,229) - - Purchase of other investments................ (19,224) (11,485) (10,249) Sale of other investments.................... 11,162 664 4,898 ------ --- ----- Net cash used in investing activities.... (721,725) (307,123) (284,615) Financing activities: Proceeds from sale of common stock (Note 4).. 20,517 30,115 28,030 Contribution of capital by NCE............... 273,300 - - Proceeds from sale of long-term notes and bonds (Note 6) ............................ 412,220 217,415 101,860 Redemption of long-term notes and bonds...... (205,550) (83,356) (44,713) Short-term borrowings - net.................. 127,530 (43,325) (36,750) Redemption of preferred stock................ (665) (1,376) (1,376) Dividends on common stock (Notes 4 and 15)... (148,279) (133,394) (127,352) Dividends on preferred stock................. (11,757) (11,857) (11,973) ------- ------- ------- Net cash provided by (used in) financing activities 467,316 (25,778) (92,274) ------- ------- ------- Net increase (decrease) in cash and temporary cash investments .............. 9,503 (5,287) 8,810 Cash and temporary cash investments at beginning of year ....................... 9,406 14,693 5,883 ----- ------ ----- Cash and temporary cash investments at end of year ............................ $18,909 $ 9,406 $ 14,693 ======= ======= ========= The accompanying notes to consolidated financial statements are an integral part of these financial statements. 61 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (SPS) The following narrative analysis discusses SPS's results of operations comparing the most recent fiscal year ending December 31, 1997 to the immediately preceding fiscal year ending August 31, 1996. SPS changed its fiscal year in early 1997 and then filed a Transition Report on Form 10-K for the period September 1, 1996 to December 31, 1996. Additional information has been presented where meaningful, however, certain information has been omitted pursuant to General Instructions I(2)(a). Discussion related to Commitments and Contingencies and Liquidity and Capital Resources is discussed in NCE's Management's Discussion and Analysis of Financial Condition and Results of Operations. See Forward Looking Information. Merger Effective August 1, 1997, following receipt of all required state and Federal regulatory approvals, SPS and PSCo merged in a tax-free "merger of equals" transaction and became wholly-owned subsidiaries of NCE, which is a registered holding company under PUHCA. This transaction was accounted for as a pooling of interests for accounting purposes. Effective with the Merger, Quixx and UE, previously wholly-owned subsidiaries, were transferred through the sale by SPS of all of the outstanding common stock of such subsidiaries at net book value, to NC Enterprises, an intermediate holding company of NCE. See Note 1 in Item 8. Financial Statements and Supplementary Data for additional discussion of SPS, the Merger and the sale of UE and Quixx. The statements of income and cash flows reflect the results of operations of Quixx and UE through July 31, 1997. Earnings Available for Common Stock Earnings available for common stock were $75.6 million, $103.3 million and $114.6 million during 1997, 1996 and 1995, respectively. The significant decrease in 1997 was primarily due to the recognition of higher merger and business integration costs, the June 1997 write-off of Quixx's and UE's investments in the Carolina Energy Project and the recognition of a $11.7 million gain on the sale of certain water rights by Quixx in 1996 (see Note 3. Acquisition and Divestiture of Investments in Item 8. Financial Statements and Supplementary Data). While costs associated with the Merger, transition planning and implementation have negatively impacted earnings during 1997 and 1996, management anticipates that future operating results will benefit from synergies resulting from the Merger. The lower earnings during the Transition Period, as compared to the same period in 1995, was primarily due to the write-off of the BCH project in December 1996 (see Note 3. Acquisition and Divestiture of Investments in Item 8. Financial Statements and Supplementary Data). Earnings applicable to common stock decreased $11.3 million in 1996, compared to 1995, primarily due to the recognition of merger and business integration costs and higher operating and maintenance expenses related to utility operations. Operating Revenues Electric Operations Substantially all of SPS's operating revenues result from the sale of electric energy. The principal factors impacting revenues are the amount and price of energy sold. The following table details the annual change in electric operating revenues and energy costs as compared to the preceding fiscal year (thousands of dollars). 62 Increase (Decrease) From Prior Year ----------------------------------- 1997 1996 ---- ---- Electric operating revenues: Retail........................... $50,743 $24,170 Wholesale........................ 14,382 25,394 Other (including unbilled revenues) (4,167) 15,750 ------ ------ Total revenues.................. 60,958 65,314 Fuel used in generation........... 56,076 46,971 Purchased power................... (3,509) 12,769 ------ ------ Net increase in electric margin. $ 8,391 $ 5,574 ======= ======= The following table compares electric Kwh sales by major customer classes. Millions of Kwh Sales % Change From Prior Year* --------------------- ------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Residential .............. 2,987 2,869 4.1% 5.9% Commercial .............. 2,990 2,887 3.6 2.7 Industrial .............. 8,135 7,813 4.1 1.7 Public Authority ......... 583 571 2.1 4.2 --- --- Total Retail............ 14,695 14,140 3.9 2.8 Wholesale................. 7,004 6,748 3.8 2.5 ----- ----- Total..................... 21,699 20,888 3.9 2.7 ====== ====== * Percentages are calculated using unrounded amounts. Electric operating revenues increased $61.0 million or 6.8% in 1997, when compared to 1996, primarily due to the pass through to customers of higher fuel costs and the costs related to the Thunder Basin judgment, a portion of which were recorded as an operating expense and increased electric sales. However, under the various state regulatory approvals, SPS is required to provide credits to retail customers over five years for one-half of the measured non-fuel operation and maintenance expense savings associated with the Merger. SPS 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. Electric operating revenues increased 7.8% in 1996, when compared to 1995, primarily due to higher fuel used in generation and increased retail and wholesale sales, which resulted from a hotter than normal late spring and early summer. Annual customer growth over the past three years was approximately 1%. Fuel used in generation expense increased $56.1 million or 13.4% in 1997, when compared to 1996, primarily due to increased generation levels at SPS's power plants and higher prices of natural gas as SPS purchased approximately 40% of its gas supply requirements on the spot market during 1997. Fuel used in generation expense increased $47.0 million or 12.7% in 1996, when compared to 1995, due to increases in natural gas and coal costs and higher electric sales. SPS has fuel cost adjustment mechanisms which recognize the majority of the effects of changes in fuel used in generation and purchased power costs and allow recovery of such costs on a timely basis. As a result, the changes in revenues associated with these mechanisms in 1997 and 1996, when compared to the respective preceding year, had little impact on net income. However, in 1996, SPS was ordered by the PUCT to refund back to customers $1.9 million of disallowed fuel costs and $5.4 million of margin credits on non-firm sales (see Note 9. Regulatory Matters in Item 8. Financial Statements and Supplementary Data). Purchased power decreased $3.5 million in 1997, when compared to 1996, primarily due to the increased availability and efficiency of SPS's power plants. Purchased power increased $12.8 million in 1996, when compared to 1995, to meet the demands of its customers. SPS generates substantially all of its power for sale to 63 its firm retail and wholesale customers and sells non-firm energy as the market demands. Similarly, SPS purchases low-cost non-firm energy when available. Other Operating Revenues Other operating revenues decreased $13.5 million or 41.6% in 1997, when compared to 1996, with the sale of Quixx and UE in connection with the Merger as discussed above. Other operating revenues in 1997 include only seven months of Quixx and UE operations compared to twelve months in 1996. Other operating revenues decreased $15.0 million in 1996, when compared to 1995, primarily due to UE's lower revenues for engineering and other services. Non-Fuel Operating Expenses Other operating and maintenance expenses increased $1.6 million in 1997 as compared to the prior year. This increase includes the $12.1 million of Thunder Basin judgment costs, which SPS expects to recover through its fixed fuel factor, net of lower labor and employee benefit costs attributable to staffing reductions in connection with the Merger and SPS's cost containment efforts. Other operating and maintenance expenses decreased $7.4 million, when compared to 1995, primarily due to UE's lower cost of revenues offset, in part, by higher steam production maintenance expenses associated with the acquisition of TNP electric properties. Depreciation and amortization expense increased $0.6 million in 1997 and $5.6 million in 1996, primarily due to the depreciation of property additions. The sale of Quixx and UE in connection with the Merger, resulted in lower depreciation for those subsidiaries in 1997. The 1996 increase in depreciation was attributable to depreciation of construction completed not classified, amortization of the TNP acquisition adjustment and increased depreciation for Quixx property additions. Income taxes decreased $16.5 million in 1997 and $2.4 million in 1996, primarily due to lower pre-tax income. Additional income tax expense was recognized in both years for non-deductible merger and executive severance costs resulting in an effective income tax of 39.2% in 1997 and 38.2% in 1996. Other Income and Deductions Other income and deductions decreased $31.9 million in 1997, as compared to 1996, primarily due to the write-off of investments in the Carolina Energy Project by Quixx and UE totaling approximately $16.1 million, the recognition of the $11.7 million gain on the sale of certain water rights by Quixx in 1996 and higher merger and business integration expenses. (see Note 3. Acquisition and Divestiture of Investments in Item 8. Financial Statements and Supplementary Data). Other income and deductions decreased $14.4 million in the Transition Period in 1996, as compared to the same period in 1995, primarily due to the December 1996 write-off of Quixx's investment in the BCH Project of approximately $15.5 million. Other income and deductions increased $1.4 million in 1996, as compared to 1995, primarily due to the gain on the sale of water rights by Quixx in 1996, reduced by the recognition of merger and business integration expenses. Interest Charges Interest charges increased $6.5 million in 1997 and $8.1 million in 1996, primarily due to interest on borrowings used to finance capital expenditures. In October 1996, Southwestern Public Service Capital I, a wholly owned trust, issued $100 million of 7.85% Trust Preferred Securities, Series A, due September 1, 2036. The expense for these securities is shown as Dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS. The funds from this financing were used to reduce short-term debt. 64 Item 8. Financial Statements and Supplementary Data (SPS) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO SOUTHWESTERN PUBLIC SERVICE COMPANY: We have audited the accompanying consolidated balance sheet and statement of capitalization of Southwestern Public Service Company (a New Mexico corporation) as of December 31, 1997, and the related consolidated statement of income, shareholder's equity and cash flows for the period ended December 31, 1997. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Southwestern Public Service Company as of December 31, 1997, and the results of their operations and their cash flows for the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Denver, Colorado February 13, 1998 65 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Southwestern Public Service Company: We have audited the consolidated balance sheet and statement of capitalization of Southwestern Public Service Company and subsidiaries as of December 31, 1996 and the related consolidated statements of income, shareholder's equity and cash flows for the four months ended December 31, 1996 and the years ended August 31, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Southwestern Public Service Company and subsidiaries at December 31, 1996, and the results of their operations and their cash flows for the above stated periods, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Dallas, Texas February 28, 1997 (June 19, 1997, as to the Carolina Energy Limited Partnership in Note 3) 66 SOUTHWESTERN PUBLIC SERVICE COMPANY CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) December 31, 1997 and 1996 ASSETS 1997 1996 ---- ---- Property, plant and equipment, at cost: Electric .......................................... $2,557,579 $2,517,579 Other (Note 1)..................................... - 37,542 Construction in progress........................... 144,452 79,346 ------- ------ 2,702,031 2,634,467 Less: accumulated depreciation .................... 987,487 944,279 ------- ------- Total property, plant and equipment............... 1,714,544 1,690,188 --------- --------- Investments, at cost: Notes receivable from affiliate (Note 1)........... 119,036 - Other.............................................. 5,832 34,446 ----- ------ Total investments................................. 124,868 34,446 ------- ------ Current assets: Cash and temporary cash investments................ 986 40,610 Accounts receivable, less reserve for uncollectible accounts ($2,442 at December 31, 1997; $2,574 at December 31, 1996) ............................... 96,548 67,779 Accrued unbilled revenues ......................... 15,468 20,304 Recoverable electric energy costs - net............ 23,086 15,715 Materials and supplies, at average cost............ 16,337 17,776 Fuel inventory, at average cost.................... 2,301 2,320 Prepaid expenses and other......................... 3,367 4,984 ----- ----- Total current assets.............................. 158,093 169,488 ------- ------- Deferred charges: Regulatory assets (Note 1)......................... 119,244 117,546 Unamortized debt expense .......................... 9,395 9,864 Other.............................................. 55,349 23,262 ------ ------ Total deferred charges............................ 183,988 150,672 ------- ------- $2,181,493 $2,044,794 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these financial statements. 67 SOUTHWESTERN PUBLIC SERVICE COMPANY CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) December 31, 1997 and 1996 CAPITAL AND LIABILITIES 1997 1996 ---- ---- Common stock (Notes 1 and 4).......................... $ 348,402 $ 348,402 Retained earnings..................................... 349,988 383,350 ------- ------- Total common equity............................... 698,390 731,752 SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS (Note 5) ............ 100,000 100,000 Long-term debt (Note 6)............................... 620,598 620,400 ------- ------- 1,418,988 1,452,152 --------- --------- Noncurrent liabilities: Employees' postretirement benefits other than pensions (Note 12) ................................ 3,800 2,874 Employees' postemployment benefits (Note 12)....... 2,446 2,369 ----- ----- Total noncurrent liabilities...................... 6,246 5,243 ----- ----- Current liabilities: Notes payable and commercial paper (Note 7)........ 154,244 53,836 Notes payable to affiliates (Note 7)............... 25,160 - Long-term debt due within one year................. 173 15,231 Accounts payable................................... 107,465 63,004 Dividends payable.................................. 22,546 - Customers' deposits................................ 5,471 5,842 Accrued taxes...................................... 28,051 19,999 Accrued interest................................... 12,715 13,151 Current portion of accumulated deferred income taxes (Note 13) .................................. 10,740 3,583 Other.............................................. 7,415 28,596 ----- ------ Total current liabilities......................... 373,980 203,242 ------- ------- Deferred credits: Unamortized investment tax credits ................ 5,469 5,719 Accumulated deferred income taxes (Note 13)........ 372,447 367,272 Other.............................................. 4,363 11,166 ----- ------ Total deferred credits............................ 382,279 384,157 ------- ------- Commitments and contingencies (Notes 9 and 10)........ ---------- ---------- $2,181,493 $2,044,794 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these financial statements. 68 SOUTHWESTERN PUBLIC SERVICE COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Thousands of Dollars, Except Per Share Information) December 31, 1997 and 1996 1997 1996 ---- ---- Common shareholder's equity: Common stock,$1 par value, authorized 200 shares in 1997 and 100,000,000 shares in 1996, outstanding 100 shares in 1997 and 40,917,908 shares in 1996 .................................... $ - $ 40,918 Paid in capital.................................... 348,402 307,484 Retained earnings.................................. 349,988 383,350 ------- ------- Total common shareholders equity.................. 698,390 731,752 ------- ------- Preferred stock (Note 4): $1 par value, 10 million shares authorized; no shares outstanding ............................... - - --- --- SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS, 4 million shares outstanding, 7.85% (Note 5)......................... 100,000 100,000 ------- ------- Long-term debt (Note 6): First Mortgage Bonds: 5.70% retired February 1, 1997..................... - 15,000 6-7/8% due December 1, 1999........................ 90,000 90,000 7-1/4% due July 15, 2004........................... 135,000 135,000 6-1/2% due March 1, 2006........................... 60,000 60,000 8-1/4% due July 15, 2022........................... 40,000 40,000 8-1/5% due December 1, 2022........................ 100,000 100,000 8-1/2% due February 15, 2025....................... 70,000 70,000 Pollution control obligations, securing pollution control revenue bonds: Not collateralized by First Mortgage Bonds: variable rate (4.30% and 3.95% at December 31, 1997 and 1996, respectively) due July 1, 2011.......... 44,500 44,500 variable rate (6.435% effective December 31, 1997 and 1996, respectively)due July 1, 2016.......... 25,000 25,000 5-3/4% series, due September 1, 2016.............. 57,300 57,300 Less funds held by Trustee......................... (161) (417) Other................................................. 286 527 Unamortized discount and premium-net.................. (1,154) (1,279) ------ ------ 620,771 635,631 Less: maturities due within one year.................. 173 15,231 --- ------ Total long-term debt.............................. 620,598 620,400 ------- ------- Total capitalization.................................. $1,418,988 $1,452,152 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these financial statements. 69 SOUTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands of Dollars) Years ended December 31, 1997 and August 31, 1996 and 1995 (Note 1) 1997 1996 1995 ---- ---- ---- Operating revenues: Electric.................................... $ 960,355 $ 899,397 $ 834,083 Other....................................... 18,928 32,403 47,434 ------ ------ ------ 979,283 931,800 881,517 Operating expenses: Fuel used in generation..................... 473,099 417,023 370,052 Purchased power............................. 14,501 18,010 5,241 Other operating & maintenance expenses...... 166,761 165,129 172,513 Depreciation and amortization............... 70,331 69,781 64,204 Taxes (other than income taxes) ............ 46,515 45,518 43,827 Income taxes (Note 13) ..................... 48,795 65,297 67,648 ------ ------ ------ 820,002 780,758 723,485 ------- ------- ------- Operating income............................... 159,281 151,042 158,032 Other income and deductions: Merger expenses............................. (15,427) (7,878) - Write-off of investment in Carolina Energy Project (Note 3) ........................... (16,052) - - Miscellaneous income and deductions - net (Note 3) ............................. 4,877 13,226 3,917 ----- ------ ----- (26,602) 5,348 3,917 Interest charges: Interest on long-term debt.................. 46,356 47,045 43,221 Other interest.............................. 7,444 6,088 1,714 Allowance for borrowed funds used during construction .............................. (4,546) (2,516) (2,463) Dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS .......................... 7,850 - - ----- --- --- 57,104 50,617 42,472 ------ ------ ------ Net income..................................... 75,575 105,773 119,477 Dividend requirements on preferred stock....... - 2,494 4,878 --- ----- ----- Earnings available for common stock............ $ 75,575 $103,279 $114,599 ======== ======== ======== The accompanying notes to consolidated financial statements are an integral part of these financial statements. 70 SOUTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands of Dollars) For the four months ended December 31, 1996 and 1995 (Note 1) 1996 1995 ---- ---- (Unaudited) Operating revenues: Electric.......................................... $295,579 $267,427 Other............................................. 10,701 11,055 ------ ------ 306,280 278,482 Operating expenses: Fuel used in generation........................... 141,896 119,081 Purchased power................................... 4,900 2,756 Other operating & maintenance expenses............ 55,582 52,134 Depreciation and amortization..................... 23,782 23,329 Taxes (other than income taxes)................... 15,152 14,590 Income taxes (Note 13)............................ 10,987 18,963 ------ ------ 252,299 230,853 ------- ------- Operating income..................................... 53,981 47,629 Other income and deductions, net: Merger expenses................................... (2,019) (2,171) Write-off of investment in BCH project (Note 3)... (15,546) - Miscellaneous income and deductions - net......... 759 737 --- --- (16,806) (1,434) Interest charges: Interest on long-term debt........................ 16,302 15,106 Other interest.................................... 1,102 950 Allowance for borrowed funds used during construction (892) (807) Dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS ............ 1,526 - ----- --- 18,038 15,249 ------ ------ Net income........................................... 19,137 30,946 Dividend requirements on preferred stock............. - 2,373 --- ----- Earnings available for common stock.................. $ 19,137 $28,573 ======== ======= The accompanying notes to consolidated financial statements are an integral part of these financial statements 71
SOUTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (Thousands of Dollars, Except Share Information) Year ended December 31, 1997, four months ended December 31, 1996 and years ended August 31, 1996 and 1995 (Note 1) Common Stock, $1 par value Paid in Retained Shares Amount Capital Earnings Total ------ ------ ------- -------- ----- Balance at September 1, 1994 40,917,908 $ 40,918 $ 306,376 $ 348,878 $ 696,172 Net income.................. - - - 119,477 119,477 Dividends declared Common stock.............. - - - (90,019) (90,019) Cumulative preferred stock - - - (4,878) (4,878) --- --- --- ------ ------ Balance at August 31, 1995.. 40,918,908 40,918 306,376 373,458 720,752 Net income.................. - - - 105,773 105,773 Retirements of cumulative preferred stock ........... - - 1,108 (921) 187 Dividends declared Common stock.............. - - - (90,020) (90,020) Cumulative preferred stock - - - (1,573) (1,573) --- --- --- ------ ------ Balance at August 31, 1996.. 40,917,908 40,918 307,484 386,717 735,119 Net income ................. - - - 19,137 19,137 Dividends declared on common stock ..................... - - - (22,504) (22,504) --- --- --- ------- ------- Balance at December 31, 1996 40,917,908 40,918 307,484 383,350 731,752 Net income.................. - - - 75,575 75,575 Dividends declared Common stock prior to August 1, 1997 Merger ........... - - - (63,845) (63,845) Common stock, to NCE...... - - - (45,092) (45,092) Merger with PSCo Exchange of common shares for NCE stock ........... (40,917,808) (40,918) 40,918 - - ----------- ------- ------ --- --- Balance at December 31, 1997 100 $ - $ 348,402 $ 349,988 $ 698,390 === ========== ========== ============= ========= Authorized shares of common stock were 200 at December 31, 1997 and 100 million at December 31, 1996, August 31, 1996 and 1995.
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 72 SOUTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands of Dollars, Except Share Information) Years ended December 31, 1997, and August 31, 1996 and 1995 (Note 1) 1997 1996 1995 ---- ---- ---- Operating activities: Net income................................... $75,575 $105,773 $119,477 Adjustments to reconcile net income to net cash provided by operating activities (Note 1): Depreciation and amortization.............. 76,929 65,448 61,069 Write off of investment in Carolina Energy Project (Note 3) .......................... 16,052 - - Amortization of investment tax credits..... (250) (250) (250) Deferred income taxes...................... 3,587 16,423 9,717 Allowance for equity funds used during construction ............................. (5) (60) (229) Change in accounts receivable.............. (39,842) (4,697) (3,905) Change in inventories...................... 301 134 (3,409) Change in other current assets............. (3,061) (7,688) (5,143) Change in accounts payable................. 45,683 10,024 (834) Change in other current liabilities........ (10,000) (7,271) 9,398 Change in deferred amounts................. (48,934) (11,381) 8,160 Other...................................... 276 13,571 (4,753) --- ------ ------ Net cash provided by operating activities 116,311 180,026 189,298 Investing activities: Construction expenditures.................... (118,550) (111,986) (94,662) Allowance for equity funds used during construction ............................... 5 60 229 Proceeds from disposition of property, plant and equipment .............................. (2,371) - - Proceeds from the sale of Quixx and UE, net of cash disposed (Note 1) .................. (29,567) - - Purchase of other investments................ (4,639) (1,768) (28,219) Acquisition of TNP properties (Note 3)....... - (29,200) - --- ------- --- Net cash used in investing activities.... (155,122) (142,894)(122,652) Financing activities: Proceeds from sale of long-term notes and bonds - 60,000 76,204 Redemption of long-term notes and bonds...... (14,986) (4,445) (16,880) Short-term borrowings - net.................. 100,564 69,624 (14,994) Retirement of preferred stock................ - (75,434) - Dividends on common stock (Notes 4 and 15)... (86,391) (90,020) (90,020) Dividends on preferred stock................. - (2,494) (4,878) --- ------ ------ Net cash used in financing activities.... (813) (42,769) (50,568) ---- ------- ------- Net (decrease) increase in cash and temporary cash investments ............. (39,624) (5,637) 16,078 Cash and temporary cash investments at beginning of year ...................... 40,610 36,860 20,782 ------ ------ ------ Cash and temporary cash investments at end of year ............................ $ 986 $ 31,223 $ 36,860 ======== ========= ======== The accompanying notes to consolidated financial statements are an integral part of these financial statements. 73 SOUTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands of Dollars) Four months ended December 31, 1996 and 1995 (Note 1) 1996 1995 ---- ---- (Unaudited) Operating activities: Net income......................................... $19,137 $30,946 Adjustments to reconcile net income to net cash provided by operating activities (Note 1): Depreciation and amortization.................... 22,289 21,873 Write-off of investment in BCH Project (Note 3).. 15,546 - Deferred income taxes and investment tax credits 4,806 3,166 Allowance for equity funds used during construction (179) (60) Change in accounts receivable.................... 10,180 9,402 Change in inventories............................ 1,417 928 Change in other current assets................... (5,674) 9,977 Change in accounts payable....................... 628 (10,673) Change in other current liabilities.............. (12,487) (11,021) Other............................................ (14,674) 7,627 ------- ----- Net cash provided by operating activities...... 40,989 62,165 Investing activities: Construction expenditures.......................... (66,031) (44,950) Purchase of other investments...................... (2,297) (3,741) Acquisition of TNP properties (Note 3)............. - (29,200) --- ------- Net cash used in investing activities.......... (68,328) (77,891) Financing activities: Proceeds from sale of long-term notes and bonds (Note 6) ........................................ 82,300 - Proceeds from sale of SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS .......................................... 100,000 - Retirement of long-term notes and bonds............ (84,776) (1,717) Short-term borrowings - net........................ (15,788) 116,250 Retirement of preferred stock...................... - (74,672) Dividends on common stock.......................... (45,010) (45,010) Dividends on preferred stock....................... - (2,373) --- ------ Net cash provided by (used in) financing activities ................................... 36,726 (7,522) ------ ------ Net increase (decrease) in cash and temporary cash investments ............................. 9,387 (23,248) Cash and temporary cash investments at beginning of period .................................... 31,223 36,860 ------ ------ Cash and temporary cash investments at end of period ....................................... $ 40,610 $ 13,612 ========= ======== The accompanying notes to consolidated financial statements are an integral part of these financial statements. 74 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 1. Summary of Significant Accounting Policies (NCE, PSCo and SPS) Effective August 1, 1997, following the receipt of all required state and Federal regulatory approvals, PSCo and SPS merged in a tax-free "merger of equals" transaction and became wholly-owned subsidiaries of NCE. Each outstanding share of PSCo common stock was canceled and converted into the right to receive one share of NCE common stock, and each outstanding share of SPS common stock was canceled and converted into the right to receive 0.95 of one share of NCE common stock. Effective with the Merger, certain utility and non-utility subsidiaries were transferred within NCE's common controlled subsidiaries. The common stock of Quixx and UE, former SPS subsidiaries, were transferred through the sale by SPS of the common stock of such subsidiaries at net book value, aggregating approximately $119.0 million, to NC Enterprises in exchange for notes payable of NC Enterprises. Subsidiaries of PSCo (Cheyenne, WGI, e prime and Natural Fuels) were transferred by a declaration of a dividend of the subsidiaries' stock, at net book value, aggregating approximately $49.9 million, to NCE. NCE subsequently made a capital contribution of the e prime and Natural Fuels common stock, at net book value, aggregating approximately $29.5 million, to NC Enterprises. The NCE consolidated financial statements reflect the accounting for the Merger as a pooling of interests. The Company's consolidated financial statements include the consolidated financial statements for both PSCo and SPS as of and for the years ended December 31, 1997 and 1996. The Company's 1995 consolidated statement of income combines the consolidated statement of income for PSCo for the year ended December 31, 1995 with the consolidated statement of income for SPS for the year ended August 31, 1995. Certain items have been reclassified in the consolidated financial statements to conform to the presentation used by the Company. On April 22, 1997, SPS changed its fiscal year from a twelve-month period ending August 31 to a twelve-month period ending December 31. SPS filed a Transition report on Form 10-K for the period September 1, to December 31, 1996 (the transition period). The fiscal year periods presented in SPS's consolidated statements of income and cash flows are for the twelve-months ending December 31, 1997, August 31, 1996 and August 31, 1995. Business, Utility Operations and Regulation NCE is a registered holding company under the PUHCA and its utility subsidiaries (PSCo, SPS and Cheyenne) are engaged principally in the generation, purchase, transmission, distribution and sale of electricity and in the purchase, transmission, distribution, sale and transportation of natural gas. Both the Company and its subsidiaries are subject to the regulatory provisions of the PUHCA. The utility subsidiaries are subject to regulation by the FERC and state utility commissions in Colorado, Texas, New Mexico, Wyoming, Kansas and Oklahoma. Over 90% of the Company's revenues are derived from its regulated utility operations. Regulatory Assets and Liabilities The Company's regulated subsidiaries prepare their financial statements in accordance with the provisions of SFAS 71, as amended. SFAS 71 recognizes that accounting for rate regulated enterprises should reflect the relationship of costs and revenues introduced by rate regulation. A regulated utility may defer recognition of a cost (a regulatory asset) or recognize an obligation (a regulatory liability) if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in revenues. During 1996, NCE's subsidiaries adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of, which imposed stricter criteria for the continued recognition of regulatory assets 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 consolidated balance sheets (in thousands): 1997 NCE PSCo SPS --- ---- --- Income taxes (Note 13).............. $162,985 $ 84,356 $ 79,161 Nuclear decommissioning costs....... 76,881 76,881 - Employees' postretirement benefits other than pensions (Note 12)..... 63,023 59,995 3,028 Early retirement costs.............. 8,008 6,645 1,363 Employees' postemployment benefits (Note 12) ......................... 24,455 23,932 - Demand-side management costs........ 42,503 38,518 3,985 Unamortized debt reacquisition costs 36,717 17,791 18,344 Thunder Basin judgment (Note 9)..... 5,912 - 5,912 Other............................... 9,991 2,540 7,451 ----- ----- ----- Total............................. $430,475 $310,658 $119,244 ======== ======== ======== 1996 NCE PSCo SPS --- ---- --- Income taxes (Note 13).............. $179,757 $ 98,355 $ 81,403 Nuclear decommissioning costs....... 89,731 89,731 - Employees' postretirement benefits other than pensions (Note 12)..... 57,641 54,449 3,192 Early retirement costs.............. 17,232 15,505 1,727 Employees' postemployment benefits (Note 12) ......................... 24,797 24,797 - Demand-side management costs........ 43,779 41,462 2,317 Unamortized debt reacquisition costs 39,794 19,914 19,880 Other............................... 13,380 4,353 9,027 ------ ----- ----- Total............................. $466,111 $348,566 $117,546 ======== ======== ======== The regulatory assets of the Company's regulated subsidiaries as of December 31, 1997 and 1996 are reflected in rates charged to customers over periods ranging from two to thirty years. Refer to the discussion below or the Notes to Consolidated Financial Statements as identified in the above table for a more detailed discussion regarding recovery periods. The Company believes its utility subsidiaries will continue to be subject to rate regulation. 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's subsidiaries could be required to write-off their regulatory assets, determine any impairment to other assets resulting from deregulation and write-down any impaired assets to their estimated fair value, which could have a material adverse effect on NCE's, PSCo's and SPS's financial position, results of operations or cash flows. Effective July 1, 1993, PSCo began collecting from customers nuclear decommissioning costs expected to total approximately $124.4 million (plus a 9% carrying cost). Such amount, which is being collected over a twelve year period, represented the inflation-adjusted estimated remaining cost of decommissioning activities not previously recognized as expense at the time of CPUC approval. PSCo is recovering approximately $13.9 million per year from its customers for such costs. Approximately 550 employees elected to participate in PSCo's early retirement enhancement program, of which approximately 370 employees elected the early retirement benefit. The total cost of the program was 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) approximately $39.7 million. These costs were deferred and, effective April 1, 1994, are being amortized to expense over approximately 4.5 years in accordance with rate regulatory treatment. This amortization period represents the participants' average remaining years of service to their expected retirement date. On January 27, 1997, the CPUC issued its order on PSCo's 1996 gas rate case. The CPUC allowed recovery of postemployment benefit costs on an accrual basis under SFAS 112 and denied amortization of the approximately $8.9 million regulatory asset recognized upon the adoption of SFAS 112 (see Note 12. Employee Benefits - Postemployment Benefits). PSCo has appealed in the Denver District Court the decision related to this issue and is assessing the impact of this decision on the future recovery of the electric jurisdictional portion of postemployment benefit costs totaling approximately $14.6 million. PSCo believes that it will be successful on appeal and that the associated regulatory asset is realizable. If PSCo is ultimately unsuccessful, these amounts will be written off. Certain costs associated with PSCo's DSM programs are deferred and recovered in rates over five to seven year periods through the DSMCA. Non-labor incremental expenses, carrying costs associated with deferred DSM costs and incentives associated with approved DSM programs are recovered on an annual basis. Costs associated with SPS's DSM programs are also deferred and, as part of a negotiated settlement agreement reached in July 1995, will be included in rate base and cost of service in future PUCT proceedings. Costs incurred to reacquire debt prior to scheduled maturity dates are deferred and amortized over the life of the debt issued to finance the reacquisition or as approved by the applicable regulatory authority. As of December 31, 1997, SPS has approximately $5.9 million in regulatory assets associated with the Thunder Basin judgment. The judgment amount paid is recoverable from customers subject to review by various regulatory agencies (see Note 9. Regulatory Matters - Electric and Gas Cost Adjustments). Recovered/Recoverable Purchased Gas and Electric Energy Costs -Net The Company's utility subsidiaries have adjustment mechanisms in place which allow for the recovery of certain purchased gas and electric energy costs in excess of the level of such costs included in base rates. Currently, these cost adjustment tariffs are revised periodically, as prescribed by the appropriate regulatory agencies, for any difference between the total amount collected under the clauses and the recoverable costs incurred (see Note 9. Regulatory Matters - Electric and Gas Cost Adjustments). Other Property Property, plant and equipment includes approximately $18.4 million and $25.4 million, respectively, for costs associated with the engineering design of the future Pawnee 2 generating station and certain water rights located in southeastern Colorado, also obtained for a future generating station. PSCo is earning a return on these investments based on its weighted average cost of debt and preferred stock in accordance with a CPUC rate order. Non-utility Subsidiaries and International Investments The Company's non-utility subsidiaries are principally involved in engineering, design and construction management, non-regulated energy services, including gas and power marketing, the management of real estate and certain life insurance policies, the financing of certain current assets of PSCo and investments in cogeneration facilities, electric wholesale generators and a foreign utility company. The Company's international investments are subject to regulation in the countries in which such investments are made (see Note 2. Acquisition of Yorkshire Electricity and U.K. Windfall Tax). Financial statements of foreign subsidiaries are translated into U.S. dollars at current rates, except for revenues, costs and expenses which are translated at average current rates during each reporting period. 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Management Estimates The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Consolidation The Company follows the practice of consolidating the accounts of its majority owned and controlled subsidiaries. The Company recognizes equity in income from its unconsolidated investments accounted for under the equity method of accounting. All intercompany items and transactions have been eliminated. Basic and Diluted Earnings Per Share Effective for periods ending after December 15, 1997, the FASB issued SFAS No. 128 "Earnings per Share" which changed the methodology for calculating and reporting earnings per share ("EPS"), and required restatement of all prior-period EPS data. Basic and Diluted EPS of common stock is computed and presented for each year based upon the weighted average number of common shares outstanding on the consolidated income statements. The dilutive effect of NCE stock options, the only dilutive securities and applicable only to NCE, was immaterial and, accordingly, the computed Basic and Diluted EPS result in the same EPS. Revenue Recognition The Company's utility subsidiaries accrue for estimated unbilled revenues for services provided after the meters were last read on a cycle billing basis through the end of each year. Statements of Cash Flows For purposes of the consolidated statements of cash flows, the Company and its subsidiaries consider all temporary cash investments to be cash equivalents. These temporary cash investments are securities having original maturities of three months or less or having longer maturities but with put dates of three months or less. Income Taxes and Interest (Excluding Amounts Capitalized) Paid (in thousands): NCE 1997 1996 1995 ---- ---- ---- Income taxes ............................... $ 99,938 $117,121 $108,750 Interest.................................... $230,507 $197,073 $182,913 PSCo 1997 1996 1995 ---- ---- ---- Income taxes, including amounts paid to NCE $ 75,439 $ 66,871 $ 58,662 Interest.................................... $172,470 $144,533 $140,823 SPS 1997 1996 1995 ---- ---- ---- Income taxes, including amounts paid to NCE $ 37,752 $ 50,250 $ 50,088 Interest.................................... $ 56,486 $ 52,540 $ 42,090 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Non-cash Transactions: Prior to the Merger, shares of PSCo's common stock (250,058 in 1997, 274,934 in 1996 and 310,546 in 1995), valued at the market price on date of issuance (approximately $10 million for each year), were issued to the Employees' Savings and Stock Ownership Plan of Public Service Company of Colorado and Participating Subsidiary Companies. The estimated issuance values were recognized in other operating expenses during the respective preceding years. Stock issuances and the dividend of subsidiaries' stock in connection with the Merger discussed above were non-cash financing and investing activities and are not reflected in the consolidated statements of cash flows. During 1996, PSCo exchanged shares of its common stock in connection with the acquisition of TOG and TOP (see Note 3. Acquisition and Divestiture of Investments). During 1995, a $40.5 million PSCo capital lease obligation was recognized in connection with a 30-year gas storage facility agreement. Property and Depreciation Property, plant and equipment is stated at original cost. Replacements and capital improvements, representing units of property, are capitalized. Maintenance and repairs of property and replacements of items of property determined to be less than a unit of property are charged to operations as maintenance expense. The cost of units of property retired, together with cost of removal, less salvage, is charged to accumulated depreciation. Depreciation expense, for financial accounting purposes, is computed on the straight-line basis based on the estimated service lives and costs of removal of the various classes of property. Depreciation expense, expressed as a percentage of average depreciable property, for NCE, PSCo and SPS ranged from approximately 2.6%-2.9% for the years ended December 31, 1997, 1996 and 1995. For income tax purposes, the Company and its subsidiaries use accelerated depreciation and other elections provided by the tax laws. Allowance for Funds Used During Construction AFDC, as defined in the system of accounts prescribed by the FERC, represents the net cost during the period of construction of borrowed funds used for construction purposes and a reasonable rate on funds derived from other sources. AFDC does not represent current cash earnings. The Company's regulated subsidiaries capitalize AFDC as a part of the cost of utility plant. Income Taxes The Company and its subsidiaries file consolidated Federal and consolidated and separate state income tax returns. Income taxes are allocated to the subsidiaries based on separate company computations of taxable income or loss. Investment tax credits have been deferred and are being amortized over the service lives of the related property. Deferred taxes are provided on temporary differences between the financial accounting and tax bases of assets and liabilities using the tax rates which are in effect at the balance sheet date (see Note 13. Income Taxes). Stock-based Compensation The Company uses the intrinsic value based method of accounting for its stock-based compensation plan (see Note 12. Employee Benefits - Incentive Compensation). 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Gas in Underground Storage (NCE and PSCo) Gas in underground storage is accounted for under the last-in, first-out (LIFO) cost method. The estimated replacement cost of gas in underground storage at December 31, 1997 and 1996 exceeded the LIFO cost by approximately $36.0 million and $52.2 million, respectively. Cash Surrender Value of Life Insurance Policies (NCE and PSCo) The following amounts related to corporate-owned life insurance ("COLI") contracts, issued by one major insurance company, are recorded as a component of Investments, at cost, on the consolidated balance sheets: 1997 1996 ---- ---- (Thousands of Dollars) Cash surrender value of contracts..................... $408,425 $359,136 Borrowings against contracts.......................... 405,285 356,421 ------- ------- Net investment in life insurance contracts......... $ 3,140 $ 2,715 ======== ======= On August 2, 1996, Congress passed legislation that will phase out tax benefits associated with certain COLI policies. The legislation had minimal impact on the Company's COLI policies as all policies were entered into prior to July 1, 1986 and were grandfathered under the legislation. 2. Acquisition of Yorkshire Electricity and U.K. Windfall Tax (NCE and PSCo) During the second quarter of 1997, Yorkshire Power, a subsidiary equally owned by PSCo and AEP, acquired indirectly all of the outstanding ordinary shares of Yorkshire Electricity, a United Kingdom regional electricity company. PSCo accounts for its investment in Yorkshire Power using the equity method. Yorkshire Power's results of operations include 100% of Yorkshire Electricity's results since April 1, 1997. PSCo's equity earnings in Yorkshire Power is 50%, the same as its ownership share. The total consideration paid by Yorkshire Power was approximately $2.4 billion (1.5 billion pounds sterling). The acquisition was financed by Yorkshire Power through a combination of approximately 25% equity and 75% debt, including the assumption of the existing debt of Yorkshire Electricity. The funds for the acquisition were obtained from PSCo's and AEP's investment in Yorkshire Power of approximately $360 million (220 million pounds sterling) each, with the remainder obtained by Yorkshire Power through the issuance of non-recourse debt. PSCo funded its entire equity investment in Yorkshire Power through $250 million of publicly issued secured medium-term notes with varying maturities and drawings of approximately $110 million on its short-term lines of credit pursuant to its short-term credit agreement with Bank of America, as agent. In July 1997, the U.K. government enacted a windfall tax on certain privatized business entities payable in two installments with the first payment in December 1997 and the second installment a year later. The windfall tax was a retroactive adjustment to the privatization value based on post-privatization profits during the 1992 to 1995 period. During the third quarter of 1997, Yorkshire Power recorded an extraordinary charge of approximately $221 million (135 million pounds sterling) for this windfall tax. PSCo's share of this tax is approximately $110.6 million. 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Summarized income statement information for the period April 1, 1997 (date of acquisition) to December 31, 1997 is presented below (in millions): Yorkshire Power: Operating revenues....................... $1,492.9 -------- Operating income......................... 202.3 ----- Income before extraordinary item......... 69.8 Extraordinary item - U.K. windfall tax... (221.1) ------ Net loss................................. $ (151.3) ======== PSCo's equity in the earnings (losses): Extraordinary item - U.K. windfall tax.. $ (110.6) Equity in earnings of Yorkshire Power (1) 34.9 ---- $ (75.7) ======== (1) Includes the impact of approximately $10 million related to the change in the U.K. corporate income tax rate from 33% to 31%. PSCo's investment in Yorkshire Power at December 31, 1997 is approximately $287 million. Summarized balance sheet information for Yorkshire Power as of December 31, 1997 is presented below (in millions): Assets: Property, plant and equipment............ $1,644.6 Current assets........................... 602.2 Other assets............................. 1,895.4 ------- $4,142.2 ======== Capitalization and Liabilities: Common shareholders' equity.............. $ 542.1 Long-term debt........................... 704.3 Other non-current liabilities............ 488.7 Current liabilities...................... 2,407.1 ------- $4,142.2 ======== The unaudited pro forma financial information presented below assumes that the investment in Yorkshire Power was acquired on the first day of each respective period. The pro forma adjustments include recognition of equity in the estimated earnings of Yorkshire Power, an adjustment for interest expense on debt associated with PSCo's investment in Yorkshire Power and related income taxes. The estimated earnings of Yorkshire Power were based on historical earnings of Yorkshire Electricity, prior to its acquisition by Yorkshire Power, adjusted for the estimated effects of purchase accounting (including the amortization of goodwill), conversion to United States generally accepted accounting principles, interest expense on debt issued by Yorkshire Power associated with the acquisition and related income taxes. Sales of electricity are affected by seasonal weather patterns and, therefore, the results of Yorkshire Power/Yorkshire Electricity will not be distributed evenly during the year. Equity in earnings of Yorkshire Power has been converted at the average exchange rates for the year ended December 31, 1997 and December 31, 1996, of $1.639/pound and $1.561/pound, respectively. 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Based on the above assumptions, shown below is unaudited pro forma financial information for the years ended December 31, 1997 and 1996 (in millions, except per share amounts): NCE Earnings before Earnings before Extraordinary Item Extraordinary Item 1997 1996 per share (1) ---- ---- ------------- NCE PSCo NCE PSCo 1997 1996 --- ---- --- ---- ---- ---- Income before extraordinary item.......... $261.5 $204.0 $272.3 $190.3 $2.50 $2.64 ===== ===== Pro forma adjustments: Equity in earnings of Yorkshire Power, net of U.S. tax benefits (2)...... (10.1) (10.1) 19.3 19.3 Interest expense, net of tax (3.5) (3.5) (13.8) (13.8) ---- ---- ----- ----- Pro forma result.............. $247.9 $190.4 $277.8 $195.8 $2.37 $2.70 ====== ====== ====== ====== ===== ===== (1) Based on the weighted average number of common shares outstanding for the period. (2) The years ending December 31, 1997 and 1996 amounts include $24.0 million and $18.9 million ($17.9 million and $11.7 million after-tax), respectively, of write-offs related to certain computer development costs, acquisition expenses and costs incurred for the preparation for deregulation. 3. Acquisition and Divestiture of Investments Carolina Energy Limited Partnership Investment (NCE and SPS) The Carolina Energy Partnership, a waste-to-energy cogeneration facility, was originally scheduled to be completed in 1997, but was halted pending an independent analysis of the project's engineering and financial viability. The banks providing debt financing to the project withheld funds for continued construction. Quixx, UE, other equity owners, senior creditors and the construction contractor were unable to restructure the project on mutually agreeable terms and the senior creditors took possession of the assets of the facility. In June 1997, Quixx wrote-off its investment of approximately $13.6 million in the Carolina Energy Partnership. Additionally, UE wrote-off its net investment of approximately $2.4 million in this same partnership. Quixx holds 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 fees for engineering services. BCH Energy Limited Partnership Investment (NCE and SPS) Quixx holds a 49% limited partnership interest in BCH Energy Limited Partnership which owned 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. In late 1996, senior creditors took possession of the assets of the facility. In December 1996, Quixx wrote-off its investment of approximately $16 million in this project. 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Quixx Underground Water Rights (NCE and SPS) During 1996, Quixx sold a portion of its underground water rights for approximately $14 million. Quixx recognized an after-tax gain on the sale of these water rights of approximately $11.7 million which is reflected in miscellaneous income and deductions - net for the year ended December 31, 1996. Acquisition of Texas-Ohio Gas, Inc. and Texas-Ohio Pipeline, Inc. (NCE and PSCo) Effective September 1, 1996, e prime acquired all of the outstanding stock of TOG and TOP in exchange for a combination of common stock of PSCo and cash. Such acquisitions were accounted for using the purchase method and the acquired assets and liabilities have been valued at their estimated fair market values as of the date of acquisition. These companies are primarily engaged in gas brokering and marketing activities and are subsidiaries of e prime. Acquisition of TNP Properties (NCE and SPS) In September 1995, SPS purchased properties of TNP located in the Texas Panhandle area for $29.2 million. The purchase added approximately 8,000 customers and was accounted for using the purchase method. Cost recovery of this amount was allowed by the PUCT through a rate surcharge over a ten-year period. Acquisition of Young Gas Storage Company (NCE and PSCo) On June 25, 1995, PSCo acquired all of the outstanding stock of YGSC for $6.3 million. The acquisition was accounted for using the purchase method. On February 1, 1996, PSCo contributed the common stock of YGSC to e prime. YGSC owns a 47.5% interest in Young Storage, which owns and operates an underground gas storage facility in northeastern Colorado. 4. Capital Stock (NCE, PSCo and SPS) Shareholder Rights On April 30, 1997, the Board of Directors declared that a dividend of one right for each Common Share be paid on the effective date of the business combination among the Company, PSCo and SPS to shareholders of record of the common shares issued and outstanding at the close of business on the day before the effective date of the business combination. Each right represents the right to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock at a price of $100 per one one-hundredth share. Additionally, the Board of Directors created a Series A Junior Participating Preferred Stock, $1 par value, and reserved 2,600,000 shares for issuance upon exercise of the Rights. In the event any person or group acquires 10% or more of the Company's common stock, the holders of the rights generally will be entitled to receive, upon exercise, common stock of the Company having a value equal to two times the exercise price of the right. In addition, the Board of Directors may, at its option after a person or group acquires 10% or more of the Company's common stock, exchange all or part of the rights for shares of the Company's common stock. In the event that the Company is acquired in a merger or other business combination or 50% or more of the Company's assets or earning power is sold or transferred, the holders of the rights have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the right. The Company may redeem the rights at a price of $.001 per right at any time prior to the tenth day following the date any person or group acquires 10% or more of the Company's common stock. The rights expire 10 years after the record date, unless earlier redeemed or exchanged by the Company. 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Common Stock Issuance In December 1997, 5.9 million common shares were issued, resulting in net proceeds (after deducting issuance costs) of $251.4 million. The proceeds from the sale of stock were used for general corporate purposes, including retirement of short-term debt and a capital contribution to PSCo. PSCo used such proceeds to retire debt and for general corporate purposes. Preferred Stock of NCE NCE has 20 million shares of preferred stock authorized. At December 31, 1997, the Company has not registered or issued any of the preferred stock. Preferred Stock of Subsidiaries 1997 1996 ---- ---- Shares Amount Shares Amount ------ ------ ------ ------ (Thousands (Thousands of Dollars) of Dollars) PSCo cumulative preferred stock, $100 par value, 3 million shares authorized: Issued and outstanding: Not subject to mandatory redemption (1): 4.20% series................... 100,000 $ 10,000 100,000 $ 10,000 4 1/4% series (includes $7,500 premium) ............... 174,997 17,507 175,000 17,508 4 1/2% series.................. 65,000 6,500 65,000 6,500 4.64% series................... 159,950 15,995 160,000 16,000 4.90% series................... 150,000 15,000 150,000 15,000 4.90% 2nd series............... 150,000 15,000 150,000 15,000 7.15% series................... 250,000 25,000 250,000 25,000 ------- ------ ------- ------ Total.......................... 1,049,947 $105,002 1,050,000 $105,008 ========= ======== ========= ======== Subject to mandatory redemption (2): 7.50% series .................. 216,000 $ 21,600 216,000 $ 21,600 8.40% series................... 202,294 20,229 208,892 20,889 ------- ------ ------- ------ 418,294 41,829 424,892 42,489 Less: Preferred stock subject to mandatory redemption within one year...................... (25,760) (2,576) (25,760) (2,576) ------- ------ ------- ------ Total........................ 392,534 $ 39,253 399,132 $ 39,913 ======= ======== ======= ======== PSCo cumulative preferred stock, $25 par value, 4 million shares authorized: Issued and outstanding: Not subject to mandatory redemption (1): 8.40% series................... 1,400,000 $ 35,000 1,400,000 $ 35,000 ==== ========= ======== ========= ======== SPS cumulative preferred stock, $1 par value, 10 million shares authorized with no shares outstanding (3) ................. - - - - === === === === (1) The PSCo preferred stock may be redeemed at the option of PSCo upon at least 30, but not more than 60, days' notice in accordance with the following schedule of prices, plus an amount equal to the accrued dividends to the date fixed for redemption; $100 par value, $101 per share, $25 par value, $25.25 per share. (2) Mandatory redemption for 7.50% series: $101.50 per share on or prior to August 31, 1998, reducing each year thereafter by $0.25 per share until August 31, 2003, after which the redemption price is $100 per share; mandatory redemption for 8.40% series: $101.75 per share on or prior to July 31, 1998, and reducing each year thereafter by $0.25 per share until July 31, 2004, after which the redemption price is $100 per share. In 1998 and in each year thereafter, PSCo must offer to repurchase 12,000 shares of the 7.50% and 13,760 shares of the 8.40% series subject to mandatory redemption at $100 per share, plus accrued dividends to the date set for repurchase. In 1997, PSCo repurchased 6,598 shares of the 8.40% cumulative preferred series subject to mandatory redemption. In 1996 and 1995, PSCo repurchased 13,760 shares of the 8.40% cumulative preferred series subject to mandatory redemption. (3) On January 31, 1996, the shareholders of SPS approved an amendment to the Restated Articles of Incorporation to replace the existing authorized preferred stock and to provide for a class of 10 million authorized shares of preferred stock, $1.00 par value, issuable from time to time in such series and having such designations, preferences, limitations, and relative rights as the Board of Directors may determine. 84 5. SPS Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debentures of SPS (NCE and SPS) In October 1996, Southwestern Public Service Capital I, a wholly-owned Trust of SPS, issued 4,000,000 shares of 7.85% Trust Preferred Securities, Series A for $100 million. The sole asset of the trust is $103 million principal amount of SPS's 7.85% Deferred Interest Subordinated Debentures, Series A, due September 1, 2036. Holders of the securities are entitled to receive quarterly dividends at an annual rate of 7.85% of the liquidation preference value of $25. The securities are redeemable at the option of SPS on October 21, 2001 at 100% of the principal amount outstanding plus accrued interest. The securities are shown as SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS on the consolidated balance sheets. The net proceeds were used to reduce short-term debt. 6. Long-Term Debt of Subsidiaries (NCE, PSCo and SPS) 1997 1996 ---- ---- (Thousands of Dollars) First Mortgage Bonds: 5-70% retired February 1, 1997..................... $ - $ 15,000 5-7/8% retired July 1, 1997........................ - 35,000 6-3/4% due July 1, 1998............................ 25,000 25,000 6.875% due December 1, 1999........................ 90,000 90,000 6.00% due January 1, 2001.......................... 102,667 102,667 7-7/8% due April 1, 2003........................... 4,000 4,000 8-1/8% due March 1, 2004........................... 100,000 100,000 5-7/8% due March 1, 2004........................... 22,000 22,500 7-1/4% due July 15, 2004........................... 135,000 135,000 6-3/8% due November 1, 2005........................ 134,500 134,500 6-1/2% due March 1, 2006........................... 60,000 60,000 7 1/8% due June 1, 2006............................ 125,000 125,000 5-5/8% due April 1, 2008........................... 18,000 18,000 7-3/8% due November 1, 2009........................ 27,250 27,250 5-1/2% due June 1, 2012............................ 50,000 50,000 5-7/8% due April 1, 2014........................... 61,500 61,500 9-7/8% due July 1, 2020............................ 75,000 75,000 Variable rate (3.80% and 7-1/4% at December 31, 1997 and 1996) due September 1, 2021.................... 7,000 7,000 8-3/4% due March 1, 2022........................... 150,000 150,000 8-1/4% due July 15, 2022........................... 40,000 40,000 8.20% due December 1, 2022......................... 100,000 100,000 7-1/4% due January 1, 2024......................... 110,000 110,000 7.50% due January 1, 2024.......................... 8,000 8,000 8.50% due February 15, 2025........................ 70,000 70,000 Variable rate (3.80% at December 31, 1997)due March 1, 2027 .................................... 10,000 - 6.02% - 9.25% secured medium-term notes, due August 1, 1997 - March 5, 2007........................... 423,500 183,500 Other secured long-term debt 13.25%, due in installments through October 1, 2016............. 31,155 31,506 Pollution control obligations, securing pollution control revenue bonds: Not collateralized by First Mortgage Bonds: Variable rate (4.30% and 3.95% at December 31, 1997 and 1996), due July 1, 2011...................... 44,500 44,500 Variable rate (6.435% effective at December 31, 1997 and 1996), due July 1, 2016................ 25,000 25,000 5-3/4% series, due September 1, 2016............. 57,300 57,300 Less funds held by Trustee:........................ (161) (417) Unsecured Medium-Term Notes: 5.91% - 6.14%, due November 24, 1997 - December 15, 1998 ....................................... 100,000 100,000 Capital lease obligations, 4.21% - 11.21% due in installments through May 31, 2025.................. 44,747 49,154 Other................................................ 286 527 Unamortized discount and premium-net................. (5,820) (6,298) ------ ------ 2,245,424 2,050,189 Less: maturities due within one year.................... 257,469 170,261 ------- ------- $1,987,955 $1,879,928 ========== ========== The First Mortgage Bonds include all long-term bonds and notes (including First Collateral Trust Bonds) issued by the Company's utility subsidiaries under various mortgage indentures. Substantially all properties of the 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Company's utility subsidiaries, other than expressly excepted property, are subject to the liens securing the First Mortgage Bonds. The Red River Authority of Texas has issued certain obligations, based on long-term installment sale agreements executed by SPS, that relate to the pollution control facilities installed at the Company's coal-fueled generating units. SPS's payments under the pollution control obligations are pledged to secure the Red River Authority Pollution Control Revenue Bonds. The annual maturities and sinking fund requirements during the five years subsequent to December 31, 1997 are (in thousands): Year Maturities Sinking Fund Requirements Total ---- ---------- ------------------------- ----- NCE 1998 $257,469 $ 560 $258,029 1999 134,454 560 135,014 2000 31,725 1,310 33,035 2001 140,969 1,310 142,279 2002 16,806 2,810 19,616 PSCo 1998 $257,160 $ 500 $257,660 1999 44,191 500 44,691 2000 31,656 1,250 32,906 2001 140,969 1,250 142,219 2002 16,806 2,750 19,556 SPS 1998 $ 173 $ - $ 173 1999 90,113 - 90,113 2000 - - - 2001 - - - 2002 - - - The sinking fund requirements relate to PSCo and Cheyenne and they expect to satisfy substantially all of their sinking fund obligations in accordance with the terms of their respective indentures through the application of property additions. SPS has no significant sinking fund requirements. 7. Short-term Borrowing Arrangements (NCE, PSCo and SPS) Notes Payable and Commercial Paper Information regarding notes payable and commercial paper for the years ended December 31, 1997 and 1996 is as follows (in thousands of dollars, except interest rates): 1997 1996 ---- ---- NCE Notes payable to banks .............................. $147,500 $ 18,478 Commercial paper .................................... 440,843 280,083 ------- ------- $588,343 $298,561 ======== ======== Weighted average interest rate at year end.............. 5.74% 5.94% PSCo Notes payable to banks .............................. $ 50,000 $ 18,375 Commercial paper .................................... 286,599 226,350 Note payable to affiliates (by NCI to Quixx) ........ 11,956 - ------ --- $348,555 $244,725 ======== ======== Weighted average interest rate at year end.............. 5.78% 5.63% 86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 1997 1996 ---- ---- SPS Commercial paper .................................... $154,244 $53,836 Note payable to affiliates (UE) ..................... 9,000 - Note payable to affiliates (Quixx) .................. 16,160 - ------ --- $179,404 $53,836 ======== ======= Weighted average interest rate at year end.............. 5.60% 5.65% Bank Lines of Credit and Compensating Bank Balances In August 1997, NCE entered into a $225 million credit facility with several banks. The credit facility provides for $100 million of direct borrowings by NCE until the outstanding common stock of PSCCC, a wholly-owned subsidiary of PSCo, is transferred to NCE. The credit facility expires August 11, 2002. After the transfer, NCE will have access to $225 million of direct borrowings under the credit facility. PSCo and its subsidiaries have entered into a credit facility with several banks providing $300 million in committed bank lines of credit. The credit facility, which is used primarily to support the issuance of commercial paper by PSCo and PSCCC, alternatively provides for direct borrowings thereunder. 1480 Welton, Inc. and PSRI are provided access to the credit facility with direct borrowings guaranteed by PSCo. The facility expires November 17, 2000. Additionally, PSCo has a credit facility which provides $125 million in committed lines of credit and expires on April 30, 1998. SPS has two credit facilities which provide $180 million in committed bank lines of credit and expire February 27 and 28, 1998. It is planned that at maturity these lines of credit will be replaced with a $200 million line of credit. Borrowings permitted under the committed bank lines of credit totaled $705 million at December 31, 1997, of which $9 million of SPS's committed bank lines of credit required account deposits of 1 1/2% of the unused portion of the loan commitment. Arrangements by the Company and its subsidiaries for committed lines of credit are maintained by a combination of fee payments and compensating balances. Arrangements for uncommitted lines of credit have no fee or compensating balance requirements. Individual PSCo arrangements for uncommitted bank lines of credit totaled $50 million at December 31, 1997, of which all were used. PSCo and SPS may borrow under uncommitted preapproved lines of credit upon request; however, the banks have no firm commitment to make such loans. 8. Financial Instruments (NCE, PSCo and SPS) Fair Value of Financial Instruments The following tables present the carrying amounts and fair values of the Company's and subsidiaries' significant financial instruments at December 31, 1997 and 1996. The carrying amount of all other financial instruments approximates fair value. SFAS No. 107, Disclosures about Fair Value of Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. 87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 1997 1996 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- NCE (Thousands of dollars) Investments, at cost................ $36,010 $36,072 $30,249 $ 30,416 Preferred stock of subsidiaries subject to mandatory redemption .. 41,829 42,893 42,489 43,685 SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS ................. 100,000 104,752 100,000 99,520 Long-term debt of subsidiaries...... 2,206,372 2,251,523 2,001,035 2,059,972 PSCo Investments, at cost................ $36,010 $36,072 $30,249 $30,416 Preferred stock subject to mandatory redemption ........................ 41,829 42,893 42,489 43,685 Long-term debt...................... 1,555,572 1,604,160 1,370,423 1,404,972 SPS SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS ................ $100,000 $ 104,752 $ 100,000 $ 99,520 Long-term debt...................... 621,800 625,348 630,612 655,000 The fair value of the debt and equity securities included in Investments, at cost, is estimated based on quoted market prices for the same or similar investments. The debt securities are classified as held-to-maturity and the equity securities are classified as available-for-sale. The unrealized holding gains and losses for these debt and equity securities are not significant. The estimated fair values of preferred stock subject to mandatory redemption, the SPS obligated mandatorily redeemable preferred securities and long-term debt are based on quoted market prices of the same or similar instruments. Since PSCo, SPS and Cheyenne are subject to regulation, any gains or losses related to the difference between the carrying amount and the fair value of these financial instruments would not be realized by the Company's shareholders. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1997 and 1996. These fair value estimates have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair values may differ significantly from the amounts presented herein. Off-Balance-Sheet Financial Instruments NCE and YGSC have guaranteed 50% of amounts financed under a $32 million Credit Agreement among Young Storage and various lending institutions entered into on June 27, 1995. This debt financing is for the development, construction and operation of an underground natural gas storage facility in northeastern Colorado (see Note 3. Acquisition and Divestiture of Investments). In connection with an agreement for the sale of electric power, SPS guaranteed certain obligations of a customer totaling $48 million. These obligations related to the construction of certain utility property that, in the event of default by the customer, would revert to SPS. SPS has an interest rate swap agreement, which, in effect, fixes the interest rate on a $25,000,000 notional amount at 6.435%. Amounts paid or received under this agreement are accrued as interest rates change and are recognized over the life of the agreement as an adjustment to interest expense. SPS is exposed to interest rate risk in the event of nonperformance by counterparties; however, SPS does not anticipate such nonperformance. 88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Concentration of Credit Risk - Accounts Receivable No individual customer or group of customers engaged in similar activities represents a material concentration of credit risk to the Company and its subsidiaries. 9. Regulatory Matters (NCE, PSCo and SPS) Merger Rate Filings The discussion below summarizes the significant conditions imposed by the state utility regulatory commissions in Colorado, Texas, New Mexico, Wyoming, Oklahoma and Kansas in their respective approvals of the Merger. PSCo The CPUC decision approving the Merger established a five-year performance based regulatory plan and acknowledged that the Merger was in the public interest. The major provisions of the decision include the following, some of which are discussed in other sections of this note: - a $6 million annual electric rate reduction, which was instituted October 1, 1996, followed by an additional $12 million annual electric rate reduction effective with the implementation of new gas rates on February 1, 1997; - an annual electric department earnings test with the sharing of earnings in excess of an 11% return on equity for the calendar years 1997-2001 and the implementation of a Quality of Service Plan; - a freeze in base electric rates for the period through December 31, 2001 with the flexibility to make certain other rate changes, including those necessary to allow for the recovery of DSM, QF capacity and decommissioning costs. The freeze in base electric rates does not prohibit PSCo from filing a general rate case or deny any party the opportunity to initiate a complaint or show cause proceeding; and - the replacement of the ECA with an ICA. On January 20, 1998, the CPUC approved the recovery of $16 million in merger costs incurred through May 31, 1997, the allocation methodologies of merger costs and the recovery of payments associated with a transmission agreement with a wholesale customer. PSCo will request approval from the CPUC for the merger costs incurred subsequent to May 31, 1997 as part of the electric department earnings test expected to be filed in mid-1998. Merger costs attributable to Colorado electric retail customers will be amortized monthly through December 31, 2001 as part of the electric department earnings test. Merger costs attributable to Colorado gas retail customers were included in the gas rate case approved by the CPUC, discussed below. SPS Under the various regulatory commission approvals, SPS is required to provide credits to customers over five years for one-half of the measured non-fuel operation and maintenance expense savings associated with the Merger. SPS will provide guaranteed minimum annual credits to retail customers of $3 million in Texas, $1.2 million in New Mexico, $100,000 in Oklahoma and $10,000 in Kansas and $1.5 million to wholesale customers. Cheyenne The WPSC approved the merger on August 16, 1996. Cheyenne agreed not to file a retail electric rate case for two years after the merger is consummated. Cheyenne expects to file a combined gas and electric rate case with the WPSC in 1999 after the two year moratorium expires. 89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Rate Cases PSCo Retail - Gas On June 5, 1996, PSCo filed a retail rate case with the CPUC requesting an annual increase in its jurisdictional gas department revenues of approximately $34 million. In early 1997, the CPUC approved an overall increase of approximately $18 million with an 11.25% return on equity, effective February 1, 1997 and as modified on May 15, 1997. The CPUC disallowed the recovery of certain postemployment benefit costs under SFAS 112 and imputed anticipated merger related savings net of costs related to the gas business (see Note 1. Summary of Significant Accounting Policies). PSCo filed a petition with the Denver District Court appealing the CPUC's decision. A decision from the Denver District Court is expected in the last half of 1998. Wholesale - FERC PSCo filed a rate case with the FERC on December 29, 1995, requesting a slight overall rate increase (less than 1%) from its wholesale electric customers. This filing, among other things, requested approval for recovery of OPEB costs under SFAS 106, postemployment benefit costs under SFAS 112 and new depreciation rates based on the Company's most recent depreciation study. On March 29, 1997, the FERC issued an order accepting for filing and suspending certain proposed rate changes. Settlement agreements have been reached with all parties and filed with the FERC, which, results in a slight decrease in rates overall. A final order accepting the settlement agreements, subject to PSCo making certain compliance filings, was received in June 1997. On October 3, 1997, PSCo filed the required compliance filing with the FERC to unbundle the wholesale generation, transmission and ancillary services prices in the wholesale power agreements. SPS New Mexico On November 17, 1997, the NMPUC issued an order investigating SPS's rates. SPS is required to file a rate case by May 5, 1998. In the order, the NMPUC determined that because of the rapid changes occurring in the electric industry there is a need for the NMPUC to require rate case filings by the major electricity suppliers who have not adopted a plan to provide retail open access and customer choice of suppliers. Wholesale - FERC On December 19, 1989, the FERC issued its final order regarding a 1985 wholesale rate case. SPS 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 SPS's claim of an offsetting cost and limiting the FERC's actions. The FERC issued its Order on Remand in July 1992, the required filings were made and a hearing was completed in February 1994. In October 1994, the administrative law judge ("ALJ") issued a favorable initial decision that, if approved by the FERC, would result in a substantial revenue recovery for SPS. Negotiated settlements with SPS's partial requirements customers and TNP were approved by the FERC in July 1993 and September 1993, respectively, and SPS received approximately $2.8 million, including interest. In a settlement with SPS's New Mexico rural electric cooperative customers, SPS received approximately $7.0 million, including interest. The FERC approved this settlement in July 1995. Resolutions of these matters with the remaining wholesale customers, the Golden Spread member cooperatives and Lyntegar Electric Cooperative, have not been achieved. SPS is awaiting a final order from the FERC. SPS cannot reasonably estimate the remaining amount recoverable from these proceedings; however, a favorable resolution could materially improve its earnings in the period in which it is resolved. 90 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Cheyenne On May 12, 1997, Cheyenne filed an application with the WPSC for an overall annual increase in retail gas revenues of approximately $1.25 million. On September 23, 1997, the WPSC approved an increase in retail gas revenues of approximately $1.19 million with an 11.71% return on equity, effective October 1, 1997. Electric and Gas Cost Adjustment Mechanisms PSCo During 1994 and 1995, the CPUC conducted several proceedings to review issues related to the ECA. The CPUC opened a docket to review whether the ECA should be maintained in its then present form, altered or eliminated, and on January 8, 1996, combined this docket with the merger docket discussed above. The CPUC decision on the Merger modified and replaced the ECA with an ICA. The ICA, which became effective October 1, 1996, allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders. As of December 31, 1997, PSCo has deferred approximately $0.7 million, as recoverable fuel and energy costs. Management does not believe the cost adjustment mechanism will have a significant impact on the Company's results of operations, financial position or cash flows. The CPUC had a docket to review and prescribe a standardized GCA process to determine the prudence of gas commodity and pipeline delivery service costs incurred by gas utilities. Other issues addressed in this docket included whether the GCA should be maintained in its present form, altered or eliminated. The CPUC issued an order on May 7, 1997, which provides for the current GCA to be maintained and the adoption of certain standardized filing and gas purchase reporting requirements. On January 30, 1998, the CPUC issued another Notice of Proposed Rulemaking seeking comments on various customer notice and reporting requirements related to changes in gas costs. SPS Texas A PUCT substantive rule requires periodic examination of SPS'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. Under the PUCT's regulations, SPS is required to file an application for the Commission to retrospectively review, at least every three years, the operations of a utility's electricity generation and fuel management activities. SPS will file a reconciliation in 1998 for the generation and fuel management activities of approximately $690 million, for the period from January 1995 through December 1997. At December 31, 1997, SPS had approximately $22.9 million in underrecovered fuel costs associated with the Texas retail jurisdiction. Currently, Texas retail customers are being surcharged for approximately $6.4 million of such underrecovered fuel costs. This surcharge does not include the Thunder Basin judgment discussed below. On May 1, 1995, SPS 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 SPS 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 SPS to pass through to customers 100% of margins from non-firm off-system opportunity sales as of January 1995. Prior PUCT rulings had allowed SPS to retain 25% of these margins. The 100% flow through is required by PUCT rules, absent of waiver. A motion for rehearing on the fuel disallowance (which was adjusted to $1.9 million) was subsequently denied by the PUCT and SPS was ordered to flow through 100% of the non-firm off-system sales margin effective with the first billing cycle after the date of the order. Upon appeal by SPS to the Travis County District Court in May 1996, the PUCT's decision on the disallowed fuel costs was upheld. SPS appealed the decision and on January 29, 1998 the Texas Court of Appeals upheld the PUCT decision to disallow fuel costs. SPS is evaluating its alternatives, including filing an appeal to the Supreme Court of Texas. 91 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) SPS was named as a defendant in a case entitled Thunder Basin Coal Co. vs. Southwestern Public Service Co., No. 93-CV304B (D. Wyo.). On November 1, 1994, the jury returned a verdict in favor of Thunder Basin and awarded damages of approximately $18.8 million. SPS 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. SPS filed a motion for rehearing which was denied. In February 1997, SPS recorded the liability for the judgment including interest and court costs. The amount of approximately $22.3 million was paid in April 1997. On September 17, 1996, the FERC issued an order granting SPS conditional approval to collect the FERC jurisdictional portion of the Thunder Basin judgment from wholesale customers. On October 24, 1997, the NMPUC issued an order granting recovery of the New Mexico retail jurisdictional portion of the judgment. On May 1, 1997, SPS filed a request with the PUCT to surcharge undercollected fuel and purchased power expenses, which included $9.1 million of the Thunder Basin judgment. In November 1997, the PUCT issued a decision which denied recovery of the judgment through a surcharge, on the grounds that the costs are not classified as fuel costs. In 1997, SPS expensed approximately $12.1 million of the Texas retail jurisdictional portion of the Thunder Basin judgment and recognized an equal amount as deferred revenue in anticipation of future recovery through the fuel reconciliation proceeding. SPS believes that recovery of the Thunder Basin costs for the Texas retail jurisdiction will be approved in a fuel reconciliation proceeding in 1998, but cannot predict the ultimate outcome. Under the PUCT regulations, a utility may recover eligible fuel expenses or fuel-related expenses, which result in benefits to customers that exceed the costs that customers would otherwise have to pay. The Thunder Basin costs resulted in total net savings to customers of $8.9 million, of which $4.8 million net savings is attributable to Texas retail jurisdictional customers. New Mexico On October 24, 1997, the NMPUC approved a fixed fuel factor for SPS's New Mexico retail jurisdiction, effective January 1998. This will employ an over/under fuel collection calculation made on a monthly basis. SPS will petition for a change in the fixed fuel factor if the over/under recovery balance reaches $5 million. In addition, on an annual basis SPS files with the NMPUC a report of SPS's fuel and purchase power costs, which will include the current over/under recovery balance and will refund or surcharge the balance. The methodology of the over/under calculation, plus interest, is similar to the Texas fixed fuel factor calculation. Previously, New Mexico's retail jurisdictional electric rates applied a monthly fuel factor. Electric Department Earnings Test and Quality of Service Plan PSCo The CPUC's decision on the Merger implemented an electric department earnings test with the sharing of earnings in excess of an 11% return on equity for the calendar years 1997-2001 as follows: Electric Department Sharing of Excess Earnings Return on Equity Customers Shareholders ---------------- --------- ------------ 11-12% 65% 35% 12-14% 50% 50% 14-15% 35% 65% over 15% 100% 0% The CPUC's decision on the Merger also implemented a QSP which provides for bill credits totaling up to $5 million in year one and increasing to $11 million in year five, if PSCo does not achieve certain performance measures relating to electric reliability, customer complaints and telephone response to inquiries. On October 15, 1997, the CPUC issued an order addressing the implementation of a reward mechanism in the QSP which 92 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) provides up to $3 million of annual rewards if PSCo achieves certain performance measures relating to electric reliability. As of December 31, 1997, PSCo recorded an estimated customer refund obligation of approximately $16.4 million related to the electric department earnings test, net of QSP rewards. 10. Commitments and Contingencies (NCE, PSCo and SPS) Environmental Issues The Company and its subsidiaries are subject to various environmental laws, including regulations governing air and water quality and the storage and disposal of hazardous or toxic wastes. The Company and its subsidiaries assess, on an ongoing basis, measures to ensure compliance with laws and regulations related to air and water quality, hazardous materials and hazardous waste compliance and remediation activities. Environmental Site Cleanup As described below, PSCo has been or is currently involved with the clean up of contamination from certain hazardous substances. In all situations, PSCo is pursuing or intends to pursue insurance claims and believes it will recover some portion of these costs through such claims. Additionally, where applicable, PSCo intends to pursue recovery from other Potentially Responsible Parties ("PRPs"). To the extent such costs are not recovered, PSCo currently believes it is probable that such costs will be recovered through the rate regulatory process. To the extent any costs are not recovered through the options listed above, PSCo would be required to recognize an expense for such unrecoverable amounts. Under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the U.S. Environmental Protection Agency ("EPA") identified, and a Phase II environmental assessment revealed, low level, widespread contamination from hazardous substances at the Barter Metals Company ("Barter") properties located in central Denver. For an estimated 30 years, PSCo sold scrap metal and electrical equipment to Barter for reprocessing. PSCo has completed the cleanup of this site at a cost of approximately $9 million and has received responses from the Colorado Department of Public Health and Environment ("CDPHE") indicating that no further action is required related to these properties. On January 3, 1996, in a lawsuit by PSCo against its insurance providers, the Denver District Court entered final judgment in favor of PSCo in the amount of $5.6 million for certain cleanup costs at Barter. Several appeals and cross appeals have been filed by one of the insurance providers and PSCo in the Colorado Court of Appeals. The insurance provider has posted supersedeas bonds in the amount of $9.7 million ($7.7 million attributable to the Barter judgment). On July 10, 1997, the Colorado Court of Appeals overturned the previously awarded $7.7 million judgment on the basis that the jury had not been properly instructed by the Judge regarding a narrow issue associated with some of the policies. PSCo plans to appeal the Colorado Court of Appeals decision to the Colorado Supreme Court. Previously, PSCo had received certain insurance settlement proceeds from other insurance providers for Barter and other contaminated sites and a portion of those funds remains to be allocated to this site by the trial court. In addition, in August 1996, PSCo filed a lawsuit against four PRPs seeking recovery of certain Barter related costs. Settlement has been achieved with two smaller PRP's. On December 16, 1997, the U. S. District Court awarded summary judgment in favor of the remaining PRPs, on the basis PSCo failed to follow CERCLA guidelines in the cleanup. On January 15, 1998, PSCo appealed the summary judgment to the U.S. Court of Appeals. Furthermore, PSCo expects to recover additional expenditures through the sale of the Barter property. PCB presence was identified in the basement of an historic office building located in downtown Denver. The Company was negotiating the future cleanup with the current owners; however, on October 5, 1993, the owners filed a civil action against PSCo in the Denver District Court. The action alleged that PSCo was responsible for the PCB releases and additionally claimed other damages in unspecified amounts. On August 8, 1994, the Denver District Court entered a judgment approving a $5.3 million offer of settlement between PSCo and the building owners resolving all claims. In December 1995, complaints were filed by PSCo against all applicable insurance carriers in the Denver 93 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) District Court. On June 30, 1997, the Court ruled in favor of the carriers on summary judgment motions addressing late notice and other issues. On August 27, 1997, PSCo filed an appeal of the decision with the Colorado Court of Appeals. Two carriers were excluded from this proceeding; subsequently, one carrier received approval to be dismissed on the same basis as the other carriers. PSCo intends to pursue recovery from the remaining carrier. In addition to these sites, PSCo has identified several other sites where clean up of hazardous substances may be required. While potential liability and settlement costs are still under investigation and negotiation, PSCo believes that the resolution of these matters will not have a material adverse effect on PSCo's financial position, results of operations or cash flows. PSCo fully intends to pursue the recovery of all significant costs incurred for such projects through insurance claims and/or the rate regulatory process. Other Environmental Matters Under the Clean Air Act Amendments of 1990 ("CAAA"), coal fueled power plants are required to reduce SO2 and NOx emissions to specified levels through a phased approach. PSCo's and SPS's facilities must comply with the Phase II requirements, which will be effective in the year 2000. Currently, these regulations permit compliance with SO2 emission limitations by using SO2 allowances allocated to plants by the EPA, using allowances generated by reducing emissions at existing plants and by using allowances purchased from other companies. The Company expects to meet the Phase II emission standards placed on SO2 through the combination of: a) use of low sulfur coal, b) the operation of air quality control equipment on certain generation facilities, and c) allowances issued by the EPA and purchased from other companies. PSCo and SPS will be required to modify certain boilers by the year 2000 to reduce the NOx emissions in order to comply with Phase II requirements. The estimated Phase II costs for future plant modifications to meet NOx requirements is approximately $14.4 million for PSCo's Cherokee Unit 1 and 2 and Arapahoe Unit 3. SPS installed two new gas turbines at its Cunningham Station in 1997. The two gas turbine units have undergone performance testing to meet the requirements of the air quality permit. The test results indicated the units may not be in compliance with certain emission limitations. SPS is working with the vendor and the New Mexico Environmental Department to insure compliance with all permit limits. PSCo has announced its intention to spend approximately $211 million on its Denver and Boulder Metro area coal-fueled power plants to further reduce such emissions below the required regulatory levels discussed above, but will only do so if the following three conditions are met: 1) the Colorado General Assembly and the CPUC approve recovery of these costs, 2) PSCo obtains flexibility in operating the plants and 3) PSCo is assured the emission reduction plan is sufficient to meet future state requirements for 15 years. Hayden Steam Electric Generating Station On May 21, 1996, PSCo and the other joint owners of Hayden Station reached an agreement resolving violations alleged in complaints filed by a conservation organization, the CDPHE and the EPA against the joint owners. PSCo is the operator and owns an average undivided interest of approximately 53% of the station's two generating units. In connection with the settlement, the joint owners of the Hayden station were required to make certain payments totaling $4.25 million to the U.S. Treasury and other organizations (PSCo's portion was approximately $2.3 million) and install emission control equipment of approximately $130 million (PSCo's portion is approximately $70 million). The settlement included stipulated future penalties for failure to comply with the terms of the agreement, including specific provisions related to meeting construction deadlines associated with the installation of additional emission control equipment and complying with particulate, SO2 and NOx emissions limitations. In August 1996, the U.S. District Court for the District of Colorado entered the settlement agreement which effectively resolved this litigation. Craig Steam Electric Generating Station On October 9, 1996, a conservation organization filed a complaint in the U.S. District Court pursuant to provisions of the Federal Clean Air Act (the "Act") against the joint owners of the Craig Steam Electric Generating Station located in western Colorado. Tri-State Generation and Transmission Association, Inc. is the operator of the 94 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Craig station and PSCo owns an undivided interest (acquired in April 1992) in each of two units at the station totaling approximately 9.7%. The plaintiff alleged that: 1) the station exceeded the 20% opacity limitations in excess of 14,000 six minute intervals during the period extending from the first quarter of 1991 through the second quarter of 1996, and 2) the owners failed to operate the station in a manner consistent with good air pollution control practices. The complaint seeks, among other things, civil monetary penalties and injunctive relief. The Act provides for penalties of up to $25,000 per day per violation, but the level of penalties imposed in any particular instance is discretionary. A settlement conference was held in February 1998. Resolution of this matter may require installation of emission control equipment. Management does not believe that this potential liability, the future impact of this litigation on plant operations, or any related cost will have a material adverse impact on PSCo's financial position, results of operations, or cash flows. Pepsi Center Hazardous substances resulting from manufactured gas plant operations have been identified at the future site of the proposed Pepsi Center, a sports arena to be located in lower downtown Denver. The site owners have approached PSCo, seeking recovery of most of the costs of cleanup of the site. Total estimated soil cleanup costs range from $1-2 million. The estimate does not include potential costs to clean up affected ground water contamination, if any exists. PSCo's insurance carriers have been notified. Fort St. Vrain In 1989, PSCo announced its decision to end nuclear operations at Fort St. Vrain. Defueling of the reactor to the Independent Spent Fuel Storage Installation ("ISFSI") was completed in June 1992. In March 1996, PSCo and the decommissioning contractors announced that the physical decommissioning activities at the facility had been completed. The final site survey was completed in late October 1996. On August 5, 1997, the NRC approved PSCo's request to terminate the Part 50 license. This concluded the decommissioning activities as the facilities and site were released for unrestricted use. On February 9, 1996, PSCo and the DOE entered into an agreement resolving all the defueling issues. As part of this agreement, PSCo has agreed to the following: 1) the DOE assumed title to the fuel currently stored in the ISFSI, 2) the DOE will assume title to the ISFSI and will be responsible for the future defueling and decommissioning of the facility, 3) the DOE agreed to pay PSCo $16 million for the settlement of claims associated with the ISFSI, 4) ISFSI operating and maintenance costs, including licensing fees and other regulatory costs, will be the responsibility of the DOE, and 5) PSCo provided to the DOE a full and complete release of claims against the DOE resolving all contractual disputes related to storage/disposal of Fort St. Vrain spent nuclear fuel. On December 17, 1996, the DOE submitted a request to the NRC to transfer the title of the ISFSI. This request is being reviewed by the NRC and PSCo anticipates approval in late-1998. As a result of the DOE settlement, coupled with a complete review of expected remaining decommissioning costs and establishment of the anticipated refund to customers, pre-tax earnings for 1996 were positively impacted by approximately $16 million. In accordance with the 1991 CPUC approval to recover certain decommissioning costs, 50% of any cash amounts received from the DOE as part of a settlement, net of costs incurred by PSCo, including legal fees, is to be refunded or credited to customers. At December 31, 1997, a $5.3 million refund to customers has been recorded on the consolidated balance sheet. Under the Price-Anderson Act, PSCo remains subject to potential assessments levied in response to any nuclear incidents prior to early 1994. PSCo continues to maintain primary commercial nuclear liability insurance of $100 million for the Fort St. Vrain site and the adjoining ISFSI. PSCo also maintains coverage of $20.4 million to provide property damage and decontamination protection in the event of an accident involving the ISFSI. 95 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Fuel Purchase Requirements Coal Purchases and Transportation PSCo and SPS have in place various long-term contracts for the purchase and transportation of coal (and with respect to SPS, the processing of coal for deliveries to its bunkers) which are used in the generation of electricity. These contracts expire on various dates through 2017 and at December 31, 1997, the total estimated obligations, based on 1997 prices, for PSCo were approximately $849 million, and for SPS were approximately $1.3 billion. Gas Purchases and Transportation PSCo and Cheyenne have long-term contracts for the purchase, firm transportation and storage of natural gas. These contracts, excluding the thirty-year contract with Young Storage which has been accounted for as a capital lease, are primarily used to support distribution of natural gas and the majority of these contracts expire on various dates through 2002. During 1996, PSCo renegotiated contracts with its primary gas pipeline supplier and committed to continue purchasing firm transportation and gas storage services through 2002. At December 31, 1997, PSCo has minimum annual obligations under such contracts of approximately $213 million in 1998 declining thereafter for a total estimated commitment of approximately $409 million. The combined PSCo and Cheyenne minimum annual obligation at December 31, 1997, under such contracts is approximately $216 million in 1998 declining thereafter for a total estimated commitment of approximately $415 million. SPS does not have any long-term contracts with minimum obligations. Purchased Power PSCo, SPS and Cheyenne have entered into agreements with utilities and QFs for purchased power to meet system load and energy requirements, replace generation from company-owned units under maintenance and during outages, and meet operating reserve obligations to various regional power pools. PSCo and SPS have various pay-for-performance contracts with QFs having expiration dates through the year 2022. In general, these contracts provide for capacity payments, subject to the QFs meeting certain contract obligations, and energy payments based on actual power taken under the contracts. The capacity and energy costs are recovered through base rates and other cost recovery mechanisms. Additionally, the Company's regulated utilities have long-term purchased power contracts with various regional utilities expiring through 2018. In general, these contracts provide for capacity and energy payments which approximate the cost of the sellers. Total capacity and energy payments associated with such contracts for NCE were $477 million, $473 million, and $451 million; for PSCo such payments were $452 million, $453 million and $445 million; and, for SPS such payments were $15 million, $20 million and $6 million in 1997, 1996 and 1995, respectively. At December 31, 1997, the estimated future payments for capacity that NCE, PSCo and SPS are obligated to purchase, subject to availability, are as follows (in thousands): Regional QFs Utilities Total --- --------- ----- NCE 1998.............................. $ 144,973 $ 184,772 $ 329,745 1999.............................. 157,741 175,046 332,787 2000.............................. 156,106 163,989 320,095 2001.............................. 154,926 142,302 297,228 2002.............................. 142,629 130,534 273,163 2003 and thereafter............... 1,248,877 1,137,900 2,386,777 --------- --------- --------- Total............................ $2,005,252 $1,934,543 $3,939,795 ========== ========== ========== 96 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Regional QFs Utilities Total --- --------- ----- PSCo 1998.............................. $ 140,466 $ 176,757 $ 317,223 1999.............................. 140,852 166,620 307,472 2000.............................. 138,937 155,226 294,163 2001.............................. 137,480 142,301 279,781 2002.............................. 124,878 130,534 255,412 2003 and thereafter............... 864,510 1,137,901 2,002,411 ------- --------- --------- Total............................ $1,547,123 $1,909,339 $3,456,462 ========== ========== ========== SPS 1998.............................. $ 4,507 $ - $ 4,507 1999.............................. 16,889 - 16,889 2000.............................. 17,169 - 17,169 2001.............................. 17,446 - 17,446 2002.............................. 17,751 - 17,751 2003 and thereafter............... 384,367 - 384,367 ------- ------- Total............................ $458,129 $ - $458,129 ======== ====== ======== Historically, all minimum coal, coal transportation, natural gas and purchased power requirements have been met. System Purchase Option SPS and the City of Las Cruces, New Mexico ("the City") entered into a System Purchase Option and Rate Agreement in August 1994, which grants the City the option to sell to SPS the electric utility system serving the City (including distribution, subtransmission and transmission facilities), which the City plans to acquire from El Paso Electric Company ("EPE") by purchase or through condemnation proceedings. The agreement has a three-year term beginning at the time the City acquires the facilities and ending no later than January 1, 2002. The purchase price which would be paid by SPS would be equal to the amount required to retire all outstanding debt incurred by the City in acquiring the facilities plus the City's reasonable costs in acquiring the facilities. SPS has the right to terminate the agreement if, in SPS's sole discretion, it determines that any proposed condemnation award is excessive or upon the occurrence of certain other events. The agreement also provides that, if the City abandons or dismisses condemnation proceedings as a consequence of SPS's termination of the agreement, SPS will reimburse the City for one-half of its reasonable litigation expenses and for any of EPE's damages and litigation expenses that the City is obligated to pay by final court order. In conjunction with the agreement, the NMPUC has initiated Case 2651 to investigate whether the agreement constitutes a security, or the guarantee of a security, under the New Mexico Public Utility Act. SPS has responded to the Commission's Order to Show Cause and does not believe the agreement to be a security or the guarantee of a security. A hearing was conducted in Case 2651 in July 1997. Post hearing briefs were filed. The hearing examiner's recommendation is expected during 1998. EPE requested a declaratory judgment regarding the condemnation stating that it is not a legal condemnation. During the first quarter of 1997, the governor of New Mexico signed and issued legislation regarding municipal condemnations which allows the City to complete its action against EPE. The City has not completed its condemnation as it is awaiting a determination of the stranded costs allocated to the system. Other In connection with an agreement for the sale of electric power, SPS guaranteed certain obligations of a customer totaling $48 million at December 31, 1997. These obligations are related to the construction of certain utility property that, in the event of default by the customer, would revert to SPS. Additionally, the Company has 97 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) commitments related to the purchase of materials, plant and equipment additions, DSM expenditures and other various items resulting from the normal course of business. Employee Matters Several employee lawsuits have been filed against PSCo involving alleged discrimination or workers' compensation issues which have arisen during the normal course of business. Also, lawsuits have been filed against PSCo alleging breach of certain fiduciary duties to employees. The plaintiffs lawsuits are in various stages of litigation and/or appeal(s), including settlement discussions, with the appropriate state and federal judicial courts. PSCo intends to contest, or is actively contesting, all such lawsuits, and believes the ultimate outcome will not have a material adverse impact on the Company's results of operations, financial position or cash flow. During 1996, ninety former Information Technology and Systems ("IT&S") employees filed a lawsuit against the Company. The complaint alleged that PSCo unfairly amended its severance plan in connection with a restructuring in late 1994 to exclude the IT&S function/positions that were outsourced to a subsidiary of IBM, effective February 1, 1995. On June 16, 1997, the Denver District Court issued a decision in favor of the former IT&S employees and awarded approximately $1.6 million in severance costs and, in a judgment on October 10, 1997, the former IT&S employees were awarded interest and attorney fees as well, making the total judgment against PSCo $2.1 million. An additional case with 153 former IT&S employees was filed asserting identical claims. Settlement on both cases was achieved in early 1998. During 1997, PSCo accrued related costs, including estimated interest and attorney fees. In early 1998, an additional lawsuit, asserting identical claims, was filed on behalf of 18 former IT&S employees. Certain employees terminated as part of PSCo's 1991/1992 organizational analysis asserted breach of contract and promissory estoppel with respect to job security and breach of the covenant of good faith and fair dealing. Of the 21 actions filed, the trial court directed verdicts in favor of PSCo in 19 cases. A jury entered verdicts adverse to PSCo in two cases which were subsequently appealed by PSCo. On February 6, 1997, the Colorado Court of Appeals issued a decision on all issues in favor of PSCo and on April 3, 1997, the employees appealed the decision of the Colorado Court of Appeals to the Colorado Supreme Court. In October 1997, the Colorado Supreme Court denied the petition for appeal, effectively ending this lawsuit. During 1996, complaints were filed by seventeen plaintiffs, allegedly on behalf of all non-managerial, non-clerical women in the Company's regional facilities. The complaints assert that the Company has engaged in a company-wide pattern and practice of sexual discrimination, including sexual harassment and retaliation. During July 1997, the Company resolved all issues related to this matter and accrued all related estimated costs. Union Contracts PSCo The current Collective Bargaining Agreement is a three year agreement extending from June 1, 1997 through May 31, 2000, with wage increases of 3%, 3% and 3.25% beginning in each year of the agreement 1997, 1998 and 1999 respectively. Approximately 1,082 employees, or 47% of PSCo's total workforce, are represented by the International Brotherhood of Electrical Workers, ("IBEW"), Local 111. During 1996, the IBEW, Local 111 filed several grievances before the National Labor Relations Board relating to the employment of certain non-union personnel to perform services for PSCo. A decision has been entered on three of the multiple grievances, with two of those decisions requiring that PSCo pay union wage rates on new construction jobs performed by outside vendors. PSCo had filed suit seeking to reverse one of these decisions and challenging the subcontracting provision of the labor agreement, all of the outstanding subcontracting grievances and both of the existing adverse decisions, as violations of federal law. During 1997, PSCo and the union reached a settlement resolving all issues and PSCo withdrew its previously filed lawsuit. 98 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) SPS The current Collective Bargaining Agreement is a three-year agreement extending from November 1, 1996 through November 1, 1999, with wage increases of 3% in each year of the agreement. Approximately 850 employees, or 55% of SPS's total workforce, are represented by the IBEW, Local 602. Leasing Program The Company's subsidiaries lease various equipment and facilities used in the normal course of business, some of which are accounted for as capital leases. Expiration of the capital leases range from 1998 to 2025. The net book value of property under capital leases was $44.7 million and $44.4 million for NCE and PSCo, respectively at December 31, 1997, and $49.2 million for NCE and PSCo at December 31, 1996. Assets acquired under capital leases are recorded as property at the lower of fair-market value or the present value of future lease payments, and are amortized over their actual contract term in accordance with practices allowed by regulators. The related obligation is classified as long-term debt. Executory costs are excluded from the minimum lease payments. The majority of the operating leases are under a leasing program that has initial noncancellable terms of one year, while the remaining leases have various terms. These leases may be renewed or replaced. No material restrictions exist in these leasing agreements concerning dividends, additional debt, or further leasing. Rental expense for 1997, 1996 and 1995 was $36.2 million, $26.9 million and $25.4 million, respectively, for NCE; $31.1 million, $25.0 million and $23.5 million, respectively, for PSCo; and $4.3 million, $3.7 million and $3.9 million, respectively, for SPS. SPS's rental expense for the Transition Period was $1.2 million. Estimated future minimum lease payments at December 31, 1997 are as follows (thousands of dollars): Capital Leases NCE PSCo --- ---- 1998 .............................................. $ 9,505 $ 9,346 1999............................................... 8,050 7,890 2000............................................... 5,137 5,092 2001............................................... 5,035 5,035 2002............................................... 4,820 4,820 All years thereafter............................... 76,358 76,358 ------ ------ Total future minimum lease payments 108,905 108,541 Less amounts representing interest............. 64,158 64,149 ------ ------ Present value of net minimum lease payments.... $44,747 $44,392 ======= ======= Operating Leases NCE PSCo SPS --- ---- --- 1998 ................................. $23,036 $19,841 $ 2,426 1999.................................. 19,143 16,176 2,389 2000.................................. 15,767 13,227 2,284 2001.................................. 9,631 7,567 1,944 2002.................................. 4,408 4,058 235 All years thereafter................. 18,392 17,899 - ------ ------ --- Total future minimum lease payments $90,377 $78,768 $ 9,278 ======= ======= ======= PSCo has in place a leasing program which includes a provision whereby PSCo indemnifies the lessor for all liabilities which might arise from the acquisition, use, or disposition of the leased property. 99 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Year 2000 Costs Based on a preliminary analysis, the Company expects to incur costs of approximately $50-65 million over the next two years to modify its computer software, hardware and other automated systems used in operations enabling proper data processing relating to the year 2000 and beyond. The majority of these costs will be incurred by or allocated to the Company's operating utilities. The costs recognized by PSCo and SPS are anticipated to be slightly less than two-thirds and one-third, respectively, of the total estimated costs. The Company continues to evaluate appropriate courses of corrective action, including the replacement of certain systems. A significant portion of these costs will represent the redeployment of existing information technology resources. If such modifications and conversions are not completed timely, the year 2000 problem may have a material impact on the operations of the Company. Management does not anticipate these activities will have a material adverse impact on the financial position, results of operations or cash flows of the Company or its subsidiaries. 11. Jointly-Owned Electric Utility Plants (NCE and PSCo) The Company's investments in jointly-owned plants (PSCo participation) and its ownership percentages as of December 31, 1997 are: Plant Construction in Accumulated Work in Service Depreciation Progress Ownership % ------- ------------ -------- ----------- (Thousands of Dollars) Hayden Unit 1................ $38,452 $30,735 $ 10,867 75.50 Hayden Unit 2................ 58,356 34,204 1,846 37.40 Hayden Common Facilities..... 4,002 453 7,520 53.10 Craig Units 1 & 2............ 57,662 24,665 47 9.72 Craig Common Facilities Units 1 & 2 .................... 10,181 3,164 28 9.72 Craig Common Facilities Units 1,2 & 3 .................. 8,780 3,503 19 6.47 Transmission Facilities, Including Substations 79,330 23,402 84 42.0-73.0 ------ ------ -- $256,763 $120,126 $ 20,411 ======== ======== ======== These assets include approximately 320 Mw of net dependable generating capacity. PSCo is responsible for its proportionate share of operating expenses (reflected in PSCo's and the Company's consolidated statements of income) and construction expenditures. The construction work in progress amounts for Hayden Unit 1, Hayden Unit 2 and Hayden Common Facilities include construction expenditures for installing emission control equipment for these facilities as discussed in Note 10. 100 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 12. Employee Benefits (NCE, PSCo and SPS) Pensions The Company and its subsidiaries maintain noncontributory defined benefit pension plans which cover substantially all employees. As of December 31, 1997, PSCo and SPS have separate employee pension plans. NCS and other NCE affiliates participated in these plans during 1997. Certain new NCE pension plans will be established in 1998. The net pension expense for these plans in 1997, 1996, 1995 and SPS's transition period was comprised of: 1997 NCE PSCo SPS - ---- --- ---- --- (Thousands of Dollars) Service cost....................... $ 18,418 $ 13,360 $ 5,058 Interest cost on projected benefit obligation ...................... 68,327 48,245 20,082 Actual return on plan assets....... (189,597) (102,719) (86,878) Amortization of net transition assets over 15-17 year periods* ......... (7,238) (3,674) (3,564) Deferral and other items........... 100,192 47,535 52,657 ------- ------ ------ Net pension expense (benefit)... $ (9,898) $ 2,747 $(12,645) ======== ======= ======== SPS Transition 1996 NCE PSCo SPS Period - ---- --- ---- --- ------ (Thousands of Dollars) Service cost....................... $ 21,226 $14,317 $ 6,846 $ 2,390 Interest cost on projected benefit obligation ....................... 66,503 46,497 20,266 7,066 Actual return on plan assets....... (133,301) (74,646) (53,666) (22,878) Amortization of net transition assets over 15-17 year periods* ......... (7,238) (3,674) (3,564) (1,188) Deferral and other items........... 59,217 24,362 30,973 14,601 ------ ------ ------ ------ Net pension expense (benefit)... $ 6,407 $ 6,856 $ 855 $ (9) ======== ======= ======== ======= 1995 NCE PSCo SPS - ---- --- ---- --- (Thousands of Dollars) Service cost....................... $ 18,203 $11,659 $ 6,606 Interest cost on projected benefit obligation ....................... 65,574 46,570 19,563 Actual return on plan assets....... (161,443) (123,531) (37,912) Amortization of net transition assets over 15-17 year periods* ......... (7,238) (3,674) (3,564) Deferral and other items........... 91,455 75,521 16,404 ------ ------ ------ Net pension expense............. $ 6,551 $6,545 $1,097 ======== ====== ====== * PSCo is amortizing its net transition assets over 17 years and SPS is amortizing its net transition assets over 15 years. 1997 1996 1995 ---- ---- ---- PSCo SPS** PSCo SPS* PSCo SPS ---- ----- ---- ---- ---- --- Significant assumptions: Discount rate 7.75% 7.5/8.0% 7.25% 8.0% 8.75% 8.0% Expected long-term increase in compensation level 4.25% 6.0/4.5% 4.00% 6.0% 5.00% 6.0% Expected weighted average long-term rate of return on assets 9.75% 9.75% 9.75% 8.0% 9.75% 8.0% * The assumptions used in 1996 for SPS were the same assumptions used for the SPS transition period. ** Assumptions used for January to April/May to December 1997 periods. Variances between actual experience and assumptions for costs and returns on assets are amortized over the average remaining service lives of employees in the plans. 101 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) A comparison of the actuarially computed benefit obligations and plan assets at December 31, 1997 and 1996, is presented in the following table. Plan assets are stated at fair value and are comprised primarily of corporate debt and equity securities, a real estate fund and government securities held either directly or in commingled funds. The Company's funding policy is to contribute annually, at a minimum, the amount necessary to satisfy the IRS funding standards. 1997 NCE PSCo SPS - ---- --- ---- --- (Thousands of Dollars) Actuarial present value of benefit obligations: Vested.................................. $ 853,533 $596,379 $257,154 Nonvested............................... 14,924 6,155 8,769 ------ ----- ----- .................................... 868,457 602,534 265,923 Effect of projected future salary increases 123,516 91,220 32,296 ------- ------ ------ Projected benefit obligation............... 991,973 693,754 298,219 Plan assets at fair value.................. (1,131,270) (699,241) (432,029) ---------- -------- -------- Excess of plan assets over projected benefit obligation ............................... 139,297 5,487 133,810 Unrecognized net gain...................... (111,191) (2,195) (108,996) Prior service costs not yet recognized in net periodic pension cost .................... 26,476 25,455 1,021 Unrecognized net transition assets being recognized over 15-17 year periods ....... (38,108) (18,369) (19,739) ------- ------- ------- Prepaid pension asset...................... $ 16,474 $ 10,378 $ 6,096 ========== ======== ======== 1996 NCE PSCo SPS - ---- --- ---- --- (Thousands of Dollars) Actuarial present value of benefit obligations: Vested.................................. $ 734,168 $514,762 $ 219,406 Nonvested............................... 39,557 28,689 10,868 ------ ------ ------ .................................... 773,725 543,451 230,274 Effect of projected future salary increases 145,727 85,216 60,511 ------- ------ ------ Projected benefit obligation............... 919,452 628,667 290,785 Plan assets at fair value.................. (996,085) (634,967) (361,118) -------- -------- -------- Excess of plan assets over projected benefit obligation ............................... 76,633 6,300 70,333 Unrecognized net loss (gain)............... (57,154) 1,110 (58,264) Prior service costs not yet recognized in net periodic pension cost .................... 28,897 27,758 1,139 Unrecognized net transition assets being recognized over 15-17 year periods ....... (41,798) (22,042) (19,756) ------- ------- ------- Prepaid pension asset...................... $ 6,578 $ 13,126 $ (6,548) ========= ======== ========= 1997 1996 ---- ---- PSCo & SPS PSCo SPS ---------- ---- --- Significant assumptions: Discount rate 7.0% 7.75% 7.5% Expected long-term increase in compensation level 4.0% 4.25% 6.0% Additionally, the Company maintains noncontributory defined benefit supplemental retirement income plans (Supplemental Plan) for certain qualifying executive personnel. The Supplemental Plan benefits are paid out of/or funded through the Company's general fund. Defined Contribution Plans The Company and its subsidiaries maintain defined contribution plans which cover substantially all employees. Total contributions to these plans by the Company and its subsidiaries for both 1997 and 1996 totaled approximately $12 million. The contribution for 1995 was approximately $11 million. 102 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Postretirement Benefits Other Than Pensions The Company and its subsidiaries provide certain post-retirement health care and life insurance benefits for substantially all employees who reach retirement age while working for the Company. Historically, the Company has recorded the cost of these benefits for these plans on a pay-as-you-go basis. The Company's subsidiaries have adopted SFAS 106 which requires the accrual, during the years that an employee renders service to the Company, of the expected cost of providing these benefits to the employee. The Company is amortizing the transition obligations for these plans over a period of 20 years. Effective January 1, 1993, PSCo adopted SFAS 106 based on a level of expense determined in accordance with the CPUC. PSCo has been transitioning to full accrual accounting for OPEB costs between January 1, 1993 and December 31, 1997, consistent with the accounting requirements for rate regulated enterprises. All OPEB costs deferred during the transition period will be amortized on a straight line basis over the subsequent 15 years. Additionally certain state agencies, which regulate the Company's utility subsidiaries, have issued guidelines related to the recovery or funding of OPEB costs. SPS is required to fund SFAS 106 costs for Texas and New Mexico collected in rates and PSCo and Cheyenne are required to fund SFAS 106 costs in irrevocable external trusts which are dedicated to the payment of these postretirement benefits. The net periodic postretirement benefit cost in 1997, 1996 and 1995 under SFAS 106 was comprised of: NCE PSCo SPS --- ---- --- 1997 (Thousands of Dollars) Service cost............................. $ 6,121 $ 4,999 $ 1,030 Interest cost............................ 26,537 21,254 4,782 Return on plan assets.................... (9,240) (6,376) (2,572) Curtailment expense...................... 3,323 - 3,323 Amortization of net transition obligation over a 20 year amortization period and deferrals............................... 14,992 12,399 2,283 ------ ------ ----- Net postretirement benefit cost required by SFAS 106............................. 41,733 32,276 8,846 OPEB expense recognized in accordance with current regulation...................... (36,351) (26,730) (9,010) ------- ------- ------ Increase (decrease) in regulatory asset (Note 1)................................ 5,382 5,546 (164) Regulatory asset at beginning of period.. 57,641 54,449 3,192 ------ ------ ----- Regulatory asset at end of period........ $ 63,023 $59,995 $ 3,028 ======== ======= ======= SPS Transition NCE PSCo SPS Period --- ---- --- ------ 1996 (Thousands of Dollars) Service cost............................. $ 8,191 $ 6,928 $ 1,266 $ 419 Interest cost............................ 27,998 22,982 5,109 1,608 Return on plan assets.................... (5,710) (4,500) (1,964) 100 Amortization of net transition obligation over a 20 year amortization period and deferrals............................... 14,775 12,710 3,049 31 ------ ------ ----- -- Net postretirement benefit cost required by SFAS 106 ............................ 45,254 38,120 7,460 2,158 OPEB expense recognized in accordance with current regulation ..................... (37,981) (31,271) (6,715) (2,230) ------- ------- ------ ------ Increase (decrease) in regulatory asset (Note 1)................................ 7,273 6,849 745 (72) Regulatory asset at beginning of period.. 50,368 47,600 2,519 3,264 ------ ------ ----- ----- Regulatory asset at end of period........ $57,641 $54,449 $ 3,264 $3,192 ======= ======= ======= ====== 103 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NCE PSCo SPS --- ---- --- 1995 (Thousands of Dollars) Service cost.............................. $ 7,240 $ 6,027 $ 1,213 Interest cost............................. 29,604 24,761 4,843 Return on plan assets..................... (3,301) (2,578) (723) Amortization of net transition obligation over a 20 year amortization period and deferrals................................ 15,186 12,710 2,476 ------ ------ ----- Net postretirement benefit cost required by SFAS 106.............................. 48,729 40,920 7,809 OPEB expense recognized in accordance with current regulation ...................... (37,933) (30,893) (7,040) ------- ------- ------ Increase in regulatory asset (Note 1)..... 10,796 10,027 769 Regulatory asset at beginning of period... 39,323 37,573 1,750 ------ ------ ----- Regulatory asset at end of period......... $50,119 $47,600 $2,519 ======= ======= ====== 1997 1996 1995 ---- ---- ---- PSCo SPS** PSCo SPS* PSCo SPS ---- ----- ---- ---- ---- --- Significant assumptions: Discount rate 7.75% 7.5/8.0% 7.25% 8.0% 8.75% 8.0% Expected long-term increase in compensation level 4.00% 6.0/4.5% 4.00% 6.0% 5.00% 6.0% Expected weighted average long-term rate of return on assets 9.75% 9.75% 9.75% 8.0% 9.75% 8.0% * The assumptions used in 1996 for SPS were the same assumptions used for the SPS transition period. ** Assumptions used for January to April/May to December 1997 periods. A comparison of the actuarially computed benefit obligations and plan assets for 1997 and 1996 is presented in the following table. Plan assets are stated at fair value and are comprised primarily of corporate debt and equity securities, a real estate fund, government securities and other short-term investments held either directly or in commingled funds. NCE PSCo SPS --- ---- --- 1997 (Thousands of Dollars) Accumulated postretirement benefit obligation: Retirees and eligible beneficiaries. $ 163,730 $ 122,945 $ 37,066 Other fully eligible plan participants 103,593 100,371 458 Other active plan participants...... 109,362 88,761 17,934 ------- ------ ------ Total........................... 376,685 312,077 55,458 Plan assets at fair value ............. (112,324) (80,480) (27,517) -------- ------- ------- Accumulated benefit obligation in excess of plan assets ....................... 264,361 231,597 27,941 Unrecognized net gain.................. 26,079 13,087 12,457 Unrecognized transition obligations over a 20 year amortization period ....... (227,724) (185,989) (36,598) -------- -------- ------- Accrued postretirement benefit obligation $ 62,716 $ 58,695 $ 3,800 ========== ========= ======== NCE PSCo SPS --- ---- --- 1996 (Thousands of Dollars) Accumulated postretirement benefit obligation: Retirees and eligible beneficiaries. $148,460 $ 110,692 $ 37,768 Other fully eligible plan participants 84,439 81,676 2,763 Other active plan participants...... 117,456 90,559 26,897 ------- ------ ------ Total........................... 350,355 282,927 67,428 Plan assets at fair value ............. (88,673) (63,744) (24,929) ------- ------- ------- Accumulated benefit obligation in excess of plan assets ....................... 261,682 219,183 42,499 Unrecognized net gain ................. 44,794 39,847 4,947 Unrecognized transition obligations over a 20 year amortization period ........ (247,925) (203,353) (44,572) -------- -------- ------- Accrued postretirement benefit obligation $ 58,551 $ 55,677 $ 2,874 ========= ========= ======== 1997 1996 ---- ---- PSCo & SPS PSCo SPS ---------- ---- --- Significant assumptions: Discount rate 7.0% 7.75% 7.5% Expected long-term increase in compensation level 4.0% 4.0% 6.0% 104 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The assumed health care cost trend rate for 1998 is 8.5%, decreasing to 4.5% in 2006 in 0.5% annual increments. A 1% increase in the assumed health care cost trend rate will increase the estimated total accumulated benefit obligation for PSCo by $37.0 million and for SPS by $7.1 million, and the service and interest cost components of net periodic postretirement benefit costs for PSCo by $5.0 million and SPS by $0.8 million. Postemployment Benefits In 1994, the Company and its regulated subsidiaries adopted SFAS 112, which establishes the accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement (postemployment benefits). At December 31, 1997, the Company has recorded a $28.0 million liability on the consolidated balance sheet, using an assumed discount rate of 7.0%. These costs have historically been recorded on a pay-as-you-go basis. Regulatory assets were recorded upon the adoption of SFAS 112 in anticipation of obtaining future rate recovery of these costs recorded. PSCo filed a FERC rate case in December 1995 and a retail gas rate case in June 1996 which included requests for recovery of all electric wholesale and gas retail jurisdictional SFAS 112 costs. A final order approving the FERC settlement agreement, which includes the recovery of SFAS 112 costs, was received in June 1997. In the 1996 PSCo gas rate case, the CPUC denied PSCo's request to amortize the approximately $8.9 million regulatory asset (gas jurisdictional portion) recognized upon the adoption of SFAS 112. PSCo has appealed to the Denver District Court the decision related to this issue and is assessing the impact of this decision on the future recovery of PSCo's electric jurisdictional portion (see Note 1. Summary of Significant Accounting Policies - Regulatory Assets and Liabilities). Management believes it is probable that the Company will receive the other required regulatory approvals to recover these costs in the future. Incentive Compensation The Company and its subsidiaries have Incentive Compensation Plans ("Incentive Plans") which provide for annual and long-term incentive awards for key employees. Approximately 5 million shares of common stock have been authorized for these Incentive Plans for the issuance of restricted shares and/or stock options, with certain vesting and/or exercise requirements. The Company recognizes compensation expense for restricted stock awards based on the fair value of the Company's common stock on the date of grant, consistent with SFAS 123. Cash, restricted stock and stock option awards were made under these plans during 1997, 1996 and 1995. The Company applies APB Opinion No. 25 in accounting for its stock-based compensation and, accordingly, no compensation cost is recognized for the issuance of stock options as the exercise price of the options equals the fair-market value of the Company's common stock at the date of grant. Assuming compensation cost for the Company, PSCo and SPS had been determined consistent with SFAS 123 using the fair-value based method, the Company's net income would have been reduced by approximately $2.8 million in 1997, which would have reduced earnings per share by approximately $0.03. The net income would have been reduced by an insignificant amount with no impact on earnings per share for 1996 and 1995. SFAS 123's method of accounting for stock-based compensation plans has not been applied to options granted prior to January 1, 1995 and as a result the pro forma compensation cost may not be representative of that to be expected in future years. A summary of the Company's stock options at December 31, 1997, 1996 and 1995 and changes during the years then ended is presented in the table below: 105 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NCE* PSCo SPS ---- ---- --- Weighted- Weighted- Weighted- Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- 1997 Outstanding at beginning of year 477,783 $31.46 441,227 $31.38 38,480 $30.80 Granted 1,690,147 43.32 62,100 39.00 2,147 37.24 Exercised 78,647 30.34 40,404 29.57 3,666 30.81 Forfeited 3,651 33.41 3,651 33.41 - - Converted to NCE options at Merger date - - 459,272 32.56 36,961 32.70 --- ------- ------ Outstanding at end of year 2,085,632 41.10 - - - - ========= === === Exercisable at end of year 431,071 32.66 - - - - ========= === === Weighted-average fair value of options granted $ 5.45 $ 4.23 $ 3.70 1996 Outstanding at beginning of year 407,117 $29.78 347,931 $29.33 62,301 $30.78 Granted 158,270 35.13 158,270 35.13 - - Exercised 74,303 30.87 51,673 30.21 21,647 30.76 Forfeited 13,301 32.48 13,301 32.84 - - ------ ------ --- Outstanding at year of year 477,783 31.46 441,227 31.38 40,654 30.79 ======= ======= ====== Exercisable at end of year 158,970 29.05 158,970 29.05 - - ======= ======= === Weighted-average fair value of options granted $ 4.31 $4.31 $ - 1995 Outstanding at beginning of year 262,932 $29.52 195,744 $28.53 70,724 $30.79 Granted 161,000 30.29 161,000 30.29 - - Exercised 5,685 32.38 267 29.00 5,703 30.92 Forfeited 11,130 29.93 8,546 29.17 2,720 30.81 ------ ----- ----- Outstanding at year of year 407,117 29.78 347,931 29.33 62,301 30.78 ======= ======= ====== Exercisable at end of year 134,809 28.88 125,931 28.52 9,345 32.34 ======= ======= ===== Weighted-average fair value of options granted $ 5.39 $ 5.39 $ - SPS Transition Period Outstanding at beginning of year 40,654 $30.79 Granted - - Exercised 2,174 30.69 Forfeited - - --- Outstanding at year of year 38,480 30.80 ====== Exercisable at end of year - --- * Amounts reflect the conversion of SPS and PSCo stock options to NCE stock options.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option-Pricing Model with the following weighted-average assumptions: 1997 1996 ---- ---- Expected option life.................................. 10 years 10 years Stock volatility....................................... 13.3% 11.95% Risk-free interest rate................................ 6.15% 6.21% Dividend yield......................................... 5.4% 5.8% Additionally, PSCo and SPS have other plans which provide for cash awards to all employees based on the achievement of corporate goals, of which certain goals were met in each of the last three years. The expenses 106 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) accrued under the incentive programs totaled approximately $4.2 million in 1997, $10.9 million in 1996 and $9.1 million in 1995. In accordance with the terms of the Company's Incentive Plans, certain unexercisable stock options, restricted stock awards and dividend equivalents became exercisable or vested on the effective date of the Merger. The NCE Omnibus Incentive Plan, which was adopted in 1997, contains a change in control provision under which all stock-based awards, such as options and restricted shares, will vest 100% and all cash-based awards will be paid out immediately in cash as if the performance objectives have been achieved through the effective date of the change in control. 13. Income Taxes (NCE, PSCo and SPS) The provisions for income taxes for NCE and PSCo for the years ended December 31, 1997, 1996 and 1995, and for SPS for the years ended December 31, 1997, August 31, 1996 and 1995 and for the four months ended December 31, 1996 and 1995 consist of the following (in thousands): 1997 NCE PSCo SPS --- ---- --- Current income taxes: Federal.......................... $ 82,337 $55,041 $43,401 State............................ 4,872 3,601 2,057 ----- ----- ----- Total current income taxes.......... 87,209 58,642 45,458 ------ ------ ------ Deferred income taxes: Federal.......................... 45,537 31,548 3,045 State............................ 6,674 5,842 542 ----- ----- --- Total deferred income taxes...... 52,211 37,390 3,587 ------ ------ ----- Investment tax credits - net........ (5,501) (5,219) (250) ------ ------ ---- Total provision for income taxes.... $133,919 $90,813 $48,795 ======== ======= ======= 1996 NCE PSCo SPS --- ---- --- Current income taxes: Federal.......................... $ 79,365 $41,737 $46,435 State............................ 2,832 951 2,689 ----- --- ----- Total current income taxes..... 82,197 42,688 49,124 ------ ------ ------ Deferred income taxes: Federal.......................... 70,964 53,612 15,776 State............................ 7,998 7,287 647 ----- ----- --- Total deferred income taxes...... 78,962 60,899 16,423 ------ ------ ------ Investment tax credits - net........ (7,506) (7,256) (250) ------ ------ ---- Total provision for income taxes.... $153,653 $96,331 $65,297 ======== ======= ======= 107 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 1995 NCE PSCo SPS --- ---- --- Current income taxes: Federal.......................... $115,025 $58,728 $56,297 State............................ 4,691 2,807 1,884 ----- ----- ----- Total current income taxes..... 119,716 61,535 58,181 ------- ------ ------ Deferred income taxes: Federal.......................... 47,327 38,006 9,321 State............................ 1,560 1,164 396 ----- ----- --- Total deferred income taxes...... 48,887 39,170 9,717 ------ ------ ----- Investment tax credits - net........ (5,598) (5,348) (250) ------ ------ ---- Total provision for income taxes.... $163,005 $95,357 $67,648 ======== ======= ======= Four Months Ending December 31, ------------------------------- SPS - Transition Period 1996 1995 ---- ---- (unaudited) Current income taxes: Federal.......................... $ 5,991 $14,799 State............................ 190 998 --- --- Total current income taxes..... 6,181 15,797 ----- ------ Deferred income taxes: Federal.......................... 4,697 3,117 State............................ 192 132 --- --- Total deferred income taxes...... 4,889 3,249 ----- ----- Investment tax credits - net........ (83) (83) --- --- Total provision for income taxes.... $ 10,987 $18,963 ======== ======= 108 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) A reconciliation of the statutory U.S. income tax rates and the effective tax rates follows (in thousands):
1997 NCE PSCo SPS --- ---- --- Tax computed at U.S. statutory rate on pre-tax accounting income... $142,506 35.0% $103,199 35.0% $43,529 35.0% Increase (decrease) in tax from: Allowance for funds used during construction......... (2,220) (0.6) (2,222) (0.8) (2) - Amortization of investment tax credits .................... (5,501) (1.4) (5,219) (1.8) (250) (0.2) State income taxes, net of Federal income tax benefit 6,617 1.6 5,250 1.8 1,689 1.4 Cash surrender value of life insurance policies.......... (12,952) (3.2) (12,876) (4.4) (76) (0.1) Amortization of prior flow- through amounts ............ 10,509 2.6 10,483 3.6 - - Merger related costs - non-deductible ............. 8,274 2.0 4,921 1.7 3,352 2.7 Foreign tax credit........... (7,043) (1.7) (7,043) (2.4) - - Other-net.................... (6,271) (1.4) (5,680) (1.9) 553 0.4 ------ ---- ------ ---- --- --- Total income taxes.......... $133,919 32.9% $ 90,813 30.8% $48,795 39.2% ======== ==== ======== ==== ======= ==== 1996 NCE PSCo SPS --- ---- --- Tax computed at U.S. statutory rate on pre-tax accounting income ....................... $153,287 35.0% $100,337 35.0% $59,874 35.0% Increase (decrease) in tax from: Allowance for funds used during construction......... (1,685) (0.3) (1,438) (0.5) (248) (0.1) Amortization of investment tax credits ..................... (7,506) (1.7) (7,256) (2.5) (250) (0.1) State income taxes, net of Federal income tax benefit 6,579 1.5 5,356 1.9 1,748 0.9 Cash surrender value of life insurance policies.......... (11,265) (2.6) (11,265) (3.9) (76) - Amortization of prior flow- through amounts ............ 10,509 2.4 10,509 3.6 - - Merger related costs - non-deductible ............. 4,258 1.0 2,574 0.9 2,006 1.2 Other-net.................... (524) (0.2) (2,486) (0.9) 2,243 1.3 ---- ---- ------ ---- ----- --- Total income taxes.......... $153,653 35.1% $ 96,331 33.6% $65,297 38.2% ======== ==== ======== ==== ======= ==== 1995 NCE PSCo SPS Tax computed at U.S. statutory rate on pre-tax accounting income ...................... $161,469 35.0% $ 95,975 35.0% $65,494 35.0% Increase (decrease) in tax from: Allowance for funds used during construction......... (2,817) (0.6) (2,495) (0.9) (322) (0.2) Amortization of investment tax credits .................... (5,598) (1.2) (5,348) (1.9) (250) (0.1) State income taxes, net of Federal income tax benefit .. 3,806 0.8 2,581 0.9 1,225 0.7 Cash surrender value of life insurance policies.......... (9,546) (2.1) (9,546) (3.5) (76) - Amortization of prior flow- through amounts ............ 10,509 2.3 10,509 3.8 - - Merger related costs - non-deductible ............. 2,225 0.5 1,414 0.5 170 0.1 Other-net.................... 2,957 0.7 2,267 0.9 1,407 0.7 ----- --- ----- --- ----- --- Total income taxes.......... $163,005 35.4% $ 95,357 34.8% $67,648 36.2% ======== ==== ======== ==== ======= ====
SPS Transition Period Four Months Ending December 31, ------------------------------- 1996 1995 ---- ---- (unaudited) Tax computed at U.S. statutory rate on pre-tax accounting income... $10,544 35.0% $17,468 35.0% Increase (decrease) in tax from: Allowance for funds used during construction......... (144) (0.5) (180) (0.4) Amortization of investment tax credits .................... (83) (0.3) (83) (0.2) State income taxes, net of Federal income tax benefit 123 0.4 649 1.3 Merger related costs - non-deductible ............. 488 1.6 620 1.2 Other-net.................... 59 0.3 489 1.1 -- --- --- --- Total income taxes.......... $10,987 36.5% $18,963 38.0% ======= ==== ======= ==== 109 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Company and its regulated subsidiaries have historically provided for deferred income taxes to the extent allowed by their regulatory agencies whereby deferred taxes were not provided on all differences between financial statement and taxable income (the flow-through method). At December 31, 1997, PSCo and SPS are fully normalized for FERC jurisdictional purposes. For state jurisdictional purposes, PSCo is fully normalized in Colorado and Wyoming and SPS is fully normalized in Texas and Oklahoma. SPS is fully normalized to the extent allowed by its regulators in New Mexico and Kansas, with flow-through treatment of certain temporary differences. To give effect to temporary differences for which deferred taxes were not previously required to be provided, a regulatory asset was recognized. The regulatory asset represents temporary differences primarily associated with prior flow-through amounts and the equity component of allowance for funds used during construction, net of temporary differences related to unamortized investment tax credits and excess deferred income taxes that have resulted from historical reductions in tax rates (see Note 1). The tax effects of significant temporary differences representing deferred tax liabilities and assets as of December 31, 1997 and 1996 are as follows (in thousands): 1997 NCE PSCo SPS --- ---- --- Deferred income tax liabilities: Accelerated depreciation and amortization $ 724,879 $432,453 $278,566 Plant basis differences (prior flow-through) .................. 173,523 118,332 54,384 Allowance for equity funds used during construction ............ 77,925 46,715 31,103 Pensions.......................... 31,832 33,105 (1,693) Other............................. 116,912 75,143 39,424 ------- ------ ------ Total............................ 1,125,071 705,748 401,784 Deferred income tax assets: Investment tax credits............ 65,111 61,333 3,065 Contributions in aid of construction 72,424 69,560 2,172 Other............................. 37,804 20,737 13,360 ------ ------ ------ Total............................ 175,339 151,630 18,597 ------- ------- ------ Net deferred income tax liability... $ 949,732 $554,118 $383,187 ========= ======== ======== 1996 NCE PSCo SPS --- ---- --- Deferred income tax liabilities: Accelerated depreciation and amortization ................... $ 685,244 $412,047 $273,197 Plant basis differences (prior flow-through) .................. 188,120 132,149 55,971 Allowance for equity funds used during construction ............ 81,559 48,952 32,607 Pensions.......................... 40,075 38,790 1,285 Other............................. 99,164 68,940 30,224 ------ ------ ------ Total............................ 1,094,162 700,878 393,284 Deferred income tax assets: Investment tax credits............ 68,484 65,278 3,206 Contributions in aid of construction 65,489 63,317 2,172 Other............................. 45,692 28,641 17,051 ------ ------ ------ Total............................ 179,665 157,236 22,429 ------- ------- ------ Net deferred income tax liability... $914,497 $543,642 $370,855 ======== ======== ======== As of December 31, 1997, the consolidated group does not have any cumulative Federal or state tax credits which have not been realized. A valuation allowance has not been recorded as the Company expects that all deferred income tax assets will be realized in the future. 110 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 14. Segments of Business (NCE and PSCo) NCE 1997 Electric Gas Other Total -------- --- ----- ----- (Thousands of Dollars) Operating revenues.................. $2,473,359 $ 816,596 $ 52,570 $3,342,525 ---------- --------- -------- ---------- Operating expenses, excluding depreciation and amortization..... 1,740,338 705,984 23,900 2,470,222 Depreciation and amortization....... 193,970 42,760 6,348 243,078 ------- ------ ----- ------- Total operating expenses.......... 1,934,308 748,744 30,248 2,713,300 --------- ------- ------ --------- Operating income.................... 539,051 67,852 22,322 629,225 ======= ====== ====== ======= Plant construction expenditures*.... 365,366 107,008 3,123 475,497 ======= ======= ===== ======= Identifiable assets: Property, plant and equipment*.... 4,585,582 872,056 75,738 5,533,376 Materials and supplies............ 61,950 5,129 1,332 68,411 Fuel inventory.................... 23,017 - 145 23,162 Gas in underground storage........ - 47,394 - 47,394 Other corporate assets............ 1,637,938 --------- $7,310,281 ========== 1996 Operating revenues.................. $2,416,539 $640,497 $ 39,998 $3,097,034 ---------- -------- -------- ---------- Operating expenses, excluding depreciation and amortization...... 1,651,960 549,223 35,403 2,236,586 Depreciation and amortization....... 182,665 35,735 6,465 224,865 ------- ------ ----- ------- Total operating expenses.......... 1,834,625 584,958 41,868 2,461,451 --------- ------- ------ --------- Operating income (loss)............. 581,914 55,539 (1,870) 635,583 ======= ====== ====== ======= Plant construction expenditures*.... 356,464 96,842 1,662 454,968 ======= ====== ===== ======= Identifiable assets: Property, plant and equipment*.... 4,400,189 805,372 83,522 5,289,083 Materials and supplies............ 58,122 7,325 1,301 66,748 Fuel inventory.................... 26,914 - 145 27,059 Gas in underground storage........ - 42,826 - 42,826 Other corporate assets............ 1,191,726 --------- $6,617,442 ========== 1995 Operating revenues.................. $2,283,179 $624,585 $54,444 $2,962,208 ---------- -------- ------- ---------- Operating expenses, excluding depreciation and amortization ..... 1,548,581 538,620 52,479 2,139,680 Depreciation and amortization....... 170,566 29,901 5,117 205,584 ------- ------ ----- ------- Total operating expenses.......... 1,719,147 568,521 57,596 2,345,264 --------- ------- ------ --------- Operating income (loss)............. 564,032 56,064 (3,152) 616,944 ======= ====== ====== ======= Plant construction expenditures*.... 289,701 86,482 4,224 380,407 ======= ====== ===== ======= Identifiable assets: Property, plant and equipment*..... 4,188,491 777,420 89,597 5,055,508 Materials and supplies............ 65,700 8,886 1,241 75,827 Fuel inventory.................... 37,854 - 145 37,999 Gas in underground storage........ - 44,900 - 44,900 Other corporate assets............ 1,046,560 --------- $6,260,794 ========== * Net of accumulated depreciation and includes allocation of common utility property. 111 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 14. Segments of Business (continued) PSCo 1997 Electric Gas Other Total -------- --- ----- ----- (Thousands of Dollars) Operating revenues.................. $1,485,196 $ 733,091 $ 11,356 $2,229,643 ---------- --------- -------- ---------- Operating expenses, excluding depreciation and amortization and income taxes.................. 1,017,108 609,004 6,914 1,633,026 Depreciation and amortization....... 125,456 40,929 2,066 168,451 ------- ------ ----- ------- Total operating expenses*......... 1,142,564 649,933 8,980 1,801,477 --------- ------- ----- --------- Operating income*................... 342,632 83,158 2,376 428,166 ======= ====== ===== ======= Plant construction expenditures**... 246,072 104,876 1,325 352,273 ======= ======= ===== ======= Identifiable assets: Property, plant and equipment**... 2,828,792 841,238 54,830 3,724,860 Materials and supplies............ 44,937 3,089 4 48,030 Fuel inventory.................... 20,717 - 145 20,862 Gas in underground storage........ - 46,576 - 46,576 Other corporate assets............ 1,154,405 --------- $4,994,733 ========== 1996 Operating revenues.................. $1,488,990 $640,497 $ 7,951 $2,137,438 ---------- -------- ------- ---------- Operating expenses, excluding depreciation and amortization and income taxes.................. 1,006,904 549,223 5,813 1,561,940 Depreciation and amortization....... 116,801 35,735 2,095 154,631 ------- ------ ----- ------- Total operating expenses*......... 1,123,705 584,958 7,908 1,716,571 --------- ------- ----- --------- Operating income*................... 365,285 55,539 43 420,867 ======= ====== == ======= Plant construction expenditures**... 223,395 96,842 925 321,162 ======= ====== === ======= Identifiable assets: Property, plant and equipment**... 2,733,699 805,372 59,824 3,598,895 Materials and supplies............ 41,418 7,325 229 48,972 Fuel inventory.................... 24,594 - 145 24,739 Gas in underground storage........ - 42,826 - 42,826 Other corporate assets............ 857,216 ------- $4,572,648 ========== 1995 Operating revenues.................. $1,449,096 $624,585 $ 7,010 $2,080,691 ---------- -------- ------- ---------- Operating expenses, excluding depreciation and amortization and income tax.................... 1,002,381 538,620 7,046 1,548,047 Depreciation and amortization....... 109,498 29,901 1,981 141,380 ------- ------ ----- ------- Total operating expenses*......... 1,111,879 568,521 9,027 1,689,427 --------- ------- ----- --------- Operating income*................... 337,217 56,064 (2,017) 391,264 ======= ====== ====== ======= Plant construction expenditures**... 198,341 86,482 693 285,516 ======= ====== === ======= Identifiable assets: Property, plant and equipment**.... 2,645,045 777,420 58,247 3,480,712 Materials and supplies............ 47,636 8,886 3 56,525 Fuel inventory.................... 35,509 - 145 35,654 Gas in underground storage........ - 44,900 - 44,900 Other corporate assets............ 733,998 ------- $4,351,789 ========== * Before income taxes. ** Net of accumulated depreciation and includes allocation of common utility property. 112 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 15. Transactions With Affiliates (PSCo and SPS) PSCo and SPS receive various administrative, management, environmental and other support services from NCS, which began operations on May 1, 1997 and construction services from UE. In addition, PSCo and SPS pay interest expense on any short-term borrowings from NCE. Dividends on common stock declared by PSCo and SPS are paid to NCE. SPS receives interest income from NC Enterprises on the note receivable related to the sale of Quixx and UE as part of the Merger. The table below contains the various significant affiliate transactions among the companies and related parties (in thousands of dollars). PSCo SPS ---- --- 1997 Operating expenses $125,030 $40,149 Interest income - 3,618 Dividends paid to NCE 76,093 45,092 Interest expenses 156 747 There were no significant related party transactions for the years ended December 31, 1996 and 1995. 16. Quarterly Financial Data (Unaudited) (NCE, PSCo and SPS) The following summarized quarterly information for 1997 and 1996 is unaudited, but includes all adjustments (consisting only of normal recurring accruals) which the Company considers necessary for a fair presentation of the results for the periods. Information for any one quarterly period is not necessarily indicative of the results which may be expected for a twelve-month period due to seasonal and other factors (in thousands, except per share data).
NCE Three Months ended ------------------ 1997 March 31 June 30 September 30 December 31 ---- -------- ------- ------------ ----------- Operating revenues.................... $898,955 $784,658 $ 804,154 $854,758 Operating income ..................... 139,289 124,750 130,135 235,051 Net income (loss)..................... 78,156 34,045 (47,225) 85,946 Basic and diluted earnings per share of common stock outstanding: Income before extraordinary item (loss) ....................... $0.75 $0.32 $ 0.61 $0.82 Extraordinary item.................. - - (1.06) - Net income (loss)................... $0.75 $0.32 $(0.45) $0.82 1996 ---- Operating revenues.................... $838,931 $733,121 $ 739,406 $819,524 Operating income ..................... 135,289 114,772 135,251 130,566 Net income............................ 76,218 59,452 76,547 60,124 Basic and diluted earnings per share of common stock outstanding: Net income.......................... $0.74 $0.58 $0.74 $0.58 PSCo Three Months ended 1997 March 31 June 30 September 30 December 31 ---- -------- ------- ------------ ----------- Operating revenues.................... $677,660 $542,677 $ 477,264 $532,042 Operating income ..................... 104,818 83,022 81,054 68,459 Net income (loss)..................... 62,881 30,607 (73,085) 73,074 1996 ---- Operating revenues.................... $622,917 $484,787 $ 476,861 $586,821 Operating income...................... 104,846 73,286 88,222 92,130 Net income............................ 64,429 34,537 39,256 52,124
113 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SPS Three Months ended 1997 March 31 June 30 September 30 December 31 ---- -------- ------- ------------ ----------- Operating revenues.................. $221,295 $243,221 $ 284,156 $230,611 Operating income ................... 34,471 39,656 53,051 32,103 Net income.......................... 18,218 6,380 (2) 31,111 19,866 Three Month Months Ended Ended 1996 Transition Period Nov. 30 Dec. 31 ---------------------- ------- ------- Operating revenues.................. $214,381 $ 81,198 Operating income.................... 34,711 12,481 Net income (loss)................... 21,470 (2,332)(3) Three Months ended 1996 Nov. 31, 95 Feb. 29, 96 May 31, 96 Aug. 31, 96 ---- ----------- ----------- ---------- ----------- Operating revenues.................. $200,957 $203,785 $225,029 $269,626 Operating income.................... 33,238 28,801 31,980 56,647 Net income.......................... 23,168 18,081 19,878 44,646 (4) (1) Includes the effect of the UK Windfall Tax recognized in the third quarter 1997. (2) Includes the write-off of Quixx's & UE's investment in the Carolina Energy Project. (3) Includes the write-off of Quixx's investment in the BCH Energy Project. (4) Includes the sale of water rights by Quixx.
114 SCHEDULE II NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Years Ended December 31, 1997, 1996 and 1995
Additions --------- Balance at Charged Charged to Deductions Balance beginning to other from at end of period income accounts(1) reserves(2) of year --------- ------ ----------- ----------- ------- NCE (Thousands of Dollars) Reserve deducted from related assets: Provision for uncollectible accounts: 1997....................... $6,623 $5,854 $ 79 $ 7,201 $5,355 ====== ====== ===== ======= ====== 1996....................... $6,218 $7,283 $ 453 $ 7,331 $6,623 ====== ====== ===== ======= ====== 1995 (3)................... $5,381 $8,431 $ (40) $ 7,648 $6,124 ====== ====== ===== ======= ====== PSCo Reserve deducted from related assets: Provision for uncollectible accounts: 1997....................... $4,049 $5,193 $(500) $ 6,470 $2,272 ====== ====== ===== ======= ====== 1996....................... $3,630 $6,741 $ 477 $ 6,799 $4,049 ====== ====== ===== ======= ====== 1995....................... $3,173 $7,815 $ 4 $ 7,362 $3,630 ====== ====== ===== ======= ====== SPS Reserve deducted from related assets: Provision for uncollectible accounts: 1997....................... $2,574 $ 661 $ (62) $ 731 $2,442 ====== ====== ===== ======= ====== 1996 (September 1996 through December 1996) ...... $2,669 $ 223 $ (13) $ 305 $2,574 ====== ====== ===== ======= ====== 1996 (4)................... $2,494 $ 535 $ (9) $ 351 $2,669 ====== ====== ===== ======= ====== 1995 (4)................... $2,208 $ 616 $ (44) $ 286 $2,494 ====== ====== ===== ======= ====== --------------------------------------- (1) Uncollectible accounts subsequently recovered, transfers from customers' deposits, etc., and the transfer of certain subsidiaries' balances of $571,620 for PSCo and $69,320 for SPS in 1997. (2) Uncollectible accounts written off or transferred to other parties. (3) Information for PSCo includes January 1995 through December 1995 and for SPS includes September 1994 through August 1995. (4) Information reflects fiscal years ended August 31, 1996 and 1995.
115 EXHIBIT 12(a) PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO CONSOLIDATED FIXED CHARGES (not covered by Report of Independent Public Accountants)
Year Ended December 31, ----------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Thousands of Dollars, except ratios) Fixed charges: Interest on long-term debt....... $ 114,460 $ 92,205 $ 85,832 $ 89,005 $ 98,089 Interest on borrowings against COLI contracts ................ 46,082 40,160 34,717 29,786 25,333 Other interest................... 24,117 17,238 23,392 14,235 9,445 Amortization of debt discount and expense less premium .......... 3,987 3,621 3,278 3,126 2,018 Interest component of rental expense 9,012 10,649 6,729 6,888 6,824 ----- ------ ----- ----- ----- Total ......................... $ 197,658 $ 163,873 $153,948 $143,040 $141,709 ========= ========= ======== ======== ======== Earnings (before fixed charges and taxes on income): Net income....................... $ 204,042 $ 190,346 $178,856 $170,269 $157,360 Fixed charges as above........... 197,658 163,873 153,948 143,040 141,709 Provisions for Federal and state taxes on income, net of investment tax credit amortization ........ 90,813 96,331 95,357 48,500 60,994 ------ ------ ------ ------ ------ Total.......................... $ 492,513 $ 450,550 $428,161 $361,809 $360,063 ========= =========== ======== ======== ======== Ratio of earnings to fixed charges.. 2.49 2.75 2.78 2.53 2.54 ==== ==== ==== ==== ====
116 EXHIBIT 12(b) PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO CONSOLIDATED COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (not covered by Report of Independent Public Accountants)
Year Ended December 31, ----------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Thousands of Dollars, except ratios) Fixed charges and preferred stock dividends: Interest on long-term debt....... $114,460 $ 92,205 $ 85,832 $ 89,005 $ 98,089 Interest on borrowings against COLI contracts ................. 46,082 40,160 34,717 29,786 25,333 Other interest................... 24,117 17,238 23,392 14,235 9,445 Amortization of debt discount and expense less premium ........... 3,987 3,621 3,278 3,126 2,018 Interest component of rental expense 9,012 10,649 6,729 6,888 6,824 Preferred stock dividend requirement 11,752 11,848 11,963 12,014 12,031 Additional preferred stock dividend requirement .................... 5,231 5,995 6,377 3,422 4,662 ----- ----- ----- ----- ----- Total ......................... $214,641 $181,716 $172,288 $158,476 $158,402 ======== ======== ======== ======== ======== Earnings (before fixed charges and taxes on income): Net income....................... $204,042 $190,346 $178,856 $170,269 $157,360 Interest on long-term debt....... 114,460 92,205 85,832 89,005 98,089 Interest on borrowings against COLI contracts ................ 46,082 40,160 34,717 29,786 25,333 Other interest................... 24,117 17,238 23,392 14,235 9,445 Amortization of debt discount and expense less premium .......... 3,987 3,621 3,278 3,126 2,018 Interest component of rental expense 9,012 10,649 6,729 6,888 6,824 Provisions for Federal and state taxes on income, net of investment tax credit amortization ............ 90,813 96,331 95,357 48,500 60,994 ------ ------ ------ ------ ------ Total.......................... $492,513 $450,550 $428,161 $361,809 $360,063 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges and preferred stock dividends..... 2.29 2.48 2.49 2.28 2.27 ==== ==== ==== ==== ====
117 EXHIBIT 12(c) SOUTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO CONSOLIDATED FIXED CHARGES (not covered by Report of Independent Public Accountants)
Year Trans- Year-Ended Ended ition August 31, Dec. 31, 1997 Period 1996 1995 1994 1993 ------------- ------ ---- ---- ---- ---- (Thousands of Dollars, except ratios) Fixed charges: Interest on long-term debt....... $ 44,112 $ 15,556 $ 44,964 $ 40,645 $ 37,881 $ 38,992 Dividends on SPS obligated mandatorily redeemable preferred securities............ 7,850 1,526 - - - - Other interest................... 7,444 1,612 6,561 3,219 3,068 2,047 Amortization of debt discount and expense less premium .......... 2,244 235 577 534 518 498 Interest component of rental expense 1,425 415 1,245 1,292 1,184 1,094 ----- --- ----- ----- ----- ----- Total ......................... $ 63,075 $ 19,344 $ 53,347 $ 45,690 $ 42,651 $ 42,631 ======== ======== ======== ======== ======== ======== Earnings (before fixed charges and taxes on income): Net income....................... $ 75,575 $ 19,137 $105,773 $119,477 $102,168 $105,254 Fixed charges as above........... 63,075 19,344 53,347 45,690 42,651 42,631 Provisions for Federal and state taxes on income, net of investment tax credit amortization ........ 48,795 10,987 65,297 67,649 58,388 57,668 ------ ------ ------ ------ ------ ------ Total.......................... $187,445 $ 49,468 $224,417 $232,816 $203,207 $205,553 ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges.. 2.97 2.56 4.21 5.10 4.76 4.82 ==== ==== ==== ==== ==== ====
118 EXHIBIT 12(d) SOUTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO CONSOLIDATED COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (not covered by Report of Independent Public Accountants)
Year Trans- Year-Ended Ended ition August 31, Dec. 31, 1997 Period 1996 1995 1994 1993 ------------- ------ ---- ---- ---- ---- (Thousands of Dollars, except ratios) Fixed charges and preferred stock dividends: Interest on long-term debt....... $ 44,112 $ 15,556 $ 44,964 $ 40,645 $ 37,881 $ 38,992 Dividends on SPS obligated mandatorily redeemable preferred securities............ 7,850 1,526 - - - - Other interest................... 7,444 1,612 6,561 3,219 3,068 2,047 Amortization of debt discount and expense less premium .......... 2,244 235 577 534 518 498 Interest component of rental expense 1,425 415 1,245 1,292 1,184 1,094 Preferred stock dividend requirement - - 2,494 4,878 4,878 5,626 Additional preferred stock dividend requirement ........... - - 1,522 2,715 2,742 3,037 --- --- ----- ----- ----- ----- Total ......................... $ 63,075 $ 19,344 $ 57,363 $ 53,283 $ 50,271 $ 51,294 ======== ======== ======== ======== ======== ======== Earnings (before fixed charges and taxes on income): Net income....................... $ 75,575 $ 19,137 $105,773 $119,477 $102,168 $105,254 Interest on long-term debt....... 44,112 15,556 44,964 40,645 37,881 38,992 Dividends on SPS obligated manditorily redeemable preferred securities............ 7,850 1,526 - - - - Other interest................... 7,444 1,612 6,561 3,219 3,068 2,047 Amortization of debt discount and expense less premium ........... 2,244 235 577 534 518 498 Interest component of rental expense 1,425 415 1,245 1,292 1,184 1,094 Provisions for Federal and state taxes on income, net of investment tax credit amortization ....... 48,795 10,987 65,297 67,649 58,388 57,668 ------ ------ ------ ------ ------ ------ Total.......................... $187,445 $ 49,468 $224,417 $232,816 $203,207 $205,553 ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges and preferred stock dividends..... 2.97 2.56 3.91 4.37 4.04 4.01 ==== ==== ==== ==== ==== ====
119 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Does not apply. PART III Item 10. Directors and Executive Officers of the Registrant (New Century Energies, Inc., Public Service Company of Colorado, and Southwestern Public Service Company) Biographies concerning the directors of NCE are contained under ELECTION OF DIRECTORS in NCE's 1998 Proxy Statement, which is incorporated herein by reference. The following tables set forth certain information concerning the directors and executive officers of each of the registrants as of December 31, 1997.
NEW CENTURY ENERGIES, INC. Name Age Occupation/Title Period - ---- --- ---------------- ------ Officers Bill D. Helton 59 Chairman of the Board, CEO and Director 1997-Present Chairman of the Board and Director 1997-Present Public Service Company of Colorado, Cheyenne Light, Fuel and Power Company, NC Enterprises, Inc., New Century Services, Inc., New Century-Cadence, Inc., and e prime, inc. Director, Southwestern Public Service Company 1990-Present CEO, Southwestern Public Service Company 1990-1997 Chairman of the Board, Southwestern Public Service, 1991-Present Quixx Corporation and Utility Engineering Corporation Director, Natural Fuels Corporation 1997-Present Director, Quixx Corporation 1990-Present Chairman of the Board and Director, Quixx Power Services, Inc. 1993-Present Director, Utility Engineering Corporation 1989-Present Wayne H. Brunetti (a) 55 Vice Chairman, President, COO, and Director 1997-Present Vice Chairman and CEO, Public Service Company of 1997-Present Colorado and Cheyenne Light, Fuel and Power Company President and Director, PSCo 1994-Present Vice Chairman, President, CEO, and Director, 1997-Present NC Enterprises, Inc., New Century Services, Inc. and New Century Cadence, Inc. Chairman, 1480 Welton, Inc., Green and Clear Lakes 1997-Present Company, PSR Investments, Inc., PS Colorado Credit Corporation, and WestGas InterState, Inc. President and Director, 1480 Welton, Inc. and Natural Fuels Corporation 1996-Present Vice Chairman, CEO, and Director, Southwestern Public Service Company 1997-Present Director, Cheyenne Light, Fuel and Power Co., Green 1994-Present and Clear Lakes Company, PSR Investments, Inc., PS Colorado Credit Corporation and WestGas InterState, Inc. Director, Young Gas Storage Company and e prime, inc. 1995-Present President and Director, Fuel Resources Development Co. 1995-Present President, Green and Clear Lakes Company and WestGas 1995-Present InterState Inc.
120 President and Director, New Century International, Inc. 1997-Present President, PSR Investments, Inc., PS Colorado Credit 1996-Present Corporation Director, Yorkshire Power Group Limited 1997-Present Chairman of the Board, Cheyenne Light, Fuel and Power 1997-1997 Company and e prime, inc. Vice Chairman and Director, Quixx Corporation, 1997-Present Yorkshire Holdings plc Vice Chairman, Yorkshire Electricity Group plc and 1997-Present e prime, inc. Richard C. Kelly 51 Executive Vice President and Chief Financial Officer 1997-Present President, Treasurer, and Director 1995-1997 Executive Vice President, CFO, and Director, Public 1997-Present Service Company of Colorado and Southwestern Public Service Company Senior Vice President, PSCo 1990-1997 Treasurer, PSCo 1986-1997 Executive Vice President and Director, NC 1997-Present Enterprises, Inc. and New Century Service, Inc. Treasurer, 1480 Welton, Inc., Cheyenne Light, Fuel and 1994-Present Power Company, Fuel Resources Development Co., Green and Clear Lakes Company, WestGas InterState, Inc. Director, Texas-Ohio Gas, Inc., Texas-Ohio Pipeline, 1996-Present Inc., e prime Networks, Inc., and e prime Telecom, Inc. Director, Quixx Corporation, Utility Engineering, 1997-Present Yorkshire Electricity Group plc, Yorkshire Holdings plc, Yorkshire Power Group Limited, e prime operating, inc., e prime projects international, inc. Director, 1480 Welton, Inc. 1989-Present Director, Cheyenne Light, Fuel and Power Company 1990-Present Vice President, Fuel Resources Development Co. 1990-Present Director, Fuel Resources Development Co. 1991-Present Director, Green and Clear Lakes Company, and Natural 1990-Present Fuels Corporation Director and Secretary, New Century International, Inc.1997-Present Director and Treasurer, New Century-Cadence, Inc. 1997-Present Vice President and Director, PSR Investments, Inc. 1986-Present Vice President and Director, PS Colorado Credit 1987-Present Corporation Director, WestGas InterState, Inc. 1993-Present Vice President, Treasurer and Director, Young Gas 1995-Present Storage Company Secretary, Treasurer and Director, e prime Energy 1997-Present Marketing, Inc. Director, e prime inc. 1995-Present President and CEO, e prime inc. 1997-Present Vice President and Treasurer, e prime, inc. 1995-1997 Paul J. Bonavia (b) 46 Senior Vice President and General Counsel 1997-Present Brian P. Jackson (c) 39 Senior Vice President Finance and Administrative Services 1997-Present Teresa S. Madden (d) 41 Controller and Secretary 1997-Present Controller and Secretary, Public Service Company 1997-Present of Colorado and New Century Services, Inc. Controller and Assistant Secretary, Southwestern 1997-Present Public Service Company
121 Director, Yorkshire Power Group Limited, Yorkshire 1997-Present Holdings plc and Yorkshire Electricity Group plc Secretary, NC Enterprises, WestGas InterState, 1997-Present e prime, inc. Cheyenne Light, Fuel and Power Company and New Century-Cadence, Inc., Texas-Ohio Pipeline, Inc., Texas-Ohio Gas, Inc., Fuel Resources Development Co. Manager of Corporate Accounting, Public Service 1990-1997 Company of Colorado Assistant Secretary, PSCo and e prime, inc. 1995-1997 Assistant Secretary, 1480 Welton, Inc., PSR 1991-Present Investments, Inc., PS Colorado Credit Corporation, Assistant Secretary, Cheyenne Light, Fuel and Power 1991-1997 Company and Fuel Resources Development Co. James D. Steinhilper 48 Treasurer, 1997-Present Assistant Treasurer, Cheyenne Light, Fuel and Power 1997-1997 Company, New Century-Cadence, Inc. and WestGas InterState, Inc. Treasurer, NC Enterprises, Inc., Public Service 1997-Present Company of Colorado, Southwestern Public Service Company and e prime, inc. Director Finance and Treasurer, New Century 1997-Present Services, Inc. Group Manager, Finance, Southwestern Public Service 1989-1997 Company PUBLIC SERVICE COMPANY OF COLORADO Directors Wayne H. Brunetti See information under NCE Officers Section above. Doyle R. Bunch II 51 Senior Vice President, New Century Services, Inc. 1997-Present Director, e prime, inc., NC Enterprises, Inc., PSCo 1997-Present Chairman of the Board, Secretary, and Director New 1995-1997 Century Energies, Inc. Director, Quixx Corporation 1985-1997 Executive Vice President, Southwestern Public Service 1992-1997 Company Henry H. Hamilton 59 Executive Vice President and Director, Southwestern 1997-Present Public Service Company, Public Service Company of Colorado and New Century Services, Inc. Director, Quixx Power Services, Inc. 1993-Present Vice President, Southwestern Public Service Company 1987-1997 Bill D. Helton See information under NCE Officers Section above. Richard C. Kelly See information under NCE Officers Section above. David M. Wilks 51 Executive Vice President and Director, Public Service 1997-Present Company of Colorado, New Century Services, Inc. and New Century-Cadence, Inc. Director, Cheyenne Light Fuel and Power Company, 1997-Present Director, Southwestern Public Service Company, Quixx 1995-Present Power Services and Utility Engineering Corporation Quixx Corporation President and Chief Operating Officer, Southwestern 1995-Present Public Service Company Senior Vice President, Southwestern Public Service 1991-1995 Company
122 Officers Bill D. Helton See information under NCE Officers Section above. Wayne H. Brunetti See information under NCE Officers Section above. Henry H. Hamilton See information under PSCo Directors Section above. Richard C. Kelly See information under NCE Officers Section above. David M. Wilks See information under PSCo Directors Section above. Teresa S. Madden See information under NCE Officers Section above. SOUTHWESTERN PUBLIC SERVICE COMPANY Directors Bill D. Helton See information under NCE Officers Section above. Wayne H. Brunetti See information under NCE Officers Section above. David M. Wilks See information under NCE Officers Section above. Henry H. Hamilton See information under PSCo Directors Section above. Richard C. Kelly See information under NCE Officers Section above. Officers Bill D. Helton See information under NCE Officers Section above. Wayne H. Brunetti See information under NCE Officers Section above. David M. Wilks See information under NCE Officers Section above. Henry H. Hamilton See information under PSCo Directors Section above. Richard C. Kelly See information under NCE Officers Section above. Teresa S. Madden See information under NCE Officers Section above. Mary Pullum 55 Secretary, SPS, Utility Engineering Corporation, 1997-Present Quixx Corporation Assistant Secretary, New Century Energies, Inc. 1997-Present New Century Services, Inc., KES Montego, Inc., Quixx Borger Cogen,Inc.,Quixx Jamaica Power, Inc., Quixx Mustang Station, Inc., and Quixxlinn Corporation Manager, Compliance/Document Services, New Century 1997-Present Services, Inc., Assistant Secretary, Quixx Jamaica, Inc. and Quixx 1996-Present WPP94 Assistant Secretary, Quixx Carolina, Inc. 1995-Present Assistant Secretary, Quixx Power Services, Inc. 1993-Present Assistant Secretary, Utility Engineering Corporation 1989-1997 and Quixx Corporation Assistant Secretary, Southwestern Public Service 1981-1997 Company
There are no family relationships between executive officers or directors of the registrants. There are no arrangements or understandings between the executive officers individually and any other person with reference to their being selected as officers of each registrant. All executive officers of each registrant are elected annually by the respective Board of Directors. (a) Mr.Brunetti was President and Chief Executive Officer of Management Systems International from June 1991 through July 1994 and Executive Vice President of Florida Power & Light Company from 1987 through May 1991. (b) Mr. Bonavia was Of Counsel at LeBoeuf, Lamb, Greene & MacRae, LLP from March 1997 through December 1997 and Senior Vice President at Dominion Resources, Inc. from 1991 through February 1997. 123 (c) Mr. Jackson was employed by Arthur Andersen LLP from 1980 through November 1997. He was a partner with the firm from 1994 through 1997. Effective February 17, 1998, Mr. Jackson was elected Chief Financial Officer of Public Service Company of Colorado and Southwestern Public Service Company. (d) Ms. Madden is a member of the audit committee and finance committee for Yorkshire Electricity Group plc. Mr. Kelly is Chairman of the audit committee and a member of the finance committee of Yorkshire Electricity Group plc. Item 11. Executive Compensation Information concerning executive compensation for NCE is contained under Compensation Of Executive Officers And Directors in the NCE 1998 Proxy Statement, which information is incorporated herein by reference. Information concerning executive compensation for SPS has been omitted pursuant to General Instruction I(2)(c). Information concerning executive compensation for PSCo is presented herein. The following tables set forth information concerning the total compensation paid or awarded in 1997 to PSCo's Chief Executive Officer and each of the four most highly compensated officers serving as such on December 31, 1997, and one additional executive officer who was among the most highly compensated officers in 1997, but who had resigned her position prior to December 31, 1997 (collective the PSCo Named Executive Officers). In 1997, in connection with the Merger, the salaries of these executives were paid by NCS and a portion of their compensation has been allocated and charged to PSCo. Information for calendar years 1996 and 1995 is presented for the executive officers who were executive officers of PSCo prior to the Merger.
======================================================================================== Summary Compensation Table ======================================================================================== Annual Compensation Long-Term Compensation (c) All Other Name and Principal Compen- Position sation ($)(d)(e) ----------------------------------------------- Year Awards Payouts ------------------------------- Salary Bonus Other Restricted Securities LTIP ($) ($) Annual Stock Underlying Payouts (a) Compen- Awards Options/ ($) sation($) ($) SAR's(#) (b) =================================================================================================== Bill D. Helton 1997 455,833 78,363 271,092 0 300,000 0 27,524 Chairman of the Board =================================================================================================== Wayne H. Brunetti 1997 435,853 104,994 3,750 0 314,400 231,722 27,304 Vice Chairman and 1996 400,018 256,820 0 16,800 30,129 20,001 Chief Executive 1995 330,838 150,448 74,992 14,700 0 6,917 Officer =================================================================================================== Richard C. Kelly 1997 254,382 48,997 3,750 0 107,100 120,484 16,089 Executive Vice 1996 227,503 100,457 0 10,950 29,388 11,917 President 1995 215,005 49,970 49,983 9,600 15,619 11,375 and Chief Financial Officer =================================================================================================== Patricia T. Smith 1997 216,559 39,723 2,250 0 6,700 84,593 2,394,914 Sr. V.P. and General 1996 225,842 94,944 0 9,300 0 11,292 Counsel 1995 220,018 49,782 24,658 8,150 0 0 =================================================================================================== Henry H. Hamilton 1997 174,583 35,673 49,125 0 66,000 0 11,139 Executive Vice President =================================================================================================== David M. Wilks 1997 238,958 41,285 24,809 0 87,000 0 9,618 Executive Vice President ===================================================================================================
(a) The amounts shown in the "Bonus" column for 1997 are related to payments made to the Named Executives Officers by PSCo or SPS in connection with the Merger. The amounts paid to Messrs. Helton, Wilks, and Hamilton were based on the average of their two highest bonuses paid by SPS in fiscal years 1993, 1994 and 1995, in accordance with their employment agreements. The amounts paid to Messrs. Brunetti and Kelly and Ms. Smith 124 represent 7/12 of the target award earned under the PSCo Omnibus Incentive Plan which were paid in accordance with their Change in Control agreements. (b) The amounts shown in this column include relocation benefits of $238,125 for Mr. Helton and the reimbursement of certain taxes related to the exercise of SPS stock options of $24,639, $16,042 and $41,785 for Messrs. Helton, Wilks and Hamilton, respectively. Also, the amounts shown in this column for Messrs. Helton, Brunetti, Kelly, Wilks and Hamilton and Ms. Smith include flexible perquisite or automobile allowance benefits ($8,328, $3,750, $3,750, $8,767, $7,340 and $2,250, respectively). (c) There were no restricted stock awards granted in 1997 and no Named Executive Officer held any restricted stock at December 31, 1997. In accordance with the terms of the PSCo Omnibus Incentive Plan, Mr. Brunetti, Mr. Kelly and Ms. Smith received certain stock option awards (14,400, 7,100 and 6,700 options, respectively) and dividend equivalents payments ($231,726, $120,484 and $84,593, respectively) which vested in connection with the Merger. (d) The amounts represented in the "All Other Compensation" column, except for the additional compensation to Ms. Smith as disclosed in footnote (e), reflect the total of matching contributions made under the PSCo and SPS employee savings plans, the PSCo and SPS non-qualified savings plans (the "Executive Savings Plan" and the "Non-Qualified Salary Deferral Plan", respectively) and insurance premiums paid by PSCo and SPS. These amounts are summarized below: - -------------------------------------------------------------------------------- Name Contributions to Contributions to Insurance Employee Savings the Non-Qualified Premiums ($) Plan ($) Savings Plans ($) - -------------------------------------------------------------------------------- Bill D. Helton 9,330 17,069 1,125 - -------------------------------------------------------------------------------- Wayne H.Brunetti 7,150 15,767 4,387 - -------------------------------------------------------------------------------- Richard C. Kelly 7,150 6,204 2,735 - -------------------------------------------------------------------------------- Patricia T. Smith 7,150 1,554 1,939 - -------------------------------------------------------------------------------- Henry H. Hamilton 5,655 4,909 575 - -------------------------------------------------------------------------------- David M. Wilks 4,773 4,235 610 - -------------------------------------------------------------------------------- (e) Ms. Smith resigned and was paid $2,384,271 on October 31, 1997. Under the terms of the severance and employment agreements in effect, she received a severance benefit equal to three years compensation including base salary and annual incentive paid at target, reimbursement of certain taxes, immediate vesting of all outstanding incentive awards and the economic equivalent of any long-term awards she would have received during the upcoming three year term. Also, Ms. Smith received additional credit under the then existing PSCo Supplemental Employment Retirement Plan for the upcoming three year term, additional contributions under the Executive Savings Plan that she would have received during the upcoming three years, continued welfare benefits for three years and a payment equal to the present value of the benefits Ms. Smith would have received under all then existing qualified retirement plans had she received credit for three additional years of service. 125 ============================================================================= Option/SAR Grants in Last Fiscal Year ============================================================================= Name Individual Grants ---------------------------------------------------------- Number of Securities % of Total Underlying Options/SARs Exercise Options/ Granted to or Base Grant Date SARs Employees in Price Expiration Present Value Granted Fiscal ($/Share) Date ($)(c) (#)(a) year(b) - -------------------------------------------------------------------------------- Bill D. Helton 300,000 18.45% 41.625 8/3/07 1,068,000 - -------------------------------------------------------------------------------- Wayne H. Brunetti 300,000 18.45% 41.625 8/3/07 1,068,000 14,400 23.19% 39.000 2/18/07 61,344 - -------------------------------------------------------------------------------- Richard C. Kelly 100,000 6.15% 41.625 8/3/07 356,000 7,100 11.43% 39.000 2/18/07 30,246 - -------------------------------------------------------------------------------- David M. Wilks 87,000 5.35% 41.625 8/3/07 309,720 - -------------------------------------------------------------------------------- Patricia T. Smith 6,700 10.79% 39.000 10/31/00 22,378 - -------------------------------------------------------------------------------- Henry H. Hamilton 66,000 4.06% 41.625 8/3/07 234,960 - -------------------------------------------------------------------------------- (a) The options with an exercise price of $39.00 were grants of PSCo common stock granted by the Compensation Committee of the PSCo Board on February 18, 1997. The options were intended to vest and be exercisable only to the extent of 33 1/3% on the first anniversary date of the grant and to the same extent on the second anniversary and third anniversary. All rights to exercise were intended to be cumulative to the extent not exercised. All options expire 10 years from the date of grant. Effective August 1, 1997, with the completion of the Merger, all PSCo options converted to NCE options based on the one for one conversion ratio used in the Merger and were immediately vested and exercisable with the $39.00 price and 10 year term carried forward, except for Ms. Smith. In accordance with the terms of Ms. Smith's PSCo Severance Agreement, her options will expire three years after her date of resignation. The $39.00 exercise price equals the Fair Market Value of PSCo Common Stock on February 18, 1997. The options with an exercise price of $41.625 were granted by the NCE Compensation Committee with an exercise price equal to the opening trade price on the New York Stock Exchange (NYSE) of NCE Common Stock on August 4, 1997. The options vest and may be fully exercisable on the first anniversary date of the grant. All options expire 10 years from the date of the grant. (b) % of Total Options/SARs Granted to Employees in Fiscal Year apply to shares of PSCo common stock granted prior to the completion of the Merger with respect to all $39.00 options and to shares of NCE Common Stock granted following the completion of the Merger with respect to all $41.625 options. (c) These amounts represent a theoretical present valuation based on the Black-Scholes Option Pricing Model as adjusted for dividends. The values in the column are estimates based upon an option value of $4.26 for the $39.00 options granted to Messrs. Brunetti and Kelly and $3.34 for the options granted to Ms. Smith. The options granted at the $41.625 exercise price are estimate based upon an option price of $3.56. The option values were derived using the following assumptions: 1. the time to exercise is the option life of ten years (except for Ms. Smith option life is 3.7 years); 2. the risk free rate is 6.45% for the $39.00 PSCo options granted to Messrs. Brunetti and Kelly; 5.89% for the options granted to Ms. Smith and 6.38% for the $41.625 NCE options. These rates represent 126 the interest rate on 10-year, 4-year and 10-year treasury strips as quoted in the Federal Reserve Statistical Release for February 1997, February 1997 and August 1997, respectively; 3. the option strike prices are $39.00 for the PSCo options and $41.625 for the NCE options; 4. the stock prices at grant date were $39.00 for the PSCo options and $41.625 for the NCE options; 5. the standard deviation of PSCo and NCE common stock, which is a measure of the volatility of the stock, is 14.15% for the $39.00 PSCo options and 9.16% for the $41.625 NCE options and 6. a dividend yield for the $39.00 PSCo options is 5.94% and for the $41.625 NCE options is 5.57%. Executives may not sell or assign these options, which have value only to the extent of the future stock price appreciation. These amounts or any of the assumptions should not be used to predict future performance of the stock price or dividends. ================================================================================ Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values ================================================================================ Number of Value of Securities Unexercised Underlying In-the-Money Unexercised Options/SARs Options/SARs at FY-End at FY-End ($) (a) (#) ------------- ------------- Name Shares Value Exercisable/ Exercisable/ Acquired Realized Unexercisable Unexercisable on ($) Exercise (#) --------------------- ------------ ------------ ------------- ------------- Bill D. Helton 890 7,512 0/ 0/ 303,561 1,948,957 - -------------------------------------------------------------------------------- Wayne H. Brunetti 0 0 52,334/ 758,843/ 300,000 1,893,750 - -------------------------------------------------------------------------------- Richard C. Kelly 0 0 41,050/ 631,866/ 100,000 631,250 - -------------------------------------------------------------------------------- Patricia T. Smith 0 0 24,150/ 323,191/ 0 0 - -------------------------------------------------------------------------------- Henry H. Hamilton 454 3,832 77/ 1,194/ 67,817 444,794 - -------------------------------------------------------------------------------- David M. Wilks 409 3,452 67/ 1,039/ 88,905 578,721 ================================================================================ (a) Option values were calculated based on a $47.9375 closing price of NCE Common Stock, as listed on the NYSE at December 31, 1997. 127 ================================================================================ Long-Term Incentive Plans - Awards in Last Fiscal Year ================================================================================ Name Number Performance Estimated Future Payouts Under of or Other Non-Stock Price-Based Plans Shares, Period Units Until or Maturation Other or Payout Rights (a)(#) ---------- ----------- ---------- Threshold Target Maximum ($ or #) ($ or #) ($ or #) - -------------------------------------------------------------------------------- Bill D. Helton N/A N/A - -------------------------------------------------------------------------------- Wayne H. Brunetti 47,480 1/1/97 thru 99,708 12/31/99 - -------------------------------------------------------------------------------- Richard C. Kelly 17,600 1/1/97 thru 36,960 12/31/99 - -------------------------------------------------------------------------------- Patricia T. Smith 15,616 1/1/97 thru 32,794 12/31/99 - -------------------------------------------------------------------------------- Henry H. Hamilton N/A N/A - -------------------------------------------------------------------------------- David M. Wilks N/A N/A - -------------------------------------------------------------------------------- (a) Dividend equivalents are granted under the PSCo Omnibus Incentive Plan. Dividend equivalents entitle the recipient to a cash amount equal to the average of the dividends paid over the performance cycle at the then current dividend rate multiplied by the number of units granted. Dividend equivalents are earned, if at all, at the end of a three-year performance period depending upon the achievement of Earnings Per Share goals over the performance period. The Target represents the amount to be awarded if 100% of the goal is achieved. Threshold represents the amount to be awarded if 90% of the goal is achieved, and Maximum represents the amount to be awarded if 110% of the goal is achieved. Additional dividend equivalents may be granted each year by the Compensation Committee. In accordance with the terms of the PSCo Omnibus Incentive Plan, dividend equivalents for all open performance periods vested at the target level immediately upon the effective date of the Merger and, accordingly, Threshold and Maximum award amounts for 1997 were not established. 128 The following table shows estimated aggregate pension benefits payable to a covered participant from the qualified defined benefit plans maintained by NCE and its subsidiaries and the NCE Supplemental Executive Retirement Plan (the "SERP"). ================================================================================ Pension Plan Table ================================================================================ Remuneration Years of Service 15 20 25 or more years - -------------------------------------------------------------------------------- $150,000 $ 61,875 $ 82,500 $ 82,500 175,000 72,188 96,250 96,250 200,000 82,500 110,000 110,000 225,000 92,813 123,750 123,750 250,000 103,125 137,500 137,500 300,000 123,750 165,000 165,000 350,000 144,375 192,500 192,500 400,000 165,000 220,000 220,000 450,000 185,625 247,500 247,500 500,000 206,250 275,000 275,000 600,000 247,500 330,000 330,000 700,000 288,750 385,000 385,000 ================================================================================ The benefits listed in the Pension Plan Table are not subject to any deduction or offset. The compensation used to calculate SERP benefits is base salary plus short-term incentive. Such covered compensation is reflected in the Salary and Bonus columns of the Summary Compensation Table for 1997. Current annual covered compensation for Mr. Helton equals $635,000. The SERP benefit accrues over 20 years and is equal to (a) 55% of the highest three years covered compensation of the five years preceding retirement or termination minus (b) the qualified plan benefit. The SERP benefit is payable as an annuity for 20 years, or as a single lump-sum amount equal to the actuarial equivalent present value of the 20 year annuity. Benefits are payable at age 62, or as early as age 55 reduced 5% for each year that the benefit commencement date proceeds age 62. The estimated credited years of service under the SERP as of December 31, 1997 were as follows: Mr. Helton 33 Mr. Brunetti 10 Mr. Kelly 30 Mr. Wilks 20 Mr. Hamilton 34 129 The Company has granted additional credited years of service to Mr. Brunetti for purposes of SERP accrual. The additional credited years of service (approximately seven) are included in the above table. Additionally, the Company has agreed to grant full accrual of SERP benefits to Mr. Brunetti at age 62 in the event he continues to be employed by the Company until such age. The Board of Directors of NCE approved the SERP in December 1997. The above Named Executive Officers are all participants of the SERP, and participate in qualified defined benefit plans sponsored by the Company or its subsidiaries. Prior to the Merger, PSCo and SPS, each sponsored one defined benefit plan covering substantially all represented and non-represented employees of the respective company. Employees who participated in the Employees' Retirement Plan of Public Service Company of Colorado and Participating Subsidiary Companies (the "Public Service Company retirement plan") prior to the Merger continue to participate in this plan. Employees who participated in the Retirement Plan for Employees of Southwestern Public Service Company (the "Southwestern Public Service Company retirement plan") prior to the Merger continue to participate in this plan. Effective July 1, 1998, the assets and liabilities associated with the non-represented employees participating in the Public Service Company retirement plan and the assets and liabilities associated with the non-represented employees participating in the Southwestern Public Service Company retirement plan will be spun-off from the respective plans and merged to form the New Century Energies retirement plan for non-represented employees. Mr. Brunetti and Mr. Kelly participate in the Employees' Retirement Plan of Public Service Company of Colorado and Participating Subsidiary Companies. Messrs. Helton, Hamilton and Wilks participate in the Retirement Plan for Employees of Southwestern Public Service Company. Effective July 1, 1998, all such executives will participate in the NCE retirement plan for non-represented employees. Ms. Smith resigned effective October 31, 1997, prior to the effective date of the SERP benefits illustrated above. Pension benefits were paid to Ms. Smith under the terms of the plans and employment agreement in effect at her date of termination. Compensation of Directors All Directors of PSCo are employees of NCS. They receive no additional compensation for their role as members of the Board of Directors. Former directors of PSCo and SPS receive and are paid retirement and other certain benefits, as defined by the terms of the agreements/policies of these subsidiaries, in effect prior to the Merger. Item 12. Security Ownership of Certain Beneficial Owners and Management Information concerning the security ownership of the directors and officers of NCE is contained under Election Of Directors in NCE's 1998 Proxy Statement, which information is incorporated herein by reference. Information concerning the security ownership of the directors and officers of SPS is omitted pursuant to General Instruction I(2)(c). Information concerning the security ownership of the directors and officers of PSCo is presented herein. All 100 shares of PSCo Common Stock, $5 par value, are directly and beneficially held by NCE. Holders of the PSCo Cumulative Preferred Stock, $100 par value and $25 par value generally have no voting rights, except with respect to certain corporate actions and in the event of certain defaults in the payment of dividends on such shares. The table below shows the number of shares of NCE Common Stock that were beneficially owned directly or indirectly as of January 29, 1998 by each director of PSCo and each of the executive officers of PSCo named in the summary compensation table, and by all directors and executive officers of PSCo as a group. No such person owns any shares of any series of the PSCo Cumulative Preferred Stock. 130 Security Ownership of Management and Directors as of January 29, 1998 (a) - -------------------------------------------------------------------------------- Title of Class Name of Beneficial Owner Amount and % of (b) nature of Class beneficial (d) ownership (c) - -------------------------------------------------------------------------------- Common Stock Bill D. Helton (1) 24,158 (e) - -------------------------------------------------------------------------------- Common Stock Wayne H. Brunetti 71,097 (e) - -------------------------------------------------------------------------------- Common Stock Richard C. Kelly (2) 46,321 (e) - -------------------------------------------------------------------------------- Common Stock Henry H. Hamilton 14,442 (e) - -------------------------------------------------------------------------------- Common Stock David M. Wilks 12,451 (e) - -------------------------------------------------------------------------------- Common Stock All the above and other 183,466 (e) Executive Officers as a Group (7 persons) ================================================================================ Notes (a) As of January 29, 1998, the Company is not aware of any persons who beneficially own more than 5% of the Company's Common Stock. (b) Common Stock listed in the table represents NCE Common Stock, $1 par value. (c) The common shares represented above include those shares, if any, held under the PSCo Employees' Savings and Stock Ownership Plan (the "ESOP") and the SPS Employee Investment Plan (the "EIP"). (d) As of January 29, 1998, the percentage of shares beneficially owned by any Director or named Executive Officer, or by all Directors and Executive Officers as a group, does not exceed one percent of the class of securities described above. (e) The number of shares includes those which the following have the right to acquire as of January 29, 1998, through the exercise of vested options granted under the NCE Omnibus Incentive Plan and the predecessor PSCo Omnibus Incentive Plan and the SPS 1989 Incentive Plan (the "1989 Plan"): Mr. Brunetti, 52,334 shares; Mr. Kelly, 41,050 shares; Mr. Hamilton, 77 shares; Mr. Wilks, 67 shares; and all Executive Officers as a group, 2,717 shares. Unless otherwise specified, each Director and named Executive Officer has sole voting and sole investment power with respect to the shares indicated. (1) Includes 716 shares held in trusts for the benefit of Mr. Helton's grandchildren. Mr. Helton's wife retains the right to the corpus of the trusts upon their termination. Mr. Helton disclaims beneficial ownership of the shares held in the trusts. (2) Mr. Kelly's wife owns 263 of these shares; Mr. Kelly disclaims beneficial ownership of those shares. Section 16(a) Beneficial Ownership Reporting Compliance Based solely upon a review of Forms 3, 4 and 5 and written representations furnished to PSCo prior to the Merger effective August 1, 1997, PSCo believes that all Directors and Officers filed in a timely manner their reports required under Section 16(a) of the Securities Exchange Act of 1934, as amended. 131 Item 13. Certain Relationships and Related Transactions Information concerning relationships and related transactions of the directors and officers of NCE is contained under Certain Relationships And Related Transactions in NCE's 1998 Proxy Statement, which information is incorporated herein by reference. PSCo and SPS have no information concerning relationships and related transactions required to be disclosed. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial Statements, Financial Statement Schedules, and Exhibits: (1)Financial Statements and Reports of Independent Public Accountants on the financial statements for NCE, PSCo and SPS are listed under Item 8 herein. (2)Financial Statement Schedules. Reports of Independent Public Accountants as to Schedules for NCE, PSCo and SPS are included in the Reports of Independent Public Accountants for each registrant. (3)Exhibits. Exhibits for NCE, PSCo and SPS are listed in Index to Exhibits below. (b) Reports on Form 8-K: NCE, PSCo and SPS: No reports were filed on Form 8-K during the quarter ended December 31, 1997. 132 EXPERTS The consolidated balance sheets of New Century Energies, Inc. and its subsidiaries as of December 31, 1997 and 1996, the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997, and the related financial statement schedule, appearing in this Annual Report on Form 10-K, have been audited by Arthur Andersen LLP, independent public accountants, as set forth in their report appearing elsewhere herein. The consolidated financial statements and the related financial statement schedule, which are included in this Annual Report on Form 10-K, are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. The consolidated balance sheets and statements of capitalization of Public Service Company of Colorado. and its subsidiaries as of December 31, 1997 and 1996, the related consolidated statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 1997, and the related financial statement schedule, appearing in this Annual Report on Form 10-K, have been audited by Arthur Andersen LLP, independent public accountants, as set forth in their report appearing elsewhere herein. The consolidated financial statements and the related financial statement schedule, which are included in this Annual Report on Form 10-K, are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. The balance sheet and statement of capitalization of Southwestern Public Service Company as of December 31, 1997, the related statement of income, shareholder's equity and cash flows for the year ended December 31, 1997, and the related financial statement schedule, appearing in this Annual Report on Form 10-K, have been audited by Arthur Andersen LLP, independent public accountants, as set forth in their report appearing elsewhere herein. The financial statements and the related financial statement schedule, which are included in this Annual Report on Form 10-K, are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. 133 EXHIBIT 23 (a) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report included in this Form 10-K, into New Century Energies, Inc.' previously filed Registration Statement (Form S-8, File No. 333-28639) pertaining to the Omnibus Incentive Plan; New Century Energies, Inc.'s Registration Statement (Form S-3, File No. 333-28637) pertaining to the Dividend Reinvestment and Cash Payment Plan and New Century Energies, Inc.'s Registration Statement (Form S-3, File No. 333-40361) pertaining to the registration of NCE Common Stock and to all references to our Firm included in this Form 10-K. As independent public accountants, we hereby consent to the incorporation by reference of our report included in this Form 10-K, into Public Service Company of Colorado's previously filed Registration Statement (Form S-3, File No. 33-62233) pertaining to the Automatic Dividend Reinvestment and Common Stock Purchase Plan; Public Service Company of Colorado's Registration Statement (Form S-3, File No. 33-37431) as amended on December 4, 1990, pertaining to the shelf registration of Public Service Company of Colorado's First Mortgage Bonds; Public Service Company of Colorado's Registration Statement (Form S-8, File No. 33-55432) pertaining to the Omnibus Incentive Plan; Public Service Company of Colorado's Registration Statement (Form S-3, File No. 33-51167) pertaining to the shelf registration of Public Service Company of Colorado's First Collateral Trust Bonds and Public Service Company of Colorado's Registration Statement (Form S-3, File No. 33-54877) pertaining to the shelf registration of Public Service Company of Colorado's First Collateral Trust Bonds and Cumulative Preferred Stock and to all references to our Firm included in this Form 10-K. As independent public accountants, we hereby consent to the incorporation by reference of our report included in this Form 10-K, into Southwestern Public Service Company's previously filed Registration Statement (Form S-3, File No. 333-05199) pertaining to Southwestern Public Service Company's Preferred Stock and Debt Securities; Southwestern Public Service Company's Registration Statement (Form S-8, File No. 33-27452) pertaining to Southwestern Public Service Company's 1989 Stock Incentive Plan and Southwestern Public Service Company's Registration Statement (Form S-8, File No. 33-57869) pertaining to Southwestern Public Service Company's Employee Investment Plan and Southwestern Public Service Company's Non-Qualified Salary Deferral Plan and to all references to our Firm included in this Form 10-K. ARTHUR ANDERSEN LLP Denver, Colorado February 26, 1998 134 EXHIBIT 23 (b) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in Registration Statement No. 333-05199 on Form S-3 and Registration Statements No. 33-27452 and 33-57869 on Form S-8 of Southwestern Public Service Company and Registration Statement No. 333-28637 and 333-40361 on Form S-3 and Registration Statement No. 333-28639 on Form S-8 of New Century Energies, Inc. of our report dated February 28, 1997 (June 19, 1997, as to the Carolina Energy Limited Partnership in Note 3) on Southwestern Public Service Company, appearing in the Annual Report on Form 10-K of New Century Energies, Inc. for the year ended December 31, 1997. DELOITTE & TOUCHE LLP Dallas, Texas February 26, 1998 EXHIBIT 24 POWER OF ATTORNEY Each director and/or officer of New Century Energies, Inc., whose signature appears herein hereby appoints B. D. Helton and R. C. Kelly, and each of them severally, and each director and/or officer of Public Service Company of Colorado and Southwestern Public Service Company, whose signature appears herein hereby appoints W. H. Brunetti and B. P. Jackson, and each of them severally, as his or her attorney-in-fact to sign in his or her name and behalf, in any and all capacities stated herein, and to file with the Securities and Exchange Commission, any and all amendments to this Annual Report on Form 10-K. 135 NEW CENTURY ENERGIES, INC. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, New Century Energies, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 24th day of February, 1998. NEW CENTURY ENERGIES, INC. By /s/R. C. Kelly _________________________________ R. C. KELLY Executive Vice President, and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of New Century Energies, Inc. and in the capacities and on the date indicated. Signature Title Date ________________________________________________________________________________ /s/B. D. Helton _____________________________ Principal Executive February 24, 1998 B. D. Helton Officer and Director Chairman of the Board and Chief Executive Officer /s/R. C. Kelly _____________________________ Principal Financial Officer February 24, 1998 R. C. Kelly Executive Vice President, Chief Financial Officer /s/Teresa S. Madden _____________________________ Principal Accounting Officer February 24, 1998 Teresa S. Madden Controller and Secretary 136 Signature Title Date _______________________________________________________________________________ /s/Bill D. Helton __________________________________ Chairman of the Board February 24, 1998 Bill D. Helton and Director /s/ W. H. Brunetti __________________________________ Vice Chairman and W. H. Brunetti Director February 24, 1998 /s/C. Coney Burgess __________________________________ Director February 24, 1998 C. Coney Burgess /s/ Danny H. Conklin __________________________________ Director February 24, 1998 Danny H. Conklin /s/Giles M. Forbess __________________________________ Director February 24, 1998 Giles M. Forbess /s/Gayle L. Greer __________________________________ Director February 24, 1998 Gayle L. Greer /s/R. R. Hemminghaus __________________________________ Director February 24, 1998 R. R. Hemminghaus /s/A. Barry Hirschfeld __________________________________ Director February 24, 1998 A. Barry Hirschfeld /s/ J. Howard Mock __________________________________ Director February 24, 1998 J. Howard Mock /s/ Will F. Nicholson, Jr. __________________________________ Director February 24, 1998 Will F. Nicholson, Jr. /s/J. Michael Powers __________________________________ Director February 24, 1998 J. Michael Powers /s/Rodney E. Slifer __________________________________ Director February 24, 1998 Rodney E. Slifer 137 Signature Title Date ________________________________________________________________________________ /s/W. Thomas Stephens __________________________________ Director February 24, 1998 W. Thomas Stephens /s/Robert G. Tointon __________________________________ Director February 24, 1998 Robert G. Tointon 138 PUBLIC SERVICE COMPANY OF COLORADO SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Public Service Company of Colorado has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 24th day of February, 1998. PUBLIC SERVICE COMPANY OF COLORADO By /s/Brian P. Jackson _________________________________ Brian P. Jackson Senior Vice President, Finance and Administrative Services Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Public Service Company of Colorado and in the capacities and on the date indicated. Signature Title Date ________________________________________________________________________________ /s/Wayne H. Brunetti ___________________________ Principal Executive February 24, 1998 Wayne H. Brunetti Officer and Director Vice Chairman, President and Chief Executive Officer /s/Brian P. Jackson ___________________________ Principal Financial Officer February 24, 1998 Brian P. Jackson and Director Senior Vice President, Finance and Administrative Services /s/Teresa S. Madden ___________________________ Principal Accounting Officer February 24, 1998 Teresa S. Madden Controller and Corporate Secretary 139 Signature Title Date ________________________________________________________________________________ /s/ Bill. D. Helton ____________________________ Director February 24, 1998 Bill. D. Helton /s/Doyle R. Bunch II ____________________________ Director February 24, 1998 Doyle R. Bunch II /s/Henry H. Hamilton ____________________________ Director February 24, 1998 Henry H. Hamilton /s/ Richard C. Kelly _____________________________ Director February 24, 1998 Richard C. Kelly /s/David M. Wilks _____________________________ Director February 24, 1998 David M. Wilks 140 SOUTHWESTERN PUBLIC SERVICE COMPANY SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Southwestern Public Service Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 24th day of February, 1998. SOUTHWESTERN PUBLIC SERVICE COMPANY By /s/Brian P. Jackson _________________________________ Brian P. Jackson Senior Vice President, Finance and Administrative Services Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Southwestern Public Service Company and in the capacities and on the date indicated. Signature Title Date ________________________________________________________________________________ /s/Wayne H. Brunetti __________________________ Principal Executive February 24, 1998 Wayne H. Brunetti Officer and Director Vice Chairman and Chief Executive Officer /s/Brian P. Jackson __________________________ Principal Financial Officer February 24, 1998 Brian P. Jackson Senior Vice President, Finance and Administrative Services /s/Teresa S. Madden __________________________ Principal Accounting Officer February 24, 1998 Teresa S. Madden Controller and Corporate Secretary 141 Signature Title Date ________________________________________________________________________________ /s/Bill. D. Helton __________________________________ Director February 24, 1998 Bill. D. Helton /s/Henry H. Hamilton __________________________________ Director February 24, 1998 Henry H. Hamilton /s/ Richard C. Kelly __________________________________ Director February 24, 1998 Richard C. Kelly /s/David M. Wilks __________________________________ Director February 24, 1998 David M. Wilks 142 EXHIBIT INDEX 2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession NCE 2(a) 1* Merger Agreement and Plan of Reorganization dated August 22, 1995 (Form S-4, Annex I, File No. 33-64951). PSCo 2(b) 1* Merger Agreement and Plan of Reorganization dated August 22, 1995 (Form 8-K, dated August 22, 1995, File No. 1-3280 - Exhibit 2). SPS 2(c) 1* Agreement and Plan of Reorganization dated August 22, 1995 (Form 8-K, Exhibit 2, dated August 22, 1995). 3 (i) Articles of Incorporation NCE 3(a) 1* Restated Articles of Incorporation date December 8, 1995 (Form S-4, Exhibit 3(a)). PSCo 3(a) 1 Amended and Restated Articles of Incorporation dated September 19, 1997 SPS 3(a) 2 Amended and Restated Articles of Incorporation dated September 30, 1997. 3 (ii) By-Laws NCE 3(b) 1* Restated Bylaws of New Century Energies, Inc. (Form S-4, Exhibit 3(b)). PSCo 3(b) 1 By-laws dated November 20, 1997. SPS 3(b) 2 By-laws dated September 29, 1997. 4 Instruments Defining the Rights of Security Holders, Including Indentures NCE 4(a)1* Rights Agreement, dated as of August 1, 1997, between New Century Energies, Inc. and the Bank of New York, as Rights Agent (Form 8-K, August 1, 1997-Exhibit 1). PSCo 4(a) 1* Indenture, dated as of December 1, 1939, providing for the issuance of First Mortgage Bonds (Form 10 for 1946- Exhibit (B-1)). 4(a) 2* Indentures supplemental to Indenture dated as of December 1, 1939:
Previous Filing: Previous Filing: Form; Date or Exhibit Form; Date or Exhibit Dated as of File No. No. Dated as of File No. No. ----------- -------- --- ----------- -------- --- Mar. 14, 1941 10, 1946 B-2 Apr. 21, 1970 8-K, Apr. 1970 1 May 14, 1941 10, 1946 B-3 Sept. 1, 1970 8-K, Sept. 1970 2 Apr. 28, 1942 10, 1946 B-4 Feb. 1, 1971 8-K, Feb. 1971 2 Apr. 14, 1943 10, 1946 B-5 Aug. 1, 1972 8-K, Aug. 1972 2 Apr. 27, 1944 10, 1946 B-6 June 1, 1973 8-K, June 1973 1 Apr. 18, 1945 10, 1946 B-7 Mar. 1, 1974 8-K, Apr. 1974 2
143 Apr. 23, 1946 10-K, 1946 B-8 Dec. 1, 1974 8-K, Dec. 1974 1 Apr. 9, 1947 10-K, 1946 B-9 Oct. 1, 1975 S-7, (2-60082) 2(b)(3) June 1, 1947 S-1, (2-7075) 7(b) Apr. 28, 1976 S-7, (2-60082) 2(b)(4) Apr. 1, 1948 S-1, (2-7671) 7(b)(1) Apr. 28, 1977 S-7, (2-60082) 2(b)(5) May 20, 1948 S-1, (2-7671) 7(b)(2) Nov. 1, 1977 S-7, (2-62415) 2(b)(3) Oct. 1, 1948 10-K, 1948 4 Apr. 28, 1978 S-7, (2-62415) 2(b)(4) Apr. 20, 1949 10-K, 1949 1 Oct. 1, 1978 10-K, 1978 D(1) Apr. 24, 1950 8-K, Apr. 1950 1 Oct. 1, 1979 S-7, (2-66484) 2(b)(3) Apr. 18, 1951 8-K, Apr. 1951 1 Mar. 1, 1980 10-K, 1980 4(c) Oct. 1, 1951 8-K, Nov. 1951 1 Apr. 28, 1981 S-16, (2-74923) 4(c) Apr. 21, 1952 8-K, Apr. 1952 1 Nov. 1, 1981 S-16, (2-74923) 4(d) Dec. 1, 1952 S-9, (2-11120) 2(b)(9) Dec. 1, 1981 10-K, 1981 4(c) Apr. 15, 1953 8-K, Apr. 1953 2 Apr. 29, 1982 10-K, 1982 4(c) Apr. 19, 1954 8-K, Apr. 1954 1 May 1, 1983 10-K, 1983 4(c) Oct. 1, 1954 8-K, Oct. 1954 1 Apr. 30, 1984 S-3, (2-95814) 4(c) Apr. 18, 1955 8-K, Apr. 1955 1 Mar. 1, 1985 10-K, 1985 4(c) Apr. 24, 1956 10-K, 1956 1 Nov. 1, 1986 10-K, 1986 4(c) May 1, 1957 S-9, (2-13260) 2(b)(15) May 1, 1987 10-K, 1987 4(c) Apr. 10, 1958 8-K, Apr. 1958 1 July 1, 1990 S-3, (33-37431) 4(c) May 1, 1959 8-K, May 1959 2 Dec. 1, 1990 10-K, 1990 4(c) Apr. 18, 1960 8-K, Apr. 1960 1 Mar. 1, 1992 10-K, 1992 4(d) Apr. 19, 1961 8-K, Apr. 1961 1 Apr. 1, 1993 10-Q, June 30, 1993 4(a) Oct. 1, 1961 8-K, Oct. 1961 2 June 1, 1993 10-Q, June 30, 1993 4(b) Mar. 1, 1962 8-K, Mar. 1962 3(a) Nov. 1, 1993 S-3, (33-51167) 4(a)(3) June 1, 1964 8-K, June 1964 1 Jan. 1, 1994 10-K, 1993 4(a)(3) May 1, 1966 8-K, May 1966 2 Sept. 2, 1994 8-K, Sept. 1994 4(a) July 1, 1967 8-K, July 1967 2 May 1, 1996 10Q, June 30, 1996 4(a) July 1, 1968 8-K, July 1968 2 Nov. 1, 1996 10-K, 1996 4(a)(3) Apr. 25, 1969 8-K, Apr. 1969 1 Feb. 1, 1997 10-Q, Mar. 31, 1997 4(a)
4(b) 1* Indenture, dated as of October 1, 1993, providing for the issuance of First Collateral Trust Bonds (Form 10-Q, September 30, 1993 - Exhibit 4(a)). 4(b) 2* Indentures supplemental to Indenture dated as of October 1, 1993: Previous Filing: Form; Date or Exhibit Dated as of File No. No. ----------- -------- --- November 1, 1993 S-3, (33-51167) 4(b)(2) January 1, 1994 10-K, 1993 4(b)(3) September 2, 1994 8-K, Sept. 1994 4(b) May 1, 1996 10-Q, June 30, 1996 4(b) November 1, 1996 10-K, 1996 4(b)(3) February 1, 1997 10-Q, Mar. 31, 1997 4(b) SPS 4(a) 1* Indenture, dated as of August 1, 1946, providing for the issuance of First Mortgage Bonds (Registration No. 2-6910, Exhibit 7-A). 144 4(b) 1* Indentures supplemental to Indenture dated as of August 1, 1946: Previous Filing: Form; Date or Exhibit Dated as of File No. No. ----------- -------- --- February 1, 1967 2-25983 2-S October 1, 1970 2-38566 2-T February 9, 1977 2-58209 2-Y March 1, 1979 2-64022 b(28) April 1, 1983 (two) 10-Q, May 1983 4(a) February 1, 1985 10-K, Aug. 1985 4(c) July 15, 1992 (two) 10-K, Aug. 1992 4(a) December 1, 1992 (two) 10-Q, Feb. 1993 4 February 15, 1995 10-Q, May 1995 4 March 1, 1996 333-05199 4(c) 4(c) 1* Standby Credit Agreement with Union Bank of Switzerland (Houston Agency) dated July 1, 1991 (Form 10-K, August 31, 1991 - Exhibit 4(a)). 4(d) 1* Red River Authority for Texas Indenture of Trust dated July 1, 1991 (Form 10-K, August 31, 1991 - Exhibit 4(b)). 4(e) 1* Indenture dated October 21, 1996, between SPS and Wilmington Trust Company, (Form 10-Q, November 30, 1996 - Exhibit 4(a)). 4(f) 1* Supplemental Indenture dated October 21,1996, between SPS and Wilmington Trust Company, (Form 10-Q, November 30, 1996 - Exhibit 4(b)). 4(g) 1* Guarantee Agreement dated October 21, 1996, between SPS and Wilmington Trust Company, (Form 10-Q, November 30, 1996 - Exhibit 4(c)). 4(h) 1* Amended and Restated Trust Agreement dated October 21, 1996, among SPS, David M. Wilks, as initial depositor, Wilmington Trust Company and the administrative trustees named therein (Form 10-Q, November 30, 1996 - Exhibit 4(d)). 4(i) 1* Agreement as to Expenses dated October 21, 1996, between SPS and Southwestern Public Service Capital I,(Form 10-K, December 31, 1996 - Exhibit F). Material Contracts NCE 10(a) 1 Form of Key Executive Change in Control Agreement. 10(b) 2*+ Employment Agreement, effective August 1, 1997, between the Company and Mr. Bill D. Helton (Form S-4, Annex I, File No. 33-64951). 10(b) 3*+ Employment Agreement, effective August 1, 1997, between the Company and Mr. Wayne H. Brunetti (Form S-4, Annex I, File No. 33-64951). PSCo 10(a) 1* Settlement Agreement dated February 9, 1996 between the Company and the United States Department of Energy (Form 10-K, December 31, 1995 - Exhibit 10(a)(1)). 145 10(a) 2* Settlement Agreement dated June 27, 1979 between the Registrant and General Atomic Company(Form S-7, File No. 2-66484-Exhibit 5(a)(1)). 10(a) 3* Services Agreement executed June 27, 1979 and effective as of January 1, 1979 between the Registrant and General Atomic Company (Form S-7, File No. 2-66484 - Exhibit 5(a)(3)). 10(c)1* Amended and Restated Coal Supply Agreement entered into October 1, 1984 but made effective as of January 1, 1976 between the Registrant and Amax Inc. on behalf of its division, Amax Coal Company (Form 10-K, December 31, 1984 - Exhibit 10(c)(1)). 10(c)2* First Amendment to Amended and Restated Coal Supply Agreement entered into May 27, 1988 but made effective January 1, 1988 between the Registrant and Amax Coal Company (Form 10-K, December 31, 1988 -Exhibit 10(c)(2).** 10(e)1*+ Supplemental Executive Retirement Plan for Key Management Employees, as amended and restated March 26, 1991 (Form 10-K, December 31, 1991 - Exhibit 10(e)(2)). 10(e)3*+ Executive Savings Plan (Form 10-K, December 31, 1991 - Exhibit 10(e)(5)). 10(e) 4*+ Form of Key Executive Severance Agreement, as amended on August 22, and November 27, 1995. (Form 10-K, December 31, 1995 - Exhibit 10(3) (4)). SPS 10(a) 1* Coal Supply Agreement (Harrington Station) between SPS and TUCO, dated May 1, 1979 (Form 8-K, May 14, 1979 - Exhibit 3). 10(b) 1* Master Coal Service Agreement between Swindell-Dressler Energy Supply Company and TUCO, dated July 1, 1978 (Form 8-K, May 14, 1979 - Exhibit 5(A)). 10(c) 1* Guaranty of Master Coal Service Agreement between Swindell-Dressler Energy Supply Company and TUCO (Form 8-K, May 14, 1979 - Exhibit 5(B)). 10(d) 1* Coal Supply Agreement (Tolk Station) between SPS and TUCO dated April 30, 1979, as amended November 1, 1979 and December 30, 1981 (Form 10-Q, February 28, 1982 - Exhibit 10(b)). 10(e) 1*+Master Coal Service Agreement between Wheelabrator Coal Services Co. and TUCO dated December 30, 1981, as amended November 1, 1979 and December 30, 1981 (Form 10-Q, February 28, 1982 - Exhibit 10(c)). 10(f) 1*+Incentive Compensation Plan (an Executive Management Plan) as amended July 23, 1996 (Form 10-K, August 31, 1996 - Exhibit 10(a)). 10(g) 1*+ 1989 Stock Incentive Plan as amended April 23, 1996 (Form 10-K, August 31, 1996 - Exhibit 10(b)). 10(h) 1*+ Director's Deferred Compensation Plan as amended January 10, 1990 (Form 10-K, August 31, 1996 - Exhibit 10(c)). 10(i) 1*+ Supplemental Retirement Income Plan as amended July 23, 1991 (Form 10-K, August 31, 1996 - Exhibit 10(e)). 10(j) 1*+ EPS Performance Unit Plan dated October 27, 1992 (Form 10-K, August 31, 1996 - Exhibit 10(a)). 146 12 Statement Re Computation of Ratios 12(a) PSCo Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges is set forth at page 116 herein. 12(b) PSCo Computation of Ratio of Consolidated Earnings to Consolidated Combined Fixed Charges and Preferred Stock Dividends is set forth at page 117 herein. 12(c) SPS Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges is set forth at page 118 herein. 12(d) SPS Computation of Ratio of Consolidated Earnings to ConsolidatedCombined Fixed Charges and Preferred Stock Dividends is set forth at page 119 herein. 21 Subsidiaries of the Registrant 23(a) Consent of Arthur Andersen LLP is set forth at page 134 herein. 23(b) Consent of Deloitte & Touche LLP is set forth at page 135 herein. 24 Power of Attorney is set forth at page 135 herein. 27 Financial Data Schedule UT 27 (a) Financial Data Schedule for NCE as of December 31, 1997 27 (b) Financial Data Schedule for PSCo as of December 31, 1997 27 (c) Financial Data Schedule for SPS as of December 31, 1997 - -------------- * Previously filed as indicated and incorporated herein by reference. + Management contracts of compensatory plans or arrangements. 147 EX-3.(A)1(I) 2 PSCO RESTATED ARTICLES AS OF NOVEMBER 20, 1997 Exhibit 3(a)1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PUBLIC SERVICE COMPANY OF COLORADO Public Service Company of Colorado, a Colorado corporation (the "Corporation"), pursuant to Section 7-110-106 and 107 of the Colorado Business Corporation Act (the "Act"), hereby adopts the following amended and restated Articles of Incorporation. I. NAME The name of the Corporation is: Public Service Company of Colorado. II. PURPOSES AND POWERS The objects for which the Corporation is formed and incorporated are as follows: 1. To manufacture, generate, produce, supply, distribute, transmit and sell gas (natural or artificial), electricity, steam, steam heat and other substances, forces and energies, for the purpose of light, heat, fuel, power or for any other purpose to which the same are now or may hereafter, in the course of new discoveries, improvements or inventions, properly be put. 2. To construct, purchase, condemn, lease or otherwise acquire, maintain and operate plants and works for manufacturing, generating, producing, supplying and distributing gas, electricity, steam and other substances, forces and energies, and to construct, purchase, condemn, lease or otherwise acquire, maintain and operate lines of mains and other pipes and conductors, and lines of poles, wires and other conductors and appliances, and lands and rights of way for the purpose of conveying, supplying and distributing gas (natural or artificial), electricity, steam and other substances, forces and energies, through highways, streets, alleys and public and private lands and places as the interests of the Corporation may require; and to make excavations and constructions for the purpose of constructing, repairing and making connections with the same. 3. To apply for, take out, purchase or otherwise acquire, use or enjoy, and to sell, assign, license and otherwise dispose of any and all inventions, improvements, processes, formulae, letters patent, copyrights, trade-marks, trade names and incorporeal rights of any and every kind whatsoever. 4. To purchase, lease, acquire by merger, consolidation, or otherwise own, manage, control, maintain and operate the properties, rights, franchises and immunities of any gas, electric, or steam heating company or companies now or hereafter organized. 5. To manufacture, purchase, lease, sell, or otherwise dispose of electric, gas, steam heating and refrigerating apparatus, appliances and supplies of every kind and nature. 1 6. To purchase or otherwise acquire, own, hold, mortgage, pledge, sell or otherwise dispose of, bonds, debentures, notes, shares of stock or other securities and evidences of indebtedness of any company or companies, without limit in amount, and to issue and exchange for such bonds, debentures, notes, stocks and other securities, its own shares of stock, bonds, debentures, notes or other obligations, to have and exercise in respect thereto all the rights, powers and privileges of individual owners thereof, and to exercise all voting power thereon in furtherance of the objects and purposes of this Corporation. 7. To purchase, condemn, lease or otherwise acquire, take, hold, operate, or otherwise enjoy, sell, convey, lease or otherwise dispose of any real or personal property, rights, rights of way, ditch rights, water appropriations, easements and franchises, in furtherance of the objects and purposes of this Corporation. 8. To purchase, lease, or otherwise acquire coal lands and to mine, manage and operate the same for the purpose of supplying its works, plants and others with coal; to sell, lease or otherwise dispose of the same or any part thereof, at pleasure; and to sell or dispose of coal, coke, and any and all of the products of its works and plants. 9. To construct, purchase, lease, acquire, operate and maintain lines of electric railway and all equipments, buildings, plants, constructions, machinery and appurtenances necessary therefor, and to obtain all requisite easements by condemnation or otherwise. 10. To borrow money, without limit as to amount, and execute, issue, negotiate and deliver its notes, bonds, debentures or other obligations therefor, and without action of its stockholders to mortgage or pledge any or all of its property, rights, interests and franchises, owned or to be acquired, as security for such notes, bonds or other obligations; and to guarantee or become surety in respect of bonds, notes or other evidences of indebtedness or other obligations of any individual or entity. 11. To lease, sell, or otherwise dispose of any or all of its properties, rights, interests, franchises and immunities, to any other persons or entities, and to merge or consolidate therewith or to arrange with any entities or persons by contract, lease or otherwise, for the operation and maintenance of the mains, lines, wires, poles, conductors, apparatus, appliances, works, plants or coal mines of this Corporation, or any of them. 12. To purchase, hold, pledge, sell, or otherwise dispose of its own capital stock, provided that as to any such purchase thereof no funds may be used therefor which would cause an impairment of the capital of the Corporation. 13. To develop, acquire, own, operate and dispose of any and all other lawful businesses. 14. To have and exercise any or all such incidental powers, in addition to those hereinabove enumerated, as shall be requisite, proper or convenient to accomplish the objects and powers aforesaid. 2 III. TERM The Corporation shall have perpetual existence. IV. BOARD OF DIRECTORS A. Bylaws; Officers. The Board of Directors of this Corporation shall have power to make from time to time such prudential bylaws for the government of the corporation as they may deem proper, and to amend, repeal and revise the same. The Board of Directors shall also have power to designate such officers and agents as may be necessary or expedient and to appoint and remove the same at pleasure and to fix the salaries of such officers and agents. B. Number. The number of directors of the Corporation shall be fixed by the Bylaws or, if the Bylaws fail to fix such number, then by resolution adopted from time to time by the board of directors. C. Conflicting Interest Transactions. As used in this paragraph, "conflicting interest transaction" means any of the following: (i) a loan or other assistance by the Corporation to a director of the Corporation or to an entity in which a director of the Corporation is a director or officer or has a financial interest; (ii) a guaranty by the Corporation of an obligation of a director of the Corporation or of an obligation of an entity in which a director of the Corporation is a director or officer or has a financial interest; or (iii) a contract or transaction between the Corporation and a director of the Corporation or between the Corporation and an entity in which a director of the Corporation is a director or officer or has a financial interest. No conflicting interest transaction shall be void or voidable, be enjoined, be set aside, or give rise to an award of damages or other sanctions in a proceeding by a shareholder or by or in the right of the Corporation, solely because the conflicting interest transaction involves a director of the Corporation or an entity in which a director of the Corporation is a director or officer or has a financial interest, or solely because the director is present at or participates in the meeting of the Corporation's board of directors or of the committee of the board of directors which authorizes, approves or ratifies a conflicting interest transaction, or solely because the director's vote is counted for such purpose, if: (A) the material facts as to the director's relationship or interest and as to the conflicting interest transaction are disclosed or are known to the board of directors or the committee, and the board of directors or committee in good faith authorizes, approves or ratifies the conflicting interest transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors are less than a quorum; or (B) the material facts as to the director's relationship or interest and as to the conflicting interest transaction are disclosed or are known to the shareholders entitled to vote thereon, and the conflicting interest transaction is specifically authorized, approved or ratified in good faith by a vote of the shareholders; or (C) a conflicting interest transaction is fair as to the Corporation of the time it is authorized, approved or ratified by the board of directors, a committee thereof, or the shareholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes, approves or ratifies the conflicting interest transaction. D. Loans and Guaranties for the Benefit of Directors. Neither the board of directors nor any committee thereof shall authorize a loan by the Corporation to a director of the Corporation or to an entity in which a director of the Corporation is a director or officer or has a financial interest, or a 3 guaranty by the Corporation of an obligation of a director of the Corporation or of an obligation of an entity in which a director of the Corporation is a director or officer or has a financial interest, until at least ten days after written notice of the proposed authorization of the loan or guaranty has been given to the shareholders who would be entitled to vote thereon if the issue of the loan or guaranty were submitted to a vote of the shareholders. The requirements of this Section D are in addition to, and not in substitution for, the provisions of Section C of this Article IV. V. LIMITATION OF LIABILITY To the maximum extent permitted by "7-108-402 of the Act (or any successor to such section), a director of the Corporation shall not be liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. Neither the amendment, nor the repeal of this Article, nor the adoption of any provision of the Articles of Incorporation inconsistent with this Article, shall eliminate or reduce the protection afforded by this Article to a director of the Corporation with respect to any matter which occurred, or any cause of action, suit or claim which but for this Article would have accrued or arisen, prior to such amendment, repeal or adoption. VI. INDEMNIFICATION To the maximum extent permitted by law, the Corporation shall indemnify any person who is or was a director, officer, agent, fiduciary or employee of the Corporation against any claim, liability, loss or expense arising against or incurred by such person as a result of circumstances, events, actions and omissions occurring in such capacity. The Corporation further shall have the authority to maintain insurance at the Corporation's expense providing for such indemnification, including insurance with respect to claims, liabilities, losses and expenses against which the Corporation would not otherwise have the power to indemnify such persons. VII. CAPITAL STOCK A. Authorized Capital. The authorized capital stock of the Corporation shall consist of the following three classes of capital stock: 1. Three million (3,000,000) shares of preferred stock with a par value of One Hundred Dollars ($100) per share ("Cumulative Preferred Stock"); 2. Four million (4,000,000) shares of preferred stock with a par value of Twenty-Five Dollars ($25) per share ("Cumulative Preferred Stock ($25)"); and 3. One Hundred (100) shares of common stock with a par value of One Cent ($.01) per share ("Common Stock"). Whenever hereafter the words "Cumulative Preferred Stock" shall be used, they shall refer to all series or kinds of Cumulative Preferred Stock. Whenever hereafter the words "Cumulative Preferred Stock ($25)" shall be used, they shall refer to all series or kinds of Cumulative Preferred Stock ($25). 4 The two authorized classes of preferred stock -- the Cumulative Preferred Stock and the Cumulative Preferred Stock ($25) -- are sometimes referred to hereinafter together as the "Preferred Stock". B. Nonassessable. All shares of capital stock of the Corporation shall be nonassessable C. Cumulative Voting. Cumulative voting shall not be permitted in any case. D. Preemptive Rights. No holder of shares of capital stock of the Corporation, of any class, shall be entitled as a matter of right, on the basis of preemptive rights or otherwise, to subscribe for, purchase or receive any shares of stock, any warrants, rights or options for the purchase or acquisition of shares of stock, or any bonds, debentures or other obligations which shall be convertible into or exchangeable for stock or to which shall be attached or appertain any warrants, instruments or other rights to purchase or acquire stock, which the Corporation may determine to issue or sell from time to time. All such additional issues of stock, rights, options, or of bonds, debentures or other obligations convertible into or exchangeable for stock, or to which such warrants shall be attached or appertain, may be issued and disposed of as determined by the Board of Directors to such persons and upon such terms as in their absolute discretion they may deem advisable. E. Changes in Capital Stock. The Corporation reserves the right to increase or decrease its authorized capital stock, or any class or series thereof, or to reclassify the same and to amend, alter, change or repeal any provision contained in these Articles of Incorporation or in any amendment hereto, in the manner now or hereafter prescribed by law, but subject to such conditions and limitations as are herein prescribed, and all rights conferred upon shareholders in these Articles of Incorporation, or any amendment hereto, are granted subject to this reservation. F. "Outstanding". No share of stock or evidence of indebtedness shall be deemed to be "outstanding", as that term is used in these Articles of Incorporation, if, prior to or concurrently with the event in reference to which a determination as to the amount thereof outstanding is to be made, the requisite funds for the redemption thereof shall be deposited in trust for that purpose and the requisite notice for the redemption thereof shall be given or the depositary of such funds shall be irrevocably authorized and directed to give or complete such notice or redemption. G. Negation of Equitable Interests in Shares or Rights. Unless a person is recognized as a shareholder through procedures established by the Corporation pursuant to "7-107-204 of the Act or any similar law, the Corporation shall be entitled to treat the registered holder of any shares of the Corporation as the owner thereof for all purposes permitted by the Act, including without limitation all rights deriving from such shares, and the Corporation shall not be bound to recognize any equitable or other claim to, or interest in, such shares or rights deriving from such shares on the part of any other person, including without limitation, a purchaser, assignee or pledgee of such shares or of rights deriving from such shares, unless and until such purchaser, assignee, pledgee or other person becomes the registered holder of such shares or is recognized as such, whether or not the Corporation shall have either actual or constructive notice of the interest of such purchaser, assignee, pledgee or other person. By way of example and not of limitation, no such purchaser, assignee, pledgee or other person shall be entitled to receive notice of any meetings of shareholders, to vote at such meetings, to examine a list of shareholders, to be paid dividends or other sums payable to shareholders, or to own, enjoy and exercise any 5 other rights deriving from such shares, until such purchaser, assignee, pledgee or other person has become the registered holder of such shares or is recognized as such. VIII. PREFERRED STOCK-GENERAL A. Designation by Board. The Board of Directors of the Corporation, without action by the holders of shares of stock of the Corporation of any class, is hereby authorized, in the appropriate manner required by the Act, subject to the specific provisions set forth in these Articles below, to fix the distinctive designation of any series of the Corporation's authorized Preferred Stock proposed to be issued and to fix, in respect to each such series: 1. the annual dividend rate or rates thereof, and the date or dates from which dividends thereon shall be cumulative; 2. the amount or amounts payable to the holders thereof on any voluntary liquidation, dissolution or winding up of the Corporation; 3. the amount or amounts payable upon redemption thereof; 4. the provisions of the sinking funds, if any, with respect thereto; 5. the number of shares to constitute each new series; 6. the conversion rights, if any, with respect thereto; and 7. such other provisions relating to the shares of each new series, not inconsistent with the provisions of these Articles of Incorporation, as the Board of Directors may by law be permitted to fix. B. Dividends. The holders of the Preferred Stock, in preference to the holders of any stock ranking junior to the Preferred Stock, shall be entitled to receive cash dividends, at such rate as may be fixed by the Board of Directors and no more, payable quarter-yearly on March first, June first, September first and December first in each year, when and as declared by the Board of Directors, out of any funds of the Corporation legally available therefor. Such dividends shall be cumulative from the date provided therefor in the instrument creating such series of Preferred Stock and shall be paid, or declared and set apart for payment, before any dividends shall be declared or paid on or set apart for the Common Stock or any other class of stock ranking junior to the Preferred Stock as to dividends or assets, so that if for any past dividend period or the current dividend period dividends on the Preferred Stock shall not have been paid, or declared and set apart for payment, the deficiency shall be fully paid or declared and funds set apart for the payment thereof before any dividends shall be declared or paid on or set apart for any class of stock ranking junior to the Preferred Stock as to dividends or assets. No dividends shall at any time be paid on or set apart for any share of Preferred Stock unless at the same time there shall be paid on or set apart for all shares of Preferred Stock then outstanding dividends in such amount that the holders of all shares of Preferred Stock shall receive or have set apart for them a uniform percentage of the full annual dividend to which they are respectively entitled. The term "dividend period", as used herein, refers to each period of three consecutive calendar months ending on the day 6 next preceding each date on which dividends, if declared, shall be payable. All shares of Cumulative Preferred Stock, regardless of designation, shall constitute one class of stock and, excepting only as to the rates of dividends payable thereon, the premiums payable on voluntary liquidation, dissolution or winding up, the redemption prices thereof, the provisions of the sinking fund, if any, conversion rights, if any, and other provisions not inconsistent with the provisions of this Article, with respect thereto, shall be of equal rank and confer equal rights upon the holders thereof. All shares of Cumulative Preferred Stock bearing the same dividend rate and being otherwise alike in all respects (except as to the date from which dividends thereon shall be cumulative) shall constitute one series of Cumulative Preferred Stock. All shares of Cumulative Preferred Stock ($25), regardless of designation, shall constitute one class of stock and, excepting only as to the rates of dividends payable thereon, the premiums payable on voluntary liquidation, dissolution or winding up, the redemption prices thereof, the provisions of the sinking fund, if any, conversion rights, if any, and other provisions not inconsistent with the provisions of this Article, with respect thereto, shall be of equal rank and confer equal rights upon the holders thereof. All shares of Cumulative Preferred Stock ($25) bearing the same dividend rate and being otherwise alike in all respects (except as to the date from which dividends thereon shall be cumulative) shall constitute one series of Cumulative Preferred Stock ($25). The Cumulative Preferred Stock and the Cumulative Preferred Stock ($25) shall be of equal rank and, excepting only as to matters relating to the par values thereof, the voting rights with respect thereto and the variations between the respective series thereof, all shares of Preferred Stock shall confer equal rights upon the holders thereof. Unless and until full cumulative dividends as aforesaid upon the Preferred Stock of all series then outstanding for all past dividend periods and for the current dividend period shall have been paid or declared and set apart for payment, no dividend whatsoever (other than a dividend payable in shares of any class of stock ranking junior to the Preferred Stock as to dividends and assets) shall be paid or declared on, and no distribution shall be made or ordered in respect of, any class of stock ranking junior to the Preferred Stock as to dividends or assets, and no money (other than the net proceeds received from the sale of stock ranking junior to the Preferred Stock as to dividends or assets) shall be set aside or applied to the purchase or redemption (through a sinking fund or otherwise) of any class of stock ranking junior to the Preferred Stock as to dividends or assets. The term "accrued dividends" shall be deemed to mean, in respect of any share of Preferred Stock as of any given date, the amount of dividends payable on such share, computed, at the annual dividend rate fixed for such share, from the date on which dividends thereon became cumulative to and including such given date, less the aggregate amount of all dividends which have been paid or which have been declared and set apart for payment on such share. Accumulations of dividends shall not bear interest. C. Liquidation. In the event of the liquidation, dissolution or winding up, whether voluntary or involuntary, of the Corporation, the holders of shares of Preferred Stock shall be entitled, in preference to any class of stock ranking junior to the Preferred Stock as to dividends or assets, to be paid in full, out of the net assets of the Corporation, the par value of their shares plus an amount equal to the accrued dividends on such shares to the date of distribution. In the event such liquidation, dissolution or winding up of the Corporation is voluntary, the holders of any series of Preferred Stock shall also be entitled to receive for each share, in preference to any class of stock ranking junior to the Preferred Stock as to dividends or assets, such premium or premiums as may be fixed for shares of such series by the Board of Directors. Unless and until such payment in full is made to the holders of shares of Preferred Stock, no distribution shall be made to any class of stock ranking junior to the Preferred Stock as to dividends or assets. If upon any liquidation, dissolution or winding 7 up, the assets distributable among the holders of the Preferred Stock of all series shall be insufficient to permit the payment of the full preferential amounts to which they shall be entitled then the entire assets of the Corporation to be distributed shall be distributed among the holders of the Preferred Stock of all series then outstanding ratably in proportion to the full preferential amounts to which they are respectively entitled. A statutory consolidation or merger of the Corporation shall not be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section C. D. Redemption. The Board of Directors of the Corporation shall have the right at any time or from time to time to redeem all or any part of the Preferred Stock or all or any part of the shares of one or more series thereof upon and by paying the holders of the shares to be redeemed the redemption price or prices of said shares, which shall include, in each case, an amount equal to the accrued dividends on said shares to the date fixed for redemption. The redemption price or prices shall be fixed by the Board of Directors. Not less than thirty (30) nor more than sixty (60) days prior to the date fixed for redemption of any shares of Preferred Stock, notice of the intention of the Corporation to redeem such shares, specifying the date and place of redemption, shall be deposited in a United States post office or mail box at any place in the United States addressed to each holder of record of the shares to be redeemed at his address as the same appears upon the records of the Corporation and the time of such mailing shall be deemed to be the time of the giving of such notice. In every case of redemption of fewer than all the outstanding shares of any one series of Preferred Stock, the shares of such series to be redeemed shall be chosen by lot in such manner as may be prescribed by resolution of the Board of Directors. The Corporation may deposit with a bank or trust company, which shall be named in the notice of redemption and shall be located in Denver, Colorado, or in the City of New York, New York, and which bank or trust company shall have capital, surplus and undivided profits aggregating at least $10,000,000, the aggregate redemption price of the shares to be redeemed, in trust for the payment thereof on or before the redemption date to the holders of such shares, upon surrender of the certificates for such shares. Such deposit in trust may, at the option of the Corporation, be upon terms whereby in case the holder of any shares of Preferred Stock called for redemption shall not, within six (6) years after the date fixed for redemption of such shares, claim the amount on deposit with any bank or trust company for the payment of the redemption price of said shares, such bank or trust company shall on demand pay to or upon the written order of the Corporation or its successor such amount and thereupon such bank or trust company shall be released from any and all further liability with respect to the payment of such redemption price and the holder of said shares shall be entitled to look only to the Corporation or its successor for the payment thereof. Upon the giving of notice of redemption and upon the deposit of the redemption price, as aforesaid (subject, as to shares of any series, to such conversion rights, if any, pertaining to such series as may be fixed for the shares thereof), or, if no such deposit is made, upon the redemption date (unless the Corporation defaults in making payment of the redemption price as set forth in such notice), such holders shall cease to be shareholders with respect to said shares, and from and after the making of said deposit and the giving of said notice (subject, as to shares of any series, to such conversion rights, if any, pertaining to such series as may be fixed for the shares thereof), or, if no such deposit is made, after the redemption date (the Corporation not having defaulted in making payment of the redemption price as set forth in such notice), said shares shall no longer be transferable on the books of the Corporation, and the said holders shall have no interest in or claim against the Corporation with respect to said shares, but shall be entitled only to receive the redemption price on the date fixed for redemption as aforesaid from said bank or trust company, or from the Corporation, without interest thereon, upon surrender of the certificates as aforesaid. 8 Nothing herein contained shall limit any legal rights of the Corporation to purchase any shares of the Preferred Stock. E. Voting. 1. So long as any shares of Preferred Stock of any series are outstanding the Corporation shall not, without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Cumulative Preferred Stock of all series, voting as one class, and the affirmative vote of the holders of at least two-thirds of the outstanding shares of Cumulative Preferred Stock ($25) of all series, voting as one class: (a) Amend the provisions of these Articles of Incorporation so as to create or authorize any stock ranking prior in any respect to the Preferred Stock or issue any such stock; or (b) Change, by amendment to these Articles of Incorporation or otherwise, the terms and provisions of the Preferred Stock so as to affect adversely the rights and preferences of the holders thereof; provided, however, that if any such change will affect adversely the holders of shares of either the Cumulative Preferred Stock or the Cumulative Preferred Stock ($25) at the time outstanding, but not both, the consent only of the holders of at least two-thirds of the outstanding shares of the class of Preferred Stock so adversely affected shall be required; and provided, further, that if any such change will affect adversely the holders of one or more, but less than all, of the series of either class of Preferred Stock at the time outstanding, the consent only of the holders of at least two-thirds of the total number of shares of the series so adversely affected shall be required. No consent of the holders of Preferred Stock shall be required in respect of any transaction enumerated in this subparagraph ( 1) if at or prior to the time when such transaction is to take effect provision is made for the redemption or other retirement of all shares of Preferred Stock at the time outstanding, the consent of which would otherwise be required hereunder. 2. So long as any shares of Preferred Stock of any series are outstanding the Corporation shall not, without the affirmative vote of at least two-thirds of the voting power of the outstanding shares of Preferred Stock of all series, voting for such purpose as a single class in such manner that the holders of the Cumulative Preferred Stock shall have four (4) votes per share and the holders of the Cumulative Preferred Stock ($25) shall have one (1) vote per share, issue any shares of Preferred Stock or shares of any stock ranking on a parity with the Preferred Stock, other than in exchange for, or for the purpose of effecting the redemption or other retirement of outstanding shares of Preferred Stock, or shares of any stock ranking on a parity therewith, having no less than the same aggregate par value, unless (a) The gross income (determined in accordance with generally accepted accounting principles) of the Corporation available for the payment of interest charges shall, for a period of twelve consecutive calendar months within the fifteen calendar months next preceding the issue of such shares, have been at least one and one-half (1-1/2) times the sum of (i) the interest for one year on all funded indebtedness and notes payable of the Corporation maturing more than twelve 9 months after, and outstanding at, the date of issue of such shares, and (ii) an amount equal to the dividend requirement for one year on all shares of the Preferred Stock of all series and on all other shares of stock, if any, ranking prior to or on a parity with the Preferred Stock, which shall be outstanding after the issue of the shares proposed to be issued; and (b) The capital represented by the Common Stock and the surplus accounts of the Corporation shall be not less than the aggregate amount payable on the involuntary dissolution, liquidation or winding up of the Corporation, in respect of all shares of Preferred Stock and all shares of stock, if any, ranking prior thereto, or on a parity therewith, which shall be outstanding after the issue of the shares proposed to be issued. No consent of the holders of Cumulative Preferred Stock shall be required in respect of any transaction described in this subparagraph (2) if at or prior to the time when such transaction is to take effect provision is made for the redemption or other retirement of all shares of Cumulative Preferred Stock at the time outstanding, and no consent of the holders of Cumulative Preferred Stock ($25) shall be required in respect of any transaction described in this subparagraph (2) if at or prior to the time when such transaction is to take effect provision is made for the redemption or other retirement of all shares of Cumulative Preferred Stock ($25) at the time outstanding. 3. So long as any shares of Preferred Stock of any series are outstanding, the Corporation shall not, without the affirmative vote of more than one-half of the voting power of the outstanding shares of Preferred Stock of all series, voting as one class for such purpose in such manner that the holders of the Cumulative Preferred Stock shall have four (4) votes per share and the holders of the Cumulative Preferred Stock ($25) shall have one (1) vote per share: (a) Issue or assume any unsecured notes, debentures or other securities representing unsecured indebtedness for any purpose other than the refunding of secured or unsecured indebtedness theretofore created or assumed by the Corporation and then outstanding or the retiring, by redemption or otherwise, of shares of the Preferred Stock or shares of any stock ranking prior thereto or on a parity therewith, if immediately after such issue or assumption the total principal amount of all unsecured notes, debentures or other securities representing unsecured indebtedness issued or assumed by the Corporation and then outstanding would exceed fifteen per centum (15%) of the aggregate of (i) the total principal amount of all bonds or other securities representing secured indebtedness issued or assumed by the Corporation and then outstanding, and (ii) the total of the capital and surplus of the Corporation, as then recorded on its books; or (b) Merge or consolidate with any other corporation or corporations or sell the property of the Corporation as or substantially as an entirety unless such merger, consolidation or sale or the issue or assumption of all securities to be issued or assumed in connection therewith shall have been ordered, approved or permitted by any regulatory authority then having jurisdiction in the premises; provided that the provisions of this clause (b) shall not apply to any mortgage of all or substantially all the property of the Corporation, or to a purchase or other acquisition by the Corporation of the assets or franchises of another corporation, or to any other transaction which does 10 not include such a merger, consolidation or sale of property, or to any merger or consolidation with or sale to a subsidiary or subsidiaries of the Corporation. No consent of the holders of the Cumulative Preferred Stock shall be required by reason of the provisions of this subparagraph (3) if, at or prior to the issue of any such securities representing unsecured indebtedness, or such consolidation, merger or sale, provision is made for the redemption or other retirement of all shares of Cumulative Preferred Stock then outstanding and no consent of the holders of the Cumulative Preferred Stock ($25) shall be required by reason of the provisions of this subparagraph (3) if, at or prior to the issue of any such securities representing unsecured indebtedness, or such consolidation, merger or sale, provision is made for the redemption or other retirement of all shares of Cumulative Preferred Stock ($25) then outstanding. 4. No provision contained in subparagraphs 1, 2 or 3 of this Section E is intended or shall be construed to relieve the Corporation from compliance with any applicable statutory provision requiring the vote or consent of a greater number of the outstanding shares of the Cumulative Preferred Stock or the Cumulative Preferred Stock ($25). F. Divided Arrearages. No holder of the Preferred Stock shall be entitled to vote for the election of directors or in respect of any matter, except as provided in subparagraph 1, 2 and 3 of paragraph E of this Article VIII, or as hereinafter provided in this Section, or as may be required by law. If, however, dividends payable on the outstanding Preferred Stock shall be accumulated and unpaid in an amount equivalent to four (4) quarter-yearly dividends, the holders of such Preferred Stock shall be entitled thereafter and until, but only until, all such accumulated and unpaid dividends shall have been fully paid or declared and funds set apart for the payment thereof (a) voting for such purpose as a single class in such manner that the holders of the Cumulative Preferred Stock shall have four (4) votes per share and the holders of the Cumulative Preferred Stock ($25) shall have one (1) vote per share, at each succeeding annual meeting of shareholders, to elect the smallest number of directors necessary to constitute a majority of the Board of Directors, the remaining directors to be elected as usual by the holders of the Common Stock; and (b) to vote on all questions other than for the election of directors in such manner that the holders of the Cumulative Preferred Stock shall have twenty (20) votes per share and the holders of the Cumulative Preferred Stock ($25) shall have five (5) votes per share; provided that if and when profits available for dividends are in excess of such accumulated and unpaid dividends, then the declaration and payment of such dividends shall not be unreasonably withheld. In consideration of the issue by the Corporation, and the purchase by the holders thereof, of shares of the capital stock of the Corporation, each and every present and future holder of shares of the capital stock of the Corporation shall be conclusively deemed, by acquiring or holding such shares, to have expressly consented to all and singular the terms and provisions of this Section F and to have agreed that the voting rights of such holder and the restrictions and qualifications thereof shall be as set forth in this Section. IX. COMMON STOCK A. Dividends. Subject to the limitations set forth in these Articles of Incorporation, dividends may be paid on shares of the Common Stock, out of any funds legally available for the purpose, when and as declared by the Board of Directors. 11 B. Liquidation. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after there shall have been paid to or set apart for the holders of shares of all classes of stock ranking prior to the Common Stock, the full preferential amounts to which they are respectively entitled under the foregoing provisions of these Articles of Incorporation, the remaining assets of the Corporation available for payment and distribution to shareholders shall be distributed ratably in accordance with their holdings to the holders of shares of the Common Stock. C. Voting. All voting power shall vest exclusively in the holders of shares of the Common Stock and such holders shall constitute the sole voting group of the Corporation, except as the Act shall expressly provide to the contrary, and except as and to the extent hereinbefore in these Articles of Incorporation otherwise provided. Each holder of Common Stock shall, in the election of directors and upon each other matter coming before any meeting of shareholders, be entitled to one vote for each share of such stock standing in the name of such holder on the books of the Corporation. X. PREFERRED STOCK-BY SERIES A. 4-1/4% Cumulative Preferred Stock. There is hereby established by the Board of Directors a series of Cumulative Preferred Stock designated and to be known as the "4-1/4% Cumulative Preferred Stock" of the Corporation. The shares of such series shall have, in addition to the general terms and characteristics of all the authorized shares of Cumulative Preferred Stock set forth above, the following distinctive terms and characteristics: 1. the annual dividend rate for the shares of such series shall be four and one-quarter percent (4.25%); 2. the premium payable to the holders of the shares of such series, in the event of any voluntary liquidation, dissolution or winding up of the Corporation, shall be one percent (1%) of the par value thereof; 3. the redemption price payable to the holders of the shares of such series shall be $101 per share plus an amount equal to the accrued dividends to the date fixed for redemption; and 4. the number of authorized shares of such series shall be One Hundred Seventy Five Thousand (175,000). B. 4.20% Cumulative Preferred Stock. There is hereby established by the Board of Directors a series of Cumulative Preferred Stock which shall be designated and known as the "4.20% Cumulative Preferred Stock" of the Corporation. The shares of such series shall have, in addition to the general terms and characteristics of all the authorized shares of Cumulative Preferred Stock set forth above, the following distinctive terms and characteristics: 1. the annual dividend rate for the shares of such series shall be four and two-tenths percent (4.20%); 12 2. the premium payable to holders of the shares of such series in the event of any voluntary liquidation, dissolution or winding up of the Corporation shall be one percent (1%) of the par value thereof; 3. the redemption price payable to the holders of the shares of such series upon the redemption of all or any part of the shares of such series shall be $101 per share plus an amount equal to accrued dividends to the date fixed for redemption; and 4. the number of shares constituting such series shall be 100,000. C. 4-1/2% Cumulative Preferred Stock. There is hereby established by the Board of Directors a series of Cumulative Preferred Stock which shall be designated and known as the "4-1/2% Cumulative Preferred Stock" of the Corporation. The shares of such series shall have, in addition to the general terms and characteristics of all the authorized shares of Cumulative Preferred Stock set forth above, the following distinctive terms and characteristics: 1. the annual dividend rate for the shares of such series shall be four and one-half percent (4-1/2%); 2. the premium payable to holders of the shares of such series in the event of any voluntary liquidation, dissolution or winding up of the Corporation shall be one percent (1 %) of the par value thereof; 3. the redemption price payable to the holders of the shares of such series upon the redemption of all or any part of the shares of such series shall be $101 per share plus an amount equal to accrued dividends to the date fixed for redemption; and 4. the number of shares constituting such series shall be 65,000. D. 4.64% Cumulative Preferred Stock. There is hereby established by the Board of Directors a series of Cumulative Preferred Stock which shall be designated and known as the "4.64% Cumulative Preferred Stock" of the Corporation. The shares of such series shall have, in addition to the general terms and characteristics of all the authorized shares of Cumulative Preferred Stock set forth above, the following distinctive terms and characteristics: 1. the annual dividend rate for the shares of such series shall be four and sixty-four hundredths percent (4.64%); 2. the premium payable to holders of the shares of such series in the event of any voluntary liquidation, dissolution or winding up of the Corporation shall be one percent (1%) of the par value thereof; 3. the redemption price payable to the holders of the shares of such series upon the redemption of all or any part of the shares of such series shall be $101 per share plus an amount equal to accrued dividends to the date fixed for redemption; and 13 4. the number of shares constituting such series shall be 160,000. E. 4.90% Cumulative Preferred Stock. There is hereby established by the Board of Directors a series of Cumulative Preferred Stock which shall be designated and known as the "4.90% Cumulative Preferred Stock" of the Corporation. The shares of such series shall have, in addition to the general terms and characteristics of all the authorized shares of Cumulative Preferred Stock set forth above, the following distinctive terms and characteristics: 1. the annual dividend rate for the shares of such series shall be four and nine-tenths percent (4.90%); 2. the premium payable to holders of the shares of such series in the event of any voluntary liquidation, dissolution or winding up of the Corporation shall be one percent (1%) of the par value thereof; 3. the redemption price payable to the holders of the shares of such series upon the redemption of all or any part of the shares of such series shall be $101 per share plus an amount equal to accrued dividends to the date fixed for redemption; and 4. the number of shares constituting such series shall be 150,000. F. 4.90% Cumulative Preferred Stock, 2nd Series. There is hereby established by the Board of Directors a series of Cumulative Preferred Stock which shall be designated and known as the "4.90% Cumulative Preferred Stock, 2nd Series" of the Corporation. The shares of such series shall have, in addition to the general terms and characteristics of all the authorized shares of Cumulative Preferred Stock set forth above, the following distinctive terms and characteristics: 1. the annual dividend rate for the shares of such series shall be four and nine-tenths percent (4.90%); 2. the premium payable to holders of the shares of such series in the event of any voluntary liquidation, dissolution or winding up of the Corporation shall be one percent (1 %) of the par value thereof; 3. the redemption price payable to the holders of the shares of such series upon the redemption of all or any part of the shares of such series shall be $101 per share plus an amount equal to accrued dividends to the date fixed for redemption; and 4. the number of shares constituting such series shall be 150,000. G. 7.15% Cumulative Preferred Stock. There is hereby established by the Board of Directors a series of Cumulative Preferred Stock which shall be designated and known as the "7.15% Cumulative Preferred Stock" of the Corporation. The shares of such series shall have, in addition to the general terms and characteristics of all the authorized shares of Cumulative Preferred Stock set forth above, the following distinctive terms and characteristics: 14 1. the annual dividend rate for the shares of such series shall be seven and fifteen-hundredths percent (7.15%); 2. the premium payable to holders of the shares of such series in the event of any voluntary liquidation, dissolution or winding up of the Corporation shall be one percent (1%) of the par value thereof; 3. the redemption price payable to the holders of the shares of such series upon the redemption of all or any part of the shares of such series shall be $100 per share plus an amount equal to accrued dividends to the date fixed for redemption; and 4. the number of shares constituting such series shall be 250,000. H. 7.50% Cumulative Preferred Stock. There is hereby established by the Board of Directors a series of Cumulative Preferred Stock which shall be designated and known as the "7.50% Cumulative Preferred Stock" of the Corporation. The shares of such series shall have, in addition to the general terms and characteristics of all the authorized shares of Cumulative Preferred Stock set forth above, the following distinctive terms and characteristics: 1. The annual dividend rate of the shares of such series shall be seven and one-half percent (7.50%) (computed on the basis of a 360-day year, 30-day month) and such dividend shall be cumulative from the date on which the shares of such series are originally issued. 2. The liquidation price payable to holders of the shares of such series in the event of any voluntary liquidation, dissolution or winding up of the Corporation shall be the following percentages of the par value thereof if such event shall occur during the twelve-month period ending on the last day of August of the indicated year: Year Percentage of Par Value 1997 101.75% 1998 101.50% 1999 101.25% 2000 101.00% 2001 100.75% 2002 100.50% 2003 100.25% and 100% of the par value thereof if such event shall occur at any time after August 31, 2003, plus, in each case, an amount equal to accrued and unpaid dividends to the date of such payment. 15 3. The redemption prices payable to the holders of the shares of such series upon the redemption of all or any part of the shares of such series shall be the following redemption prices per share if redeemed during the twelve-month period ending on the last day of August of the indicated year: Year Redemption Price 1997 $101.75 1998 $101.50 1999 $101.25 2000 $101.00 2001 $100.75 2002 $100.50 2003 $100.25 and $100 per share if redeemed at any time after August 31, 2003, plus, in each case, an amount equal to accrued and unpaid dividends to the date fixed for redemption. 4. (a) On July 1, 1984, and on each July 1 thereafter (so long as any shares of the 7.50% Cumulative Preferred Stock are outstanding), the Corporation shall set aside in a sinking fund for the purchase of shares of the 7.50% Cumulative Preferred Stock an amount from the legally available funds of the Corporation sufficient to purchase 12,000 of such shares (or the number of such shares then outstanding if less than 12,000) at a purchase price equal to the total of $100 per share plus, in each case, an amount equal to the accrued and unpaid dividends thereon to the date of purchase. The funds so set aside in the sinking fund pursuant to this subparagraph (a) or any of the following subparagraphs of this paragraph 4, shall be deposited in a separate sinking fund account. (b) Concurrently with setting aside funds in the sinking fund for the 7.50% Cumulative Preferred Stock, the corporation shall offer to purchase 12,000 shares of the 7.50% Cumulative Preferred Stock (or the number of such shares then outstanding if fewer than 12,000) at the purchase price specified in subparagraph (a) above. No redemption of shares of the 7.50% Cumulative Preferred Stock pursuant to paragraph 3 above nor any purchase or other acquisition [other than pursuant to this paragraph 4] of such shares by the Corporation shall constitute a credit against the number of shares which the Corporation is required to offer to purchase pursuant to this paragraph 4. (c) The annual obligation of the Corporation to set aside funds in the sinking fund for the 7.50% Cumulative Preferred Stock and to make the offer to purchase shares thereof as required by subparagraphs (a) and (b) above shall be a cumulative obligation and shall continue in 16 effect until fully satisfied, whether any failure of the Corporation to fulfill such obligation is due to insufficiency of legally available funds or otherwise. To the extent that the Corporation shall not have, on any date on which the setting aside of funds in the sinking fund is required pursuant to subparagraph (a) above, funds legally available for such purpose in the full amount required to be set aside pursuant thereto, it shall set aside in the sinking fund on such date such funds,if any, as are then legally available, and as soon thereafter as any funds or any additional funds become legally available,it shall set aside such funds in the sinking fund in an amount not in excess of the amount necessary to fulfill such cumulative obligation. Notwithstanding the foregoing, if at any time the Corporation shall have outstanding any Parity Sinking Fund Preferred Stock other than the 7.50% Cumulative Preferred Stock, shall be obligated to set aside legally available funds in the sinking fund for the 7.50% Cumulative Preferred Stock and the sinking fund or funds for such other Parity Sinking Fund Preferred Stock, and shall not have sufficient funds legally available to so set aside the full amount required for all such sinking funds, such legally available funds as the Corporation then has shall be distributed among all such sinking funds in proportion to the amounts which the Corporation is then obligated to set aside in each such sinking fund. At any time following the setting aside of funds in the sinking fund for the 7.50% Cumulative Preferred Stock pursuant to this subparagraph (c) when the amount available in such sinking fund is sufficient to purchase at least 2,000 shares thereof at the pricespecified in subparagraph (a), the Corporation shall promptly offer to purchase such number of whole shares of 7.50% Cumulative Preferred Stock as may be purchased with such amount available at the purchase price specified in subparagraph (a) above. (d) Any offer to purchase shares of the 7.50% Cumulative Preferred Stock pursuant to this paragraph 4 shall be made by mailing a notice thereof by first class mail, postage prepaid, to each holder of shares of the 7.50% Cumulative Preferred Stock at the address to which such holder shall have requested that notices be sent, or if such holder shall have made no such request, to such holder's address as the same shall appear on the stock register of the Corporation. Such notice shall specify the number of such shares which the Corporation is offering to purchase hereunder and the date of purchase, which shall be 60 days after the date of any such notice. Each holder wishing to accept such offer shall notify the Corporation not later than 30 days prior to the date of purchase of the number of such shares which such holder proposes to sell in response to such offer. (e) If the total number of shares of the 7.50% Cumulative Preferred Stock which all holders accepting such offer propose to sell is fewer than or equal to the total number of such shares which the Corporation has offered to buy, the Corporation shall apply the sinking fund so established to purchase all such shares so offered. (f) If the total number of shares of the 7.50% Cumulative Preferred Stock which all holders accepting such offer propose to sell exceeds the total number of such shares which the Corporation has offered to purchase, the number of such shares to be purchased from each such holder shall be determined in the following manner: (i) The number of shares of the 7.50% Cumulative Preferred Stock to be purchased from each such holder shall be equivalent to the lesser of (A) the total number of such shares tendered to the Corporation by such holder, and (B) the number of such shares 17 which bears the same proportion to the total number of such shares to be purchased by the Corporation pursuant to such offer as the total number of such shares held by such holder bears to the total number of such shares held by all holders accepting such offer; (ii) If the total number of shares of the 7.50% Cumulative Preferred Stock to be purchased from all such holders determined in accordance with clause (i) above shall be fewer than the total number of such shares which the Corporation has offered to purchase, then the number of such shares to be purchased from each such holder whose number of shares was determined pursuant to subclause (B) of clause (i) above shall be redetermined and shall be equivalent to the lesser of (A) the total number of such shares tendered to the Corporation by such holder, and (B) the number of such shares which bears the same proportion to a number equal to the difference between (x) the total number of such shares to be purchased by the Corporation pursuant to such offer and (y) the total number of such shares to be purchased by it from all holders whose number of shares was determined pursuant to subclause (A) of clause (i) above, as the total number of such shares held by such holder whose number of shares was determined pursuant to subclause (B) of clause (i) above bears to the total number of such shares held by all holders whose number of shares was determined pursuant to subclause (B) of clause (i) above; and (iii) If the total number of shares of the 7.50% Cumulative Preferred Stock to be purchased from all such holders in accordance with clauses (i) and (ii) above shall be fewer than the total number of such shares which the Corporation has offered to purchase, then the number of such shares to be purchased from each such holder whose number of shares was determined pursuant to subclause (B) of clause (ii) above shall be redetermined in the same manner as provided in clause (ii), until the total number of such shares to be purchased from all holders proposing to sell in response to such offer shall be equivalent to the total number of such shares which the Corporation has offered to purchase. If the number of shares of the 7.50% Cumulative Preferred Stock to be purchased from each holder shall be determined in accordance with clause (i), (ii) or (iii) above, the Corporation shall notify each such holder of the number of such shares to be purchased from such holder not later than 15 days prior to the date of purchase, and the Corporation shall apply the sinking fund to the purchase of such shares. (g) On each purchase of shares of the 7.50% Cumulative Preferred Stock pursuant to this paragraph 4, the Corporation shall pay any transfer or other taxes to which any holder selling shares to the Corporation may be subject, other than income taxes on any dividend or gain received by the holder as a result of such sale. (h) Five days after the expiration date of the 60-day period referred to in subparagraph (d) above, the balance, if any, of the sinking fund not expended for the purchase and retirement of shares, after deducting any amounts required for the payment of shares purchased but not delivered to the Corporation prior to such date, shall be restored to the general funds of the 18 Corporation, free from the sinking fund requirement for the then calendar year, but only if the Corporation shall have satisfied in full its cumulative obligation under this paragraph 4. (i) If at any time the Corporation shall not have satisfied in full its cumulative obligation under this paragraph 4, the Corporation will not (i) declare, pay, or set aside any amount for the payment of any dividends, or make any distribution, on its Common Stock or any class of stock ranking as to dividends or other distributions junior to shares of the 7.50% Cumulative Preferred Stock, or (ii) redeem, purchase or otherwise acquire, or permit any Subsidiary to purchase or otherwise acquire, any shares of Common Stock or any class of stock or series thereof ranking as to dividends or other distributions junior or equal to the shares of the 7.50% Cumulative Preferred Stock (including any other series of Cumulative Preferred Stock), except that if the Corporation shall set aside funds in the sinking fund or funds for any other Parity Sinking Fund Preferred Stock in accordance with the third sentence of subparagraph (c) above, it may redeem or purchase shares of such other Parity Sinking Fund Preferred Stock in partial fulfillment of its sinking fund obligations with respect thereto. (j) For purposes of this paragraph 4, (i) the term "Parity Sinking Fund Preferred Stock" shall mean any series of Preferred Stock (including the 7.50% Cumulative Preferred Stock) or any other class or series of stock of the Corporation ranking on a parity with the Cumulative Preferred Stock as to the payment of dividends and the distribution of assets, and the terms of which shall (A) obligate the Corporation to provide a sinking fund for the redemption or purchase of shares thereof, and (B) require the Corporation, if it shall not have sufficient funds legally available to set aside and deposit the full amount for all such sinking funds, to distribute such funds as are then available among all such sinking funds in proportion to the amounts which the Corporation is then obligated to deposit in each such sinking fund, and to apply the funds so distributed to the redemption or purchase of shares in partial fulfillment of its obligation with respect to such sinking fund; and (ii) the term "Subsidiary" shall mean any corporation at least the majority of the stock of which having general voting rights is, at the time as of which any determination is being made, owned by the Corporation either directly or through Subsidiaries. 5. All shares of the 7.50% Cumulative Preferred Stock redeemed, purchased (including, without limitation, pursuant to paragraph 4 above) or otherwise acquired by the Corporation shall be canceled. Such shares shall be restored to the status of authorized but unissued shares of Cumulative Preferred Stock, but 19 shall not be reissued as shares of the 7.50% Cumulative Preferred Stock. 6. The number of shares constituting such series shall be 300,000. I. 8.40% Cumulative Preferred Stock. There is hereby established by the Board of Directors a series of Cumulative Preferred Stock which shall be designated and known as the "8.40% Cumulative Preferred Stock" of the Corporation. The shares of such series shall have, in addition to the general terms and characteristics of all the authorized shares of Cumulative Preferred Stock set forth above, the following distinctive terms and characteristics: 1. The annual dividend rate of the shares of such series shall be eight and four-tenths percent (8.40%) (computed on the basis of a 360 day year, 30-day month) and such dividends shall be cumulative from the date on which the shares of such series are originally issued. 2. The liquidation price payable to holders of the shares of such series in the event of any voluntary liquidation, dissolution or winding up of the Corporation shall be the following percentages of the par value thereof if such event shall occur during the twelve-month period ending on the last day of July of the indicated year: Year Percentage of Par Value 1997 102.00% 1998 101.75% 1999 101.50% 2000 101.25% 2001 101.00% 2002 100.75% 2003 100.50% 2004 100.25% and 100% of the par value thereof if such event shall occur at any time after July 31, 2004, plus, in each case, an amount equal to accrued and unpaid dividends to the date of such payment. 3. The redemption prices payable to the holders of the shares of such series upon the redemption of all or any part of the shares of such series shall be the following redemption prices per share if redeemed during the twelve-month period ending on the last day of July of the indicated year: Year Redemption Price 1997 $102.00 20 1998 $101.75 1999 $101.50 2000 $101.25 2001 $101.00 2002 $100.75 2003 $100.50 2004 $100.25 and $100 per share if redeemed at any time after July 31, 2004, plus, in each case, an amount equal to accrued and unpaid dividends to the date fixed for redemption. 4. (a) On July 1, 1985, and on each July 1 thereafter (so long as any shares of the 8.40% Cumulative Preferred Stock are outstanding), the Corporation shall set aside in a sinking fund for the purchase of shares of the 8.40% Cumulative Preferred Stock an amount from the legally available funds of the corporation sufficient to purchase 13,760 of such shares (or the number of such shares then outstanding if less than 13,760) at a purchase price equal to the total of $100 per share plus, in each case, an amount equal to the accrued and unpaid dividends thereon to the date of purchase. The funds so set aside in the sinking fund pursuant to this subparagraph (a) or any of the following subparagraphs of this paragraph 4 shall be deposited in a separate sinking fund account. (b) Concurrently with setting aside funds in the sinking fund for the 8.40% Cumulative Preferred Stock, the Corporation shall offer to purchase 13,760 shares of the 8.40% Cumulative Preferred Stock (or the number of such shares then outstanding if fewer than 13,760) at the purchase price specified in subparagraph (a) above. No redemption of shares of the 8.40% Cumulative Preferred Stock pursuant to paragraph 3 above nor any purchase or other acquisition (other than pursuant to this paragraph 4) of such shares by the corporation shall constitute a credit against the number of shares which the Corporation is required to offer to purchase pursuant to this paragraph 4. (c) The annual obligation of the Corporation to set aside funds in the sinking fund for the 8.40% Cumulative Preferred Stock and to make the offer to purchase shares thereof as required by subparagraphs (a) and (b) above shall be a cumulative obligation and shall continue in effect until fully satisfied, whether any failure of the Corporation to fulfill such obligation is due to insufficiency of legally available funds or otherwise. To the extent that the Corporation shall not have, on any date on which the setting aside of funds in the sinking fund is required pursuant to subparagraph (a) above, funds legally available for such purpose in the full amount required to be set aside pursuant thereto, it shall set aside in the sinking fund on such date such funds, if any, as are then legally available, and as soon thereafter as any funds or any additional funds become legally available, it shall 21 set aside such funds in the sinking fund in an amount not in excess of the amount necessary to fulfill such cumulative obligation. Notwithstanding the foregoing, if at any time the Corporation shall have outstanding any Parity Sinking Fund Preferred Stock other than the 8.40% Cumulative Preferred Stock, shall be obligated to set aside legally available funds in the sinking fund for the 8.40% Cumulative Preferred Stock and the sinking fund or funds for such other Parity Sinking Fund Preferred Stock, and shall not have sufficient funds legally available to so set aside the full amount required for all such sinking funds, such legally available funds as the Corporation then has shall be distributed among all such sinking funds in proportion to the amounts which the Corporation is then obligated to set aside in each such sinking fund. At any time following the setting aside of funds in the sinking fund for the 8.40% Cumulative Preferred Stock pursuant to this subparagraph (c), when the amount available in such sinking fund is sufficient to purchase at least 2,000 shares thereof at the price specified in subparagraph (a), the Corporation shall promptly offer to purchase such number of whole shares of 8.40% Cumulative Preferred Stock as may be purchased with such amount available at the purchase price specified in subparagraph (a) above. (d) Any offer to purchase shares of the 8.40% Cumulative Preferred Stock pursuant to this paragraph 4 shall be made by mailing a notice thereof by first class mail, postage prepaid, to each holder of shares of the 8.40% Cumulative Preferred Stock at the address to which such holder shall have requested that notices be sent, or if such holder shall have made no such request, to such holder's address as the same shall appear on the stock register of the Corporation. Such notice shall specify the number of such shares which the Corporation is offering to purchase hereunder and the date of purchase, which shall be 60 days after the date of any such notice. Each holder wishing to accept such offer shall notify the Corporation not later than 30 days prior to the date of purchase of the number of such shares which such holder proposes to sell in response to such offer. (e) If the total number of shares of 8.40% Cumulative Preferred Stock which all holders accepting such offer propose to sell is fewer than or equal to the total number of such shares which the Corporation has offered to buy, the Corporation shall apply the sinking fund so established to purchase all such shares so offered. (f) If the total number of shares of 8.40% Cumulative Preferred Stock which all holders accepting such offer propose to sell exceeds the total number of such shares which the Corporation has offered to purchase, the number of such shares to be purchased from each such holder shall be determined in the following manner: (i) The number of shares of the 8.40% Cumulative Preferred Stock to be purchased from each such holder shall be equivalent to the lesser of (A) the total number of such shares tendered to the Corporation by such holder, and (B) the number of such shares which bears the same proportion to the total number of such shares to be purchased by the Corporation pursuant to such offer as the total number of such shares held by such holder bears to the total number of such shares held by all holders accepting such offer; 22 (ii) If the total number of shares of the 8.40% Cumulative Preferred Stock to be purchased from all such holders determined in accordance with clause (i) above shall be fewer than the total number of such shares which the Corporation has offered to purchase, then the number of such shares to be purchased from each such holder whose number of shares was determined pursuant to subclause (B) of clause (i) above shall be redetermined and shall be equivalent to the lesser of (A) the total number of such shares tendered to the Corporation by such holder, and (B) the number of such shares which bears the same proportion to a number equal to the difference between (x) the total number of such shares to be purchased by the Corporation pursuant to such offer and (y) the total number of such shares to be purchased by it from all holders whose number of shares was determined pursuant to subclause (A) of clause (i) above, as the total number of such shares held by such holder whose number of shares was determined pursuant to subclause (B) of clause (i) above bears to the total number of such shares held by all holders whose number of shares was determined pursuant to subclause (B) of clause (i) above; and (iii) If the total number of shares of the 8.40% Cumulative Preferred Stock to be purchased from all such holders in accordance with clauses (i) and (ii) above shall be fewer than the total number of such shares which the Corporation has offered to purchase, then the number of such shares to be purchased from each such holder whose number of shares was determined pursuant to subclause (B) of clause (ii) above shall be redetermined in the same manner as provided in clause (ii), until the total number of such shares to be purchased from all holders proposing to sell in response to such offer shall be equivalent to the total number of such shares which the Corporation has offered to purchase. If the number of shares of the 8.40% Cumulative Preferred Stock to be purchased from each holder shall be determined in accordance with clause (i), (ii) or (iii) above, the Corporation shall notify each such holder of the number of such shares to be purchased from such holder not later than 15 days prior to the date of purchase, and the Corporation shall apply the sinking fund to the purchase of such shares. (g) On each purchase of shares of the 8.40% Cumulative Preferred Stock pursuant to this paragraph 4, the Corporation shall pay any transfer or other taxes to which any holder selling shares to the Corporation may be subject, other than income taxes on any dividend or gain received by the holder as a result of such sale. (h) Five days after the expiration date of the 60-day period referred to in subparagraph (d) above, the balance, if any, of the sinking fund not expended for the purchase and retirement of shares, after deducting any amounts required for the payment of shares purchased but not delivered to the retirement of shares purchased but not delivered to the Corporation prior to such date, shall be restored to the general funds of the Corporation, free from the sinking fund requirement for the then calendar year, but only if the Corporation shall have satisfied in full its cumulative obligation under this paragraph 4. 23 (i) If at any time the Corporation shall not have satisfied in full its cumulative obligation under this paragraph 4, the Corporation will not (i) declare, pay, or set aside any amount for the payment of any dividends, or make any distribution, on its Common Stock or any class of stock ranking as to dividends or other distributions junior to shares of the 8.40% Cumulative Preferred Stock, or (ii) redeem, purchase or otherwise acquire, or permit any Subsidiary to purchase or otherwise acquire, any shares of Common Stock or any class of stock or series thereof ranking as to dividends or other distributions junior or equal to the shares of the 8.40% Cumulative Preferred Stock (including any other series of Cumulative Preferred Stock), except that if the Corporation shall set aside funds in the sinking fund or funds for any other Parity Sinking Fund Preferred Stock in accordance with the third sentence of subparagraph (c) above, it may redeem or purchase shares of such other Parity Sinking Fund Preferred Stock in partial fulfillment of its sinking fund obligations with respect thereto. (j) For purposes of this paragraph 4, (i) the term "Parity Sinking Fund Preferred Stock" shall mean any series of Preferred Stock (including the 8.40% Cumulative Preferred Stock) or any other class or series of stock of the Corporation ranking on a parity with the Cumulative Preferred Stock as to the payment of dividends and the distribution of assets, and the terms of which shall (A) obligate the Corporation to provide a sinking fund for the redemption or purchase of shares thereof, and (B) require the Corporation, if it shall not have sufficient funds legally available to set aside and deposit the full amount for all such sinking funds, to distribute such funds as are then available among all such sinking funds in proportion to the amounts which the Corporation is then obligated to deposit in each such sinking fund, and to apply the funds so distributed to the redemption or purchase of shares in partial fulfillment of its obligation with respect to such sinking fund; and (ii) the term "Subsidiary" shall mean any corporation at least the majority of the stock of which having general voting rights is, at the time as of which any determination is being made, owned by the Corporation either directly or through Subsidiaries. 5. All shares of the 8.40% Cumulative Preferred Stock redeemed, purchased (including, without limitation, pursuant to paragraph 4 above) or otherwise acquired by the Corporation shall be canceled. Such shares shall be restored to the status of authorized but unissued shares of Cumulative Preferred Stock, but shall not be reissued as shares of the 8.40% Cumulative Preferred Stock. 6. The number of shares constituting such series shall be 344,000. J. 8.40% Cumulative Preferred Stock ($25). There is hereby established by the Board of Directors a series of Cumulative Preferred Stock ($25) which shall be designated and known as the "8.40% Cumulative Preferred Stock ($25)" of the Corporation. The shares of such series shall have, in addition to the general terms and characteristics of all the authorized shares of Cumulative Preferred Stock ($25) set forth above, the following distinctive terms and characteristics: 24 1. the annual dividend rate for the shares of such series shall be eight and four-tenths percent (8.40%), and such dividends shall be cumulative from the date on which the shares of such series are originally issued; 2. the premium payable to holders of the shares of such series in the event of any voluntary liquidation, dissolution or winding up of the Corporation shall be one percent (1%) of the par value thereof; 3. the redemption price payable to the holders of the shares of such series upon the redemption of all or any part of the shares of such series shall be $25.25 plus an amount equal to accrued dividends to the date fixed for redemption; and 4. the number of shares constituting such series shall be 1,400,000. * * * * * These amended and restated Articles of Incorporation were adopted by unanimous written consent of the directors of the Corporation and by written consent of the sole shareholder of the Corporation. The number of votes cast for each amendment by each voting group entitled to vote separately on the amendment was sufficient for approval by that voting group. IN WITNESS WHEREOF, the Corporation has set its hand and seal effective as of September 19, 1997. PUBLIC SERVICE COMPANY OF COLORADO /s/ Wayne H. Brunetti By: Wayne H. Brunetti, Chief Executive Officer Attest: /s/ Teresa S. Madden _____________________________ Teresa S. Madden, Corporate Secretary 25 EX-3.(A)2(I) 3 SPS ATICLES Exhibit 3(a)2 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF SOUTHWESTERN PUBLIC SERVICE COMPANY Pursuant to Sections 53-13-4 and -7, New Mexico Statutes Annotated, Southwestern Public Service Company, a New Mexico corporation (the "Corporation"), hereby amends and restates its Articles of Incorporation, as previously amended and restated, as follows: FIRST: Name. The name of the Corporation is Southwestern Public Service Company. SECOND: Principal New Mexico Office. The location of the principal office of the Corporation in New Mexico shall be at 111 East Fifth, Roswell, New Mexico. THIRD: Purpose. The purpose for which the Corporation is organized is to transact any and all lawful business for which corporations may be incorporated under the New Mexico Business Corporation Act (the "NMBCA"). FOURTH: Capital Stock. The total number of authorized shares of the Corporation shall be 10,000,200, divided into 10,000,000 preferred shares having a par value of $1 per share (the "Preferred Stock") and 200 common shares having a par value of $1 per share (the "Common Stock"). The designations, voting powers, preferences, and relative, participating, optional, or other special rights, and qualifications, limitations, or restrictions of the above classes of stock are as follows: (A) Preferred Stock (1) Issuance in Series. Shares of Preferred Stock may be issued in one or more series when and for such consideration or considerations as the Board of Directors determines. All series will rank equally and be identical in all respects, except as permitted by the following provisions of paragraph 2 of this Article Fourth (A). (2) Authority of the Board with Respect to Series. The Board of Directors is authorized, at any time, to provide for the issuance of the shares of Preferred Stock in one or more series with the designations, voting powers, preferences, and relative, participating, optional, or other special rights, and qualifications, limitations, or restrictions thereof as are stated in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors, and as are not stated in these Amended and Restated Articles of Incorporation or any amendment hereto or not otherwise prescribed by law including, but not limited to, determination of any of the following: (i) The maximum number of shares to constitute the series, which may subsequently be increased or decreased (but not below the number of shares of such series then outstanding) by resolution of the Board of Directors and the distinctive designation thereof; (ii) Whether the shares of the series shall have any voting powers, in addition to the voting powers provided by law, and, if any, the terms of the voting powers; (iii) The dividend rate or rates, if any, on the shares of the series or the manner in which such rate or rates shall be determined, the conditions and dates upon which the dividends shall be payable, and the preference or relation which the dividends shall bear to the dividends payable on any other class or classes or on any other series of capital stock, and whether the dividends shall be cumulative or noncumulative; (iv) Whether the shares of the series shall be subject to redemption by the Corporation, and, if made subject to redemption, the times, prices, and other terms, limitations, restrictions, or conditions of the redemption; (v) The relative amounts, and the relative rights or preferences, if any, of payment in respect of shares of the series, which the holders of shares of the series shall be entitled to receive upon the liquidation, dissolution, or winding up of the Corporation; (vi) Whether the shares of the series shall be subject to the operation of a retirement or sinking fund and, if so, the extent to which and the manner in which any retirement or sinking fund shall be applied to the purchase or redemption of the shares of the series for retirement or for other corporate purposes, and the terms and provisions relative to the operation of the retirement or sinking fund; (vii) Whether the shares of the series shall be convertible into, or exchangeable for, shares of any other class, classes, or series, or other securities, whether or not issued by the Corporation, and if so convertible or exchangeable, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting them; (viii) The limitations and restrictions, if any, to be effective while any shares of the series are outstanding upon the payment of dividends or the making of other distributions on, and upon the purchase, redemption, or other acquisition by the Corporation of, the Common Stock or any other class or classes of stock of the Corporation ranking junior to the shares of the series either as to dividends or upon liquidation, dissolution, or winding up of the Corporation; 2 (ix) The conditions or restrictions, if any, upon the creation of indebtedness of the Corporation or upon the issuance of any additional stock (including additional shares of such series or of any other class) ranking on a parity with or prior to the shares of the series as to dividends or distribution of assets upon liquidation, dissolution, or winding up of the Corporation; and (x) Any other preference, relative, participating, optional, or other special rights, and the qualifications, limitations, or restrictions thereof, not inconsistent with law, this Article Fourth, or any resolution of the Board of Directors pursuant hereto. (3) Preemptive Rights. The holders of the Preferred Stock shall have no preemptive rights to subscribe to any issue of shares or other securities of any class of the Corporation. (B) Common Stock (1) Dividends. Subject to the preferential rights of holders of the Preferred Stock, dividends may be paid or declared and set apart for payment upon the Common Stock out of any funds legally available for the declaration of dividends, but only when and as determined by the Board of Directors. (2) Liquidation, Dissolution, or Winding Up. Subject to the preferential rights of holders of the Preferred Stock in the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, the holders of shares of the Common Stock shall be entitled to receive all of the assets of the Corporation available for distribution to its shareholders ratably in proportion to the number of shares of the Common Stock they hold. (3) Voting Rights. Except as may be otherwise required by the NMBCA or these Amended and Restated Articles of Incorporation, each holder of Common Stock has one vote for each share of stock he or she holds of record on the books of the Corporation on all matters voted upon by the shareholders. Cumulative voting for the election of directors shall not be permitted. (4) Preemptive Rights. The holders of the Common Stock shall have no preemptive rights to subscribe to any issue of shares or other securities of any class of the Corporation. FIFTH: Duration. The duration of the Corporation shall be perpetual. SIXTH: Number of Directors. The number of directors shall be fixed as provided in the Bylaws of the Corporation (the "Bylaws") or, if the Bylaws fail to fix the number, by resolution adopted from time to time by the Board of Directors. 3 SEVENTH: Limitations of Liability; Indemnification. A director of the Corporation shall not be personally liable to the Corporation or to its shareholders for monetary damages for a breach of fiduciary duty as a director unless (a) he or she has breached or failed to perform the duties of his or her office in accordance with the NMBCA, and (b) the breach or failure to perform constitutes negligence, willful misconduct, or recklessness. If the NMBCA is amended to permit the further elimination or limitation of the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the NMBCA, as amended. To the maximum extent permitted by law, the Corporation shall indemnify any person who is or was a director, officer, agent, fiduciary, or employee of the Corporation against any claim, liability, loss, or expense arising against or incurred by such person as a result of circumstances, events, actions, and omissions occurring in such capacity. The Corporation further shall have the authority to maintain insurance at the Corporation's expense providing for such indemnification, including insurance with respect to claims, liabilities, losses, and expenses against which the Corporation would not otherwise have the power to indemnify such persons. Any repeal or modification of this Article Seventh by the shareholders of the Corporation shall not adversely affect any right or protection of a director, officer, agent, fiduciary, or employee of the Corporation in respect of any act or omission occurring prior to the time of the repeal or modification. EIGHTH: Bylaws. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is authorized to make and alter the Bylaws, subject to the power of the shareholders to alter and repeal the Bylaws made by the Board of Directors. * * * * * The foregoing Amended and Restated Articles of Incorporation include amendments to the Corporation's previous Articles of Incorporation, as amended. These amendments were duly approved and adopted by the Board of Directors of the Corporation effective August 26, 1997. The sole shareholder of the Corporation, owning 100 shares of common stock of the Corporation, duly approved the foregoing Amended and Restated Articles of Incorporation (including the amendments reflected therein) by written consent effective August 26, 1997. All such shares were eligible to vote on the amendment as a single class, and all such shares were voted for and none against such amendments. No other shares of capital stock of the Corporation were or are outstanding. 4 These Amended and Restated Articles of Incorporation correctly set forth the corresponding provisions of the Articles of Incorporation as amended and supersede the original Articles of Incorporation and all prior amendments thereto. Dated: September 30, 1997. SOUTHWESTERN PUBLIC SERVICE COMPANY By /s/ David M. Wilks David M. Wilks, President By /s/ Mary Pullum Mary Pullum, Secretary STATE OF TEXAS ) ) ss. COUNTY OF POTTER ) David M. Wilks, being first duly sworn, states that he is President of Southwestern Public Service Company, that he has read and signed the foregoing document, and that every statement in the document is true and correct to the best of his information and belief. /s/ David M. Wilks David M. Wilks SWORN AND SUBSCRIBED TO BEFORE ME BY David M. Wilks, as President of Southwestern Public Service Company, on this 30th day of September 1997. /s/ Teresa Joan Parker Teresa Joan Parker Notary Public, State of Texas My commission expires: May 19, 2001 [NOTARIAL SEAL] [Filed in the office of the State Corporation Commission of New Mexico and made effective on October 1, 1997.] 5 EX-3.(B)1(II) 4 PSCO BY-LAWS Exhibit 3(b)1 PUBLIC SERVICE COMPANY OF COLORADO BYLAWS adopted November 20, 1997 ARTICLE I Shareholders Section 1. Annual Meeting. The annual meeting of the shareholders of the Company for the election of directors and for the transaction of any other business that may be properly brought before the meeting shall be held at a place, date, and hour designated by resolution of the Board of Directors. Section 2. Special Meetings. Special meetings of the shareholders for any purpose or purposes shall be called by the Secretary upon receipt of a written request from either the Chairman of the Board or the President, a majority of the directors, or any person or persons authorized by the Colorado Business Corporation Act (the "Act') to request such a meeting. Special meetings of the shareholders shall be held at a place, date, and hour designated by either the Chairman of the Board or the President or by resolution of the Board of Directors. Section 3. Procedure. At each meeting, of the shareholders, the Chairman of the Board or, in his or her absence, the President shall act as chairman of the meeting. The chairman of the meeting shall determine the order of business and all other matters of procedure. The chairman of the meeting may establish rules to maintain order and to conduct the meeting. The chairman of the meeting shall act in his or her absolute discretion, and his or her rulings are not subject to appeal. ARTICLE II Directors Section 1. Board of Directors. The business of the Company shall be managed by a Board of Directors. The number of directors constituting the Board of Directors shall be established from time to time by resolution of the Board of Directors, subject to any limitations set forth in the Articles of Incorporation. A Chairman of the Board may be chosen from among the directors. No person who has attained the age of sixty-five shall be eligible for election as a director of the Company unless he or she is already a member of the Board of Directors. No director who has attained the age of seventy-two shall serve as a director, effective with the next annual meeting of the shareholders. No director who was also an officer of the Company at the time he or she was last elected as a director shall serve as a director, effective with the next annual meeting of the shareholders, after ceasing to be an officer. Section 2. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at times and places determined by the Board of Directors. Section 3. Special Meetings. Special meetings of the Board of Directors shall be called by the Secretary upon the receipt of a request from the Chairman of the Board, the President, or any two directors. Notice of special meetings shall be given to each director at any time before the special meeting either personally or by telephone (including by message or recording device) or telegraph or facsimile not less than two hours before the meeting or by mail not less than three days before the meeting. Any notice shall be directed to the address or telephone number of each director as furnished to the Secretary for that purpose Section 4. Adjournment of Meetings. The directors may adjourn from time to time any regular or special meeting at which a quorum is present, without notice other than announcement at the meeting. The adjourned meeting may be called to order at any time without further notice, and any business may be transacted which might have been transacted at the original meeting. Section 5. Compensation of Directors. The Board of Directors may by resolution provide for payment of fees for attendance at meetings of the Board of Directors and the reimbursement of expenses of directors in attending meetings. The Board of Directors may also by resolution provide for the payment of other fees or compensation to members of the Board of Directors. Section 6. Authority to Appoint Committees and Delegate Authority. The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members one or more committees each of which, except to the extent limited by law, the Articles of Incorporation, these Bylaws, and the resolution establishing the committee, shall have and may exercise all of the authority of the Board of Directors, and may also prescribe rules of operation of the committee. Regular meetings of any committee may be held without notice at times and places determined by the Board of Directors or the committee. Special meetings of any committee shall be called by the Secretary upon the receipt of a request from the Chairman of the Board, the President, the chairman of the committee, or any member of the committee. Notice of special meetings shall be given in the same manner as provided in Section 3 of this Article II. ARTICLE III Officers Section 1. Number. The officers of the Company shall be a President, a Secretary, and a Treasurer, and may include a chief executive officer, a chief operating officer, a chief financial officer, one or more Vice Presidents (one or more of whom may be designated Executive Vice President or Senior Vice President), a Controller, and/or a chief accounting officer. Section 2. Election and Term of Office. Each officer shall be elected by the Board of Directors and shall hold office until the meeting of the Board of Directors following the next annual 2 meeting of the shareholders and until his or her successor has been elected and qualified or until his or her earlier retirement, disability, death, resignation, or removal. Section 3. Removal and Vacancies. Any officer may be removed at any time with or without cause by the Board of Directors. A vacancy in any office may be filled for the unexpired portion of the term in the same manner as provided for election to the office. Section 4. Assistant Officers. The Company may have such assistant officers as the Board of Directors may elect. Each assistant officer shall hold office at the pleasure of, and may be removed at any time with or without cause by, the Board of Directors. Assistant officers may include one or more Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers, and Assistant Controllers. Section 5. Duties. Each officer shall have the authority and shall perform the duties as may be assigned by the Board of Directors, the Chairman of the Board, or the President, or as shall be conferred or required by law or these Bylaws, or as shall be normally incidental to the office. The President, the chief executive officer, the chief operating officer, the chief financial officer and any Vice President of the Corporation (including Senior Vice Presidents, Executive Vice Presidents and Assistant Vice Presidents) may execute and deliver instruments and contracts on behalf of the Corporation and otherwise may bind the Corporation. In addition, any of the foregoing officer-signatories, and the board of directors of the Corporation, may delegate to any other person, in writing, the authority to execute and deliver instruments and contracts on behalf of the Corporation and otherwise to bind the Corporation. ARTICLE IV Indemnification of Directors, Officers, Employees, and Agents Section 1. Mandatory Indemnification. Each person who is a party or is threatened to be made a party, either as plaintiff, defendant, respondent, or otherwise, to any action, suit, or proceeding, whether civil, criminal, administrative, or investigative (a "Proceeding"), based upon, arising from, relating to, or by reason of the fact that such person, or a person of whom such person is the legal representative, is or was a director or officer of the Company, or is or was serving at the request of the Company as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation or non-profit corporation, cooperative, partnership, joint venture, trust, or other incorporated or unincorporated enterprise, or any employee benefit plan or trust (each, a "Company Affiliate"), shall be indemnified and held harmless by the Company to the fullest extent authorized by the Act, as the same exists on the date of the adoption of these Bylaws or as may hereafter be amended (but, in the case of any such amendment only to the extent that such amendment permits the Company to provide broader indemnification rights than permitted by the Act prior to such amendment), against any and all expenses, liability, and loss (including, without limitation, investigation expenses and expert witnesses' and attorneys' fees and expenses, judgments, penalties, fines, and amounts paid or to be paid in settlement) actually incurred by such person in connection therewith. The right to indemnification conferred in this Article IV shall be a contract right and shall include the right to be 3 paid by the Company for expenses incurred in defending or prosecuting any Proceeding in advance of its final disposition. For purposes of this Article IV, references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan or trust; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, or agent of the Company which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan or trust, its participants, or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan or trust shall be deemed to have acted in a manner "not opposed to the best interests of the Company." The Company's indemnity of any person who was or is serving at its request as a director, officer, partner, trustee, employee, or agent of a Company Affiliate shall be reduced by any amounts such person may collect as indemnification from such Company Affiliate. Section 2. Recovery Against the Company. If a claim under Section I of this Article IV is not paid in full by the Company within thirty days after a written claim has been received by the Company, except in the case of a claim for expenses to be incurred in defending a Proceeding in advance of its final disposition (in which case the applicable period shall be ten days), the claimant may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim and, if successful in whole or in any material part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. The claimant shall be presumed to be entitled to indemnification under this Article IV upon submission of a written claim (and any required undertaking and/or affirmations required by the Act) and thereafter the Company shall have the burden of proof to overcome the presumption that the claimant is not so entitled. Neither the failure of the Company (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because such person has met the applicable standard of conduct set forth in the Act, nor an actual determination by the Company (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 3. Non-Exclusive Right. The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Article IV shall not be exclusive of any other right which any person may be entitled under any statute, provision of the Articles of Incorporation, or Bylaw, any agreement, a resolution of shareholders or directors, or otherwise both as to action in such person's official capacity and as to action in another capacity while holding such office. Section 4. Insurance. The Company may purchase and maintain insurance or furnish similar protection, including, but not limited to, providing a trust fund, letter of credit, or 4 self-insurance, on behalf of any person who is a director, officer, employee, or agent of the Company or who, while a director, officer, employee, or agent of the Company, is serving at the request of the Company as a director, officer, partner, trustee, employee, or agent of a Company Affiliate, against any liability asserted against and incurred by such director, officer, employee, or agent in such capacity or arising out of such director's, officer's, employee's, or agent's status as such, whether or not the Company would have the power to indemnify such director, officer, employee, or agent against such liability under the Act. Section 5. Delegation of Authority. The Company may, by action of its Board of Directors, authorize one or more officers to grant rights to indemnification and advancement of expenses to employees or agents of the Company on such terms and conditions as such officer or officers deem appropriate under the circumstances. Section 6. Continuing Effect. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article IV shall, unless otherwise provided when authorized, continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such persons. Anything in this Article IV to the contrary notwithstanding, no elimination or amendment of this Bylaw adversely affecting the right of any person to indemnification or advancement of expenses hereunder shall be effective until the sixtieth day following notice to such indemnified person of such action, and no elimination or amendment of these Bylaws shall deprive any such person of such person's rights hereunder arising out of alleged or actual occurrences, acts, or failures to act which had their origin prior to such sixtieth day. Section 7. Severability. In case any provision in this Article IV shall be determined at any time to be unenforceable in any respect, the other provisions shall not in any way be affected or impaired thereby, and the affected provision shall be given the fullest possible enforcement in the circumstances, it being the intention of the Company to afford indemnification and advancement of expenses to the persons indemnified hereby to the fullest extent permitted by law. Section 8. Notice to Shareholders. Submission of these Bylaws to the shareholders of the Company for ratification shall constitute notice to the shareholders of the Company and shall be the only notice which the Company shall be required to give the shareholders of the Company with respect to any of the matters covered hereby, including, without limitation, the Company's entering into any agreement or making other arrangements providing for the indemnification of or the advancement of expenses to a director, officer, employee, or agent, the actual advancement of expenses to a director, officer, employee, or agent of the Company, or the payment of any other liability or indemnification to or on behalf of a director, officer, employee, or agent. 5 ARTICLE V Share Certificates and Transfer of Shares Section 1. Share Certificates. Shares of stock of the Company may, at the discretion of the Board of Directors, be represented by certificates or may be uncertificated. Any share certificates of the Company shall be in the form and contain the provisions determined by the Board of Directors and required by the Act. Section 2. Transfer Rules. The Board of Directors, the Chairman of the Board, the President, or the Secretary may from time to time promulgate rules or regulations as it or such officer may deem advisable concerning the issue, transfer, registration, or replacement of share certificates of the Company. Section 3. Registered Shareholders. The Company shall be entitled to treat the holder of record of any share or shares as the holder in fact of those shares. The Company shall not be bound to recognize any equitable or other claim to or interest in any shares on the part of any other person, regardless of whether the Company has actual or imputed knowledge of a claim of interest, except as otherwise required by the Act. ARTICLE VI Fiscal Year and Seal Section 1. Fiscal Year. The fiscal year of the Company shall begin on the first day of January and end on the last day of December each year. Section 2. Seal. The Company may have a corporate seal if the Chairman of the Board, the Board of Directors, the President or the Secretary so desires. The seal of the Company shall be circular in form. Around the margin of the seal shall be placed the name of the Company. ARTICLE VII Amendments These Bylaws may be altered, amended, or repealed by the affirmative vote of a majority of the Board of Directors then in office at any regular meeting or, if notice of intention to amend, alter, or repeal the Bylaws is given in the notice of the meeting, at any special meeting of the Board of Directors. These Bylaws may also be altered, amended, or repealed by the shareholders by the affirmative vote of the holders of a majority in interest of the shares issued and outstanding and entitled to vote. 6 EX-3.(B)2(II) 5 SPS BY-LAWS Exhibit 3(b)2 SOUTHWESTERN PUBLIC SERVICE COMPANY BYLAWS (as amended through September 29, 1997) ARTICLE I Shareholders Section 1. Annual Meeting. The annual meeting of the shareholders of the Company for the election of directors and for the transaction of any other business that may be properly brought before the meeting shall be held at a place, date, and hour designated by resolution of the Board of Directors. Section 2. Special Meetings. Special meetings of the shareholders for any purpose or purposes shall be called by the Secretary upon receipt of a written request from the Chairman of the Board, the Vice Chairman of the Board, the President, a majority of the directors, or any person or persons authorized by the New Mexico Business Corporation Act (the "Act") to request such a meeting. Special meetings of the shareholders shall be held at a place, date, and hour designated by the Chairman of the Board, the Vice Chairman of the Board, the President, or by resolution of the Board of Directors. Section 3. Procedure. At each meeting of the shareholders, the Chairman of the Board or, in his or her absence, the Vice Chairman of the Board or the President shall act as chairman of the meeting. The chairman of the meeting shall determine the order of business and all other matters of procedure. The chairman of the meeting may establish rules to maintain order and to conduct the meeting. The chairman of the meeting shall act in his or her absolute discretion, and his or her rulings are not subject to appeal. ARTICLE II Directors Section 1. Board of Directors. The business of the Company shall be managed by a Board of Directors. The number of directors constituting the Board of Directors shall be established from time to time by resolution of the Board of Directors, subject to any limitations set forth in the Amended and Restated Articles of Incorporation. A Chairman of the Board and/or a Vice Chairman of the Board may be chosen from among the directors. No person who has attained the age of 65 shall be eligible for election as a director of the Company unless he or she is a non-employee member of the Board of Directors. No non-employee director who has attained the age of 70 shall serve as a director effective with the next annual meeting of the shareholders. No director who was also an officer of the Company or any affiliate of the Company when he or she ceased being an officer or attained the age of 65 shall serve as a director effective with the first day of the following month after ceasing to be an officer or attaining the age of 65. Section 2. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at times and places determined by the Board of Directors. Section 3. Special Meetings. Special meetings of the Board of Directors shall be called by the Secretary upon the receipt of a request from the Chairman of the Board, the Vice Chairman of the Board, the President, or any two directors. Notice of special meetings shall be given to each director at any time before the special meeting either personally or by telephone (including by message or recording device) or telegraph or facsimile not less than two hours before the meeting or by mail not less than three days before the meeting. Any notice shall be directed to the address or telephone number of each director as furnished to the Secretary for that purpose. Section 4. Adjournment of Meetings. The directors may adjourn from time to time any regular or special meeting at which a quorum is present, without notice other than announcement at the meeting. The adjourned meeting may be called to order at any time without further notice, and any business may be transacted which might have been transacted at the original meeting. Section 5. Compensation of Directors. The Board of Directors may by resolution provide for payment of fees for attendance at meetings of the Board of Directors and the reimbursement of expenses of directors in attending meetings. The Board of Directors may also by resolution provide for the payment of other fees or compensation to members of the Board of Directors. Section 6. Authority to Appoint Committees and Delegate Authority. The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members one or more committees, each of which, except to the extent limited by law, the Amended and Restated Articles of Incorporation, these Bylaws, and the resolution establishing the committee, shall have and may exercise all of the authority of the Board of Directors, and may also prescribe rules of operation of the committee. Regular meetings of any committee may be held without notice at times and places determined by the Board of Directors or the committee. Special meetings of any committee shall be called by the Secretary upon the receipt of a request from the Chairman of the Board, the Vice Chairman of the Board, the President, the chairman of the committee, or any member of the committee. Notice of special meetings shall be given in the same manner as provided in Section 3 of this Article II. ARTICLE III Officers Section 1. Number. The officers of the Company shall be a President, a Secretary, and a Treasurer, and may include a Chairman of the Board, a Vice Chairman of the Board, a chief executive officer, a chief operating officer, a chief financial officer, one or more Vice Presidents (one or more of whom may be designated Executive Vice President or Senior Vice President), a Controller, and/or a chief accounting officer. 2 Section 2. Election and Term of Office. Each officer shall be elected by the Board of Directors and shall hold office until the meeting of the Board of Directors following the next annual meeting of the shareholders and until his or her successor has been elected and qualified or until his or her earlier retirement, disability, death, resignation, or removal. Section 3. Removal and Vacancies. Any officer may be removed at any time with or without cause by the Board of Directors. A vacancy in any office may be filled for the unexpired portion of the term in the same manner as provided for election to the office. Section 4. Assistant Officers. The Company may have such assistant officers as the Board of Directors may elect. Each assistant officer shall hold office at the pleasure of, and may be removed at any time with or without cause by, the Board of Directors. Assistant officers may include one or more Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers, and Assistant Controllers. Section 5. Duties. Each officer shall have the authority and shall perform the duties as may be assigned by the Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, or the President, or as shall be conferred or required by law or these Bylaws, or as shall be normally incidental to the office. Unless otherwise restricted by the Board of Directors from time to time, (i) the Chairman of the Board, the Vice Chairman of the Board, the President, the chief executive officer, the chief operating officer, the chief financial officer, and any Vice President of the Company (including Executive Vice Presidents, Senior Vice Presidents, and Assistant Vice Presidents) may execute and deliver instruments and contracts on behalf of the Company and otherwise may bind the Company, and (ii) any of the foregoing officer-signatories and the Board of Directors may delegate to any other person, in writing, the authority to execute and deliver instruments and contracts on behalf of the Company and otherwise bind the Company. ARTICLE IV Indemnification of Directors, Officers, Employees, and Agents Section 1. Mandatory Indemnification. Each person who is a party or is threatened to be made a party, either as plaintiff, defendant, respondent, or otherwise, to any action, suit, or proceeding, whether civil, criminal, administrative, or investigative (a "Proceeding"), based upon, arising from, relating to, or by reason of the fact that such person, or a person of whom such person is the legal representative, is or was a director or officer of the Company, or is or was serving at the request of the Company as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation or non-profit corporation, cooperative, partnership, joint venture, trust, or other incorporated or unincorporated enterprise, or any employee benefit plan or trust (each, a "Company Affiliate"), shall be indemnified and held harmless by the Company to the fullest extent authorized by the Act, as the same exists on the date of the adoption of these Bylaws or as may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than permitted by the Act prior to such amendment), against any and all expenses, liability, and loss (including, without limitation, investigation expenses and expert witnesses' and attorneys' fees and expenses, judgments, penalties, fines, and amounts paid or to be paid 3 in settlement) actually incurred by such person in connection therewith. The right to indemnification conferred in this Article IV shall be a contract right and shall include the right to be paid by the Company for expenses incurred in defending or prosecuting any Proceeding in advance of its final disposition. For purposes of this Article IV, references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan or trust; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, or agent of the Company which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan or trust, its participants, or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan or trust shall be deemed to have acted in a manner "not opposed to the best interests of the Company." The Company's indemnity of any person who was or is serving at its request as a director, officer, partner, trustee, employee, or agent of a Company Affiliate shall be reduced by any amounts such person may collect as indemnification from such Company Affiliate. Section 2. Recovery Against the Company. If a claim under Section 1 of this Article IV is not paid in full by the Company within thirty days after a written claim has been received by the Company, except in the case of a claim for expenses to be incurred in defending a Proceeding in advance of its final disposition (in which case the applicable period shall be ten days), the claimant may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. The claimant shall be presumed to be entitled to indemnification under this Article IV upon submission of a written claim (and any required undertaking and/or affirmations required by the Act) and thereafter the Company shall have the burden of proof to overcome the presumption that the claimant is not so entitled. Neither the failure of the Company (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because such person has met the applicable standard of conduct set forth in the Act, nor an actual determination by the Company (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 3. Non-Exclusive Right. The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Article IV shall not be exclusive of any other right to which any person may be entitled under any statute, provision of the Amended and Restated Articles of Incorporation, or Bylaw, any agreement, a resolution of shareholders or directors, or otherwise both as to action in such person's official capacity and as to action in another capacity while holding such office. 4 Section 4. Insurance. The Company may purchase and maintain insurance or furnish similar protection, including, but not limited to, providing a trust fund, letter of credit, or self-insurance, on behalf of any person who is a director, officer, employee, or agent of the Company or who, while a director, officer, employee, or agent of the Company, is serving at the request of the Company as a director, officer, partner, trustee, employee, or agent of a Company Affiliate, against any liability asserted against and incurred by such director, officer, employee, or agent in such capacity or arising out of such director's, officer's, employee's, or agent's status as such, whether or not the Company would have the power to indemnify such director, officer, employee, or agent against such liability under the Act. Section 5. Delegation of Authority. The Company may, by action of its Board of Directors, authorize one or more officers to grant rights to indemnification and advancement of expenses to employees or agents of the Company on such terms and conditions as such officer or officers deem appropriate under the circumstances. Section 6. Continuing Effect. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article IV shall, unless otherwise provided when authorized, continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such persons. Anything in this Article IV to the contrary notwithstanding, no elimination or amendment of this Bylaw adversely affecting the right of any person to indemnification or advancement of expenses hereunder shall be effective until the sixtieth day following notice to such indemnified person of such action, and no elimination or amendment of these Bylaws shall deprive any such person of such person's rights hereunder arising out of alleged or actual occurrences, acts, or failures to act which had their origin prior to such sixtieth day. Section 7. Severability. In case any provision in this Article IV shall be determined at any time to be unenforceable in any respect, the other provisions shall not in any way be affected or impaired thereby, and the affected provision shall be given the fullest possible enforcement in the circumstances, it being the intention of the Company to afford indemnification and advancement of expenses to the persons indemnified hereby to the fullest extent permitted by law. Section 8. Notice to Shareholders. Submission of these Bylaws to the shareholders of the Company for ratification shall constitute notice to the shareholders of the Company and shall be the only notice which the Company shall be required to give the shareholders of the Company with respect to any of the matters covered hereby, including, without limitation, the Company's entering into any agreement or making other arrangements providing for the indemnification of or the advancement of expenses to a director, officer, employee, or agent, the actual advancement of expenses to a director, officer, employee, or agent of the Company, or the payment of any other liability or indemnification to or on behalf of a director, officer, employee, or agent. 5 ARTICLE V Share Certificates and Transfer of Shares Section 1. Share Certificates. Shares of stock of the Company may, at the discretion of the Board of Directors, be represented by certificates or may be uncertificated. Any share certificates of the Company shall be in the form and contain the provisions determined by the Board of Directors and required by the Act. Section 2. Transfer Rules. The Board of Directors, the Chairman of the Board, the Vice Chairman of the Board, the President, or the Secretary may from time to time promulgate rules or regulations as it or such officer may deem advisable concerning the issue, transfer, registration, or replacement of share certificates of the Company. Section 3. Registered Shareholders. The Company shall be entitled to treat the holder of record of any share or shares as the holder in fact of those shares. The Company shall not be bound to recognize any equitable or other claim to or interest in any shares on the part of any other person, regardless of whether the Company has actual or imputed knowledge of a claim of interest, except as otherwise required by the Act. ARTICLE VI Fiscal Year and Seal Section 1. Fiscal Year. The fiscal year of the Company shall begin on the first day of January and end on the last day of December each year. Section 2. Seal. The seal of the Company shall be circular in form. Around the margin of the seal shall be placed the words "Southwestern Public Service Company" and in the center the words "Corporate Seal Incorporated 1921 New Mexico." ARTICLE VII Amendments These Bylaws may be altered, amended, or repealed by the affirmative vote of a majority of the Board of Directors at any regular meeting or, if notice of intention to amend, alter, or repeal the Bylaws is given in the notice of the meeting, at any special meeting of the Board of Directors. These Bylaws may also be altered, amended, or repealed by the shareholders by the affirmative vote of the holders of a majority in interest of the shares issued and outstanding and entitled to vote. * * * * * 6 EX-10 6 FORM CHANGE OF CONTROL Exhibit 10(a) 1 Form of Change in Control Agreement Between New Century Energies, Inc. and (Executive Name) THIS AGREEMENT is made and entered into effective as of the 1st day of August, 1997 by and between NEW CENTURY ENERGIES, INC., a Delaware corporation (hereinafter "NCE") and (Executive Name) (hereinafter, the "Executive"). WHEREAS Executive is a valuable employee of NCE and an integral part of its management; and WHEREAS NCE wishes to encourage Executive to continue Executive's career with and services to NCE for the period during and after an actual or threatened Change In Control; and WHEREAS the Board of Directors of NCE has determined that it would be in the best interests of NCE and its shareholders to assure continuity in the management of NCE in the event of a Change In Control by entering into this Agreement with Executive; NOW, THEREFORE, in consideration of the services to be performed by Executive for NCE in the future, as well as the promises and covenants contained in this Agreement, the parties agree as follows: Sec. 1. DEFINITIONS. For purposes of this Agreement, the following capitalized terms shall have the meanings prescribed below: Sec. 1.1 Board. "Board" means the Board of Directors of NCE. Except where this Agreement requires that action be taken by a specified percentage or number of the members of the Board, action on behalf of the Board may be taken by its Executive Committee, or by any other committee or individual specifically authorized to act on behalf of the Board by resolution of the Board. Sec. 1.2 Change In Control. A "Change In Control" is the occurrence of any of the events described in subsections (a) through (d) below: (a) Either (i) receipt by NCE of a report on Schedule 13D, or an amendment to such a report, filed with the Securities and Exchange Commission pursuant to Section 13(d) of the Securities Exchange Act of 1934 (the "1934 Act") disclosing that any person (as such term is used in Section 13(d) of the 1934 Act) ("Person"), is the beneficial owner, directly or indirectly, of twenty percent or more of the combined voting power of the outstanding stock of NCE, or (ii) actual knowledge by the Board of facts on the basis of which any Person is required to file such a report on Schedule 13D, or to make an amendment to such a report, with the SEC (or would be required to file such a report or amendment upon the lapse of the applicable period of time specified in Section 13(d) of the 1934 Act) disclosing that such Person is the beneficial owner, directly or indirectly, of twenty percent or more of the combined voting power of the outstanding stock of NCE. (b) Purchase by any Person other than NCE or a wholly-owned subsidiary of NCE, of shares pursuant to a tender or exchange offer to acquire any stock of NCE (or securities convertible into stock) for cash, securities or any other consideration provided that, after consummation of the offer, such Person is the beneficial owner (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of twenty percent or more of the combined voting power of the outstanding stock of NCE (calculated as provided in paragraph (d) of Rule 13d-3 under the 1934 Act in the case of rights to acquire stock). (c) Approval by the shareholders of NCE of a transaction described in any of the following paragraphs: (1) Any consolidation or merger of NCE in which NCE is not the continuing or surviving corporation or pursuant to which shares of stock of NCE would be converted into cash, securities or other property, other than a consolidation or merger of NCE in which holders of its stock immediately prior to the consolidation or merger own at least a majority of the combined voting power of the outstanding stock of the surviving corporation immediately after the consolidation or merger (or at least a majority of the combined voting power of the outstanding stock of a corporation which owns directly or indirectly all of the voting stock of the surviving corporation). (2) Any consolidation or merger in which NCE is the continuing or surviving corporation but in which the shareholders of NCE immediately prior to the consolidation or merger do not hold at least a majority of the combined voting power of the outstanding stock of the continuing or surviving corporation (except where such holders of stock hold at least a majority of the combined voting power of the outstanding stock of the corporation which owns directly or indirectly all of the voting stock of NCE). (3) Any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of NCE (except such a transfer to a corporation which is wholly owned, directly or indirectly, by NCE), or any complete liquidation of NCE. (4) Any merger or consolidation of NCE where, after the merger or consolidation, one Person owns 100% of the shares of stock of NCE (except where the holders of NCE's voting stock immediately prior to such merger or consolidation own at least a majority of the combined voting power of the outstanding stock of such Person immediately after such merger or consolidation). (d) A change in the majority of the members of the Board within a 24-month period unless the election or nomination for election by NCE's shareholders of each new director was approved by the vote of at least two-thirds of the directors then still in office who were in office at the beginning of the 24-month period. 2 A Change In Control occurs on the date that an event described in subsection (a), (b) or (d) occurs. In the case of a transaction described in subsection (c) which is subject to approval by the shareholders, the Change In Control occurs on the date the transaction is completed. Sec. 1.3 Code. "Code" means the Internal Revenue Code of 1986, as amended. Sec. 1.4 Disability. "Disability" or "Disabled" means the inability of Executive as a result of physiological or psychological condition to perform the essential functions of any position held by Executive on or after the date a Change In Control occurred. Sec. 1.5 Discharge for Cause. Solely for purposes of this Agreement, "Discharge for Cause" means a termination of Executive's employment by NCE because of Executive's fraud or dishonesty which has resulted, or is likely to result, in material economic damage to NCE, as determined in good faith by a vote of two-thirds of the non-employee directors at a meeting of the Board at which Executive has been afforded an opportunity to be heard. Sec. 1.6 Good Reason. "Good Reason" means the occurrence, on or after the date of a Change In Control and without Executive's written consent, of any of the following events or circumstances, as determined in good faith by Executive: (a) A reduction in Executive's base salary in effect immediately prior to the Change In Control. (b) A material reduction in Executive's target opportunity, measured as a percentage of base salary, to earn annual or long-term incentives or bonuses. (c) A failure to provide to Executive employee benefits and perquisites (other than amounts described in subsections (a) and (b)) which are reasonably equivalent in the aggregate to those provided to Executive immediately prior to the Change In Control. (d) A material reduction by NCE of Executive's job duties and responsibilities that existed immediately prior to the Change In Control, including but not limited to the assignment to Executive of duties and responsibilities which are materially inconsistent with those of Executive's position immediately prior to the Change In Control. (e) Assignment or reassignment of Executive to another place of employment that is more than 50 miles (measured by the shortest paved highway route) from Executive's place of employment immediately prior to the Change In Control. (f) A failure by NCE to pay to Executive when due any deferred compensation that was deferred by Executive prior to the Change in Control. (g) A failure by NCE to comply with the terms and conditions of this Agreement. Notwithstanding the foregoing: 3 (aa)An event or circumstance shall not constitute Good Reason unless Executive provides written notice to NCE specifying the basis for Executive's determination that Good Reason exists within six months after the first day on which such Good Reason existed. If NCE cures the event or circumstance within 30 days of receiving such written notice (including retroactive restoration of any lost compensation or benefits, where reasonably possible), Good Reason shall be deemed never to have existed. (bb)NCE and Executive may, upon mutual written agreement, waive any provision of this Section which would otherwise constitute Good Reason. Sec. 2. TERM OF AGREEMENT. This Agreement shall become effective as of the date written in the first paragraph of this Agreement and shall be for an initial term ending on December 31, 1999. The term of this Agreement shall be automatically extended on each December 31 for one additional calendar year, unless NCE provides written notice to Executive prior to a December 31 that this sentence shall cease to apply on that December 31. (For example, on December 31, 1997, the term will be automatically extended to December 31, 2000 unless NCE gives written notice to Executive prior to December 31, 1997.) This Agreement will apply to any Change in Control that occurs during the term of this Agreement. Sec. 3. ELIGIBILITY FOR BENEFITS. Except as provided in Sec. 3.1, if Executive is a full-time employee of NCE on the date a Change In Control occurs, Executive shall be entitled to the benefits provided under Sec. 4 following the occurrence of either of the following events: (a) Executive's employment is involuntarily terminated by NCE during the 36-month period following the Change In Control. (b) Executive terminates employment with NCE for Good Reason during the 36-month period following the Change In Control; provided that the period in which NCE could correct the Good Reason has expired. Sec. 3.1 Disqualification from Benefits. Notwithstanding Sec. 3, Executive shall not be eligible for any benefits under this Agreement under any of the following circumstances: (a) NCE terminates Executive's employment due to Discharge for Cause. (b) Executive's employment with NCE terminates due to Disability or Executive's death. (c) Executive voluntarily terminates employment without Good Reason. For purposes of this Agreement, a voluntary termination of employment includes any termination that qualifies as a form of "retirement" under any employee pension benefit plan maintained by NCE that covers Executive; provided that Good Reason does not exist at the time of such retirement. (d) Executive's employment is terminated pursuant to any policy of NCE that requires or permits mandatory retirement of Executive upon attainment of a specified age and that complies with applicable laws and regulations. 4 If this Sec. 3.1 applies, Executive shall be subject to the normal policies of NCE regarding such events and shall be eligible for only such compensation and benefits as would apply if this Agreement did not exist. Sec. 3.2 Anticipation of Change In Control. If (i) Executive's employment is involuntarily terminated by NCE, or Executive terminates such employment with NCE for Good Reason, on or after the date on which a public announcement is made by NCE of its intention to participate in a transaction which would constitute a Change In Control, (ii) Executive would be eligible under Sec. 3 if the Change In Control had already occurred, (iii) Sec. 3.1 does not apply, and (iv) the Change In Control actually occurs, then Executive's employment shall be deemed solely for purposes of this Agreement to have terminated under Sec. 3 on the date the Change In Control occurred and Executive shall be entitled to the benefits provided under Sec. 4. Sec. 4. BENEFITS. If Executive is eligible under Sec. 3, Executive will receive the benefits provided under Sec. 4.1 through Sec. 4.5. Sec. 4.1 Severance Payment. Within five business days after Executive's termination of employment under Sec. 3 occurs, NCE will pay to Executive a lump sum equal to two and one-half times the sum of the amounts determined under subsections (a) and (b): (a) Executive's annual base salary immediately prior to the Change In Control. (b) The average of the short- and long-term bonuses that Executive received for the two calendar years immediately preceding the date Executive's employment terminated. For purposes of this subsection: (1) If Executive's employment terminates during 1997, the amount under this subsection (b) shall be equal to the target award payable by NCE for 1997. (2) If Executive's employment terminates during 1998, the amount under this subsection (b) shall be equal to the target award for 1998. (3) If Executive's employment terminates during 1999, the amount under this subsection (b) shall be the average of the actual bonus for 1998 and the target award for 1999. (4) Any portion of a bonus that was paid or awarded in the form of NCE stock will be valued for purposes of this subsection (b) at the closing price for such stock on the New York Stock Exchange on the most recent business day preceding the date the cash portion of the award became payable to Executive (disregarding any election to defer said payment). The payment under this Sec. 4.1 shall also include any accrued but unpaid salary and pay for any accrued but unused vacation under NCE's policies which is outstanding on the date Executive's employment terminates. 5 Sec. 4.2 Stock Options and Restricted Stock. All stock options granted to Executive which are outstanding on the date of Executive's termination of employment under Sec. 3 shall become vested, and all restrictions on restricted shares of NCE stock granted to Executive shall lapse on that date. All of Executive' outstanding stock options shall be exercisable as if Executive had remained an employee of NCE during the two and one-half year period following the termination of Executive's employment. Sec. 4.3 Continuation of Welfare Benefits. During the 30 month period following Executive's termination of employment under Sec. 3, Executive will be eligible for continuation of coverage for Executive and Executive's eligible dependents under all life insurance, disability, accident and health insurance coverage in effect at the time Executive's employment terminated, subject to the following: (a) Such coverage shall be provided under the same terms and conditions as apply to similarly situated active employees of NCE during such period. Executive shall pay to NCE the contribution, if any, required to be paid for such coverage by similarly situated active employees of NCE during such period. (b) If a group insurance carrier refuses to provide the coverage described in this Sec. 4.3 under its contract issued to NCE, or if NCE reasonably determines that the coverage required under this Sec. 4.3 would cause a welfare plan sponsored by NCE to violate any provision of the Code prohibiting discrimination in favor of highly compensated employees or key employees, NCE will use its best efforts to obtain for Executive an individual insurance policy providing comparable coverage. However, if NCE determines in good faith that comparable coverage cannot be obtained for less than two times the premium or premium equivalent for such coverage under NCE's welfare plan or plans, NCE's sole obligation under this Sec. 4.3 with respect to that coverage will be limited to paying to Executive a monthly amount equal to two times the monthly premium or premium equivalent for that coverage under NCE's plans. (c) Benefits provided to Executive or Executive's dependents under this section will be secondary to any comparable benefits provided by another employer to the extent permitted by applicable law. Sec. 4.4 Retirement Benefits. Within five business days after Executive's employment terminates under Sec. 3 (or as soon thereafter as the amount payable under this section can reasonably be determined), NCE will pay Executive a lump sum equal to the sum of the following amounts: (a) Retirement Plans. The present value of the additional benefit to which Executive would be entitled under the qualified defined benefit pension plan and non-qualified supplemental executive retirement plan, if any, that covered Executive on the date the termination of employment occurred, determined by assuming that Executive's employment had continued for an additional 30 months and that Executive's rate of compensation being recognized by each such plan immediately prior to the termination of employment had continued in effect during such period. The "present value" for purposes of this subsection (a) shall be determined by using the actuarial equivalent 6 factors specified in the qualified defined benefit pension plan for determining lump sum distributions (disregarding any restriction on the size of lump sum distributions allowed). (b) Savings Plans. The sum of the additional contributions (other than pre-tax salary deferral contributions by Executive) that would have been made or credited by NCE to Executive's accounts under each qualified defined contribution plan and non-qualified supplemental executive savings plan, if any, that covered Executive on the date the termination of employment occurred, determined by assuming that: (1) Executive's employment had continued for an additional 30 months. (2) Executive's rate of compensation being recognized by each plan immediately prior to the termination of employment had continued in effect during such period. (3) In the case of matching contributions, Executive's rate of pre-tax salary deferral contributions in effect immediately prior to the termination of employment had remained in effect throughout such period. (4) In the case of discretionary contributions by NCE, NCE continued to make such contributions during such period at the rate that applied to the most recent plan year that ended prior to the termination of employment. Sec. 4.5 Excise Tax Gross-Up. If Independent Tax Counsel determines that the aggregate payments made to Executive under this Agreement and any other payments to Executive from NCE which constitute "parachute payments" as defined in Code Section 280G, or any successor provision thereto ("Parachute Payments") would be subject to the excise tax imposed by Code Section 4999 (the "Excise Tax"), then Executive will receive an additional payment (a "Gross-Up Payment") in an amount determined by Independent Tax Counsel such that after payment by Executive of all federal and state income and excise taxes (including any Excise Tax) imposed on the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, Executive retains from the Gross-Up Payment an amount equal to the Excise Tax imposed on the payments. (a) If Independent Tax Counsel determines that no Excise Tax is payable by Executive, it shall furnish Executive with a written opinion that Executive has substantial authority not to report any Excise Tax on Executive's federal income tax return. If Executive is subsequently required to make a payment of any Excise Tax, then Independent Tax Counsel shall determine the grossed-up amount of such payment using the same principles as applied to calculation of the Gross-Up Payment (referred to herein as a "Gross-Up Underpayment") and any such Gross-Up Underpayment shall be promptly paid by NCE to or for the benefit of Executive. 7 (b) Executive shall notify NCE in writing within 15 days of any claim by the Internal Revenue Service that, if successful, would require the payment by NCE of a Gross-Up Payment. If NCE notifies Executive in writing that it desires to contest such claim and that it will bear the costs and provide the indemnification as required by this subsection, Executive shall: (1) Give NCE any information reasonably requested by NCE relating to such claim. (2) Take such action in connection with contesting such claim as NCE shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by NCE. (3) Cooperate with NCE in good faith in order to effectively contest such claim. (4) Permit NCE to participate in any proceedings relating to such claim. NCE shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. NCE shall control all proceedings taken in connection with such contest. If NCE directs Executive to pay such claim and sue for a refund, NCE shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance. (c) If, after the receipt by Executive of an amount paid or advanced by NCE pursuant to this Section, Executive becomes entitled to receive any refund with respect to such Excise Tax, Executive shall within 10 days pay to NCE the Gross-Up Payment or Gross-Up Underpayment related to the amount of such refund (together with any interest paid or credited thereon, after adjustment for any taxes applicable to such interest or repayment). (d) For purposes of this Sec. 4.5, "Independent Tax Counsel" means a lawyer, a certified public accountant with a nationally recognized accounting firm, or a compensation consultant with a nationally recognized actuarial and benefits consulting firm, with expertise in the area of executive compensation tax law, who shall be selected by Executive and shall be reasonably acceptable to NCE. The fees and disbursements of Independent Tax Counsel shall be paid by NCE. Sec. 4.6 No Offsets. Executive shall be under no obligation to seek other employment or otherwise mitigate the amounts payable by NCE under Sec. 4. There will be no offset against the amounts payable under Sec. 4 on account of any compensation or earnings from any subsequent employment or self-employment of Executive, except as provided in Sec. 4.3(c). NCE's obligations to make the payments provided for this Agreement and otherwise to perform its 8 obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which NCE may have against Executive or others, unless Executive has given written consent to such as set-off or is subject to a final judgment in favor of NCE. Sec. 5 SOURCE OF PAYMENTS. Except as otherwise provided in this section, all payments provided in Sec. 4 shall be paid from the general funds of NCE, and NCE shall not be required to establish a special or separate fund or otherwise segregate assets to assure payments will be made under this Agreement. (a) On or before the date a Change In Control occurs (or as soon as reasonably possible following a Change In Control for which NCE has no advance warning), NCE will establish a trust in the form generally known as a "rabbi trust", and will immediately deposit into that trust an amount equal to the total of the estimated amounts to which Executive would become entitled under Sections 4.1, 4.4 and 4.5 in the event the requirements of Sec. 3 are satisfied. (1) The trustee shall be a national bank or trust company selected by NCE and reasonably acceptable to Executive. (2) The amount to be deposited in the trust shall be determined by an actuary employed by a nationally recognized actuarial and benefits consulting firm selected by NCE which shall be reasonably acceptable to Executive. (b) In the event Executive satisfies the requirements of Sec. 3 and becomes entitled to payments under Sec. 4, those payments shall be made from the assets of the trust to the extent those assets are sufficient. NCE's obligations under this Agreement shall be reduced to the extent of the payments made from the trust. (c) If Executive does not become eligible under Sec. 3 within 36 months after the date a Change In Control occurs, or if an event described in Sec. 3.1 occurs that makes Executive ineligible for benefits, the trust shall terminate and its assets shall be returned to NCE. Notwithstanding the foregoing provisions of this section, it is expressly understood and agreed that Executive (and any dependent, beneficiary or estate of Executive who becomes entitled to payments hereunder) shall at all times be an unsecured creditor of NCE, and shall have no rights to assets of NCE (including assets held in any trust) that are superior to other unsecured creditors of NCE. Nothing in this Agreement shall be interpreted as creating a constructive trust over any assets of NCE or creating a fiduciary relationship between NCE and Executive or any other person. Sec. 6 ENFORCEMENT. The rights and obligations created under this Agreement shall be enforced as follows: (a) Arbitration. In the event of any dispute or difference between NCE and Executive with respect to the subject matter or interpretation of this Agreement or the enforcement of rights hereunder, such dispute or difference shall be submitted to arbitration. The arbitrator or arbitrators shall be selected by agreement of the parties or, if they cannot 9 agree on an arbitrator or arbitrators within 30 days after the date one party notified the other of the desire to have the question settled by arbitration, then the arbitrator or arbitrators shall be selected by the American Arbitration Association (the "AAA") in Denver, Colorado upon the application of either party. The determination reached in such arbitration shall be final and binding on both parties without any right of appeal or further dispute. Execution of the determination by such arbitrator may be sought in any court of competent jurisdiction. In any such arbitration or subsequent proceeding, Executive shall be entitled to seek both legal and equitable relief and remedies, including but not limited to specific performance of NCE's obligations under this Agreement. The arbitrators shall not be bound by judicial formalities and may abstain from following the strict rules of evidence and shall interpret this Agreement as an honorable engagement and not merely as a legal obligation. Unless otherwise agreed by the parties, any such arbitration shall take place in Denver, Colorado, and shall be conducted in accordance with the Rules of the AAA. (b) Costs and Expenses. NCE will pay all fees of the arbitrators, whether the arbitration is initiated by NCE or Executive. In addition, NCE will pay, upon written demand from Executive, all legal fees and expenses which Executive may reasonably incur in connection with the arbitration or subsequent judicial proceedings to enforce this Agreement, plus interest on any award at the applicable federal rate, under Code Section 7872(f)(2); provided, however, that this sentence shall not apply unless Executive recovers through such action some amount or benefit (regardless of size or value) in excess of the amount NCE had offered prior to commencement of the action. (c) Survival. The obligations under this Sec. 6 shall survive the termination of this Agreement for any reason, whether such termination is by NCE, by Executive, upon the expiration of this Agreement, or otherwise. Sec. 7 SUCCESSOR EMPLOYER. If Executive becomes an employee of another entity as a result of a transaction in which NCE consolidates or merges into or with such entity or transfers all or substantially all of its assets to such entity (whether or not the transaction constitutes a Change In Control), the term "NCE" in this Agreement shall mean such other entity and this Agreement shall continue in full force and effect. If Executive becomes an employee of a wholly-owned subsidiary of NCE (or of a successor entity described in the previous sentence), Executive shall be deemed for purposes of this Agreement to continue as an employee of NCE (or the successor entity) while employed by such subsidiary. Sec. 8 MISCELLANEOUS PROVISIONS. Sec. 8.1 Amendment. This Agreement may be amended or modified only in writing, signed by both parties. Sec. 8.2 Tax Withholding. NCE may withhold from any payments made under this Agreement all federal, state or other taxes which it determines to be required pursuant to any law or governmental regulation or ruling. 10 Sec. 8.3 Death of Executive Following Entitlement to Payments. If Executive dies after becoming eligible under Sec. 3, but before all payments provided under Sec. 4 have been made, the remaining payments shall be made to the beneficiary designated by Executive in the most recent written instrument filed with NCE prior to Executive's death which specifically refers to this Agreement. Executive may revoke such a beneficiary designation at any time, without consent of any beneficiary, and file a new designation. If no effective beneficiary designation is on file with NCE at the time of Executive's death, the remaining payments shall be paid to Executive's estate. Sec. 8.4 Entire Agreement. This Agreement contains the entire understanding of the parties with regard to all matters contained herein. There are no other agreements, conditions or representations, oral or written, expressed or implied, with regard thereto. This Agreement supersedes all prior agreements relating to separation payments following a Change In Control between Executive and NCE or any predecessor to NCE. However, this Agreement shall not operate to reduce any benefit or compensation to which Executive is entitled under any plan, policy or program maintained by NCE that does not specifically relate to payments following a Change In Control, including but not limited to benefits or compensation under incentive plans, qualified retirement plans, or nonqualified supplemental or excess pension or savings plans. Sec. 8.5 Assignment. NCE may in its sole discretion assign this Agreement to any entity which succeeds to the business of NCE through merger, consolidation, a sale of all or substantially all of the assets of NCE, or any similar transaction. Executive acknowledges that the services to be rendered by Executive are unique and personal. Accordingly, Executive may not assign any of Executive's rights or obligations under this Agreement. Sec. 8.6 Successors. Subject to Sec. 8.5, the provisions of this Agreement shall be binding upon the parties hereto, upon any successor to or assign of NCE, and upon Executive's heirs and the personal representative of Executive or Executive's estate. Sec. 8.7 No Attachment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. Sec. 8.8 Notices. Any notice required to be given under this Agreement shall be in writing and shall be delivered either in person or by certified or registered mail, return receipt requested. Any notice by mail shall be addressed as follows: If to NCE, to: New Century Energies, Inc. 1225 17th Street Denver, Colorado 80202 Attention: Marilyn E. Taylor, Vice President/Human Resources 11 If to Executive, to: _"Address"___________________ ____________________________ ____________________________ or to such other addresses as either party may designate in writing to the other party from time to time. Sec. 8.9 Waiver of Breach. Any waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement, unless the waiver specifically states that it is a continuing waiver or that it applies to other provisions. No waiver by NCE shall be valid unless in writing and signed by the chief executive officer of NCE. No waiver by Executive shall be valid unless in writing and signed by Executive. Sec. 8.10 Severability. If any one or more of the provisions (or portions thereof) of this Agreement shall for any reason be held by a final determination of a court of competent jurisdiction to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision (or portions of the provisions) of this Agreement, and the invalid, illegal or unenforceable provisions shall be deemed replaced by a provision that is valid, legal and enforceable and that comes closest to expressing the intention of the parties hereto. Sec. 8.11 Governing Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Colorado, without giving effect to conflict of law principles. Sec. 8.12 Headings. The headings of sections herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. Sec. 8.13 Counterparts. This Agreement may be executed by either of the parties hereto in counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute a single instrument. Sec. 9 WAIVER OF SEPARATION AGREEMENT (Applicable to former Public Service Company of Colorado Executives). Executive is currently a party to a Separation Agreement with Public Service Company of Colorado ("PSC"), which was originally effective August 22, 1995, and which has been amended several times prior to the date of this Agreement. (That Separation Agreement, including all subsequent amendments of it executed prior to August 1, 1997, is hereinafter called the "Separation Agreement".) Executive is entitled to certain severance payments and other benefits under the Separation Agreement if Executive's employment terminates under certain conditions, or if Executive has a "constructive discharge", following a "change in control" of PSC. Executive understands that the merger of PSC and Southwestern Public Service Co. to form NCE is a "change in control" under the Separation Agreement. Paragraph 13 of the Separation Agreement allows Executive to waive all rights under the Separation Agreement by executing a written instrument. In consideration of the benefits described in this Agreement, Executive hereby waives and surrenders all rights that Executive or any of Executive's beneficiaries, survivors, heirs, successors 12 or assigns may have under the Separation Agreement against NCE, PSC, or any of their predecessors, successors or affiliates, either now or at any time in the future. The waiver includes, but is not limited to, all rights under the Separation Agreement to severance benefits, continuation of employee benefits, or increases in benefits provided under employee benefit plans (including nonqualified supplemental plans). For purposes of Paragraph 13 of the Separation Agreement, Executive's signature below constitutes a complete, continuing and irrevocable waiver of all the terms and conditions of the Separation Agreement, both at the present time and at all times in the future. IN WITNESS WHEREOF, NCE has caused this Agreement to be executed by its duly authorized officer, and Executive has executed this Agreement, all effective as of the date first above written. EXECUTIVE NEW CENTURY ENERGIES, INC. __________________________________ By: __________________________________ (Executive Name) Chairman and Chief Executive Officer or Vice Chairman of the Board 13 Schedule to Form of Change in Control Agreement Effective Executive Date Bill D. Helton August 1, 1997 Wayne H. Brunetti August 1, 1997 Marilyn E.Taylor August 1, 1997 Richard C. Kelly August 1, 1997 Doyle R. Bunch II August 1, 1997 Ross C. King August 1, 1997 David M. Wilks August 1, 1997 Henry Hamilton August 1, 1997 Gary L. Gibson August 1, 1997 Teresa S. Madden August 1, 1997 James D. Steinhilper August 1, 1997 John McAfee August 1, 1997 Paul J. Bonavia December 1, 1997 Brian P. Jackson December 1, 1997 EX-21 7 NCE & PSCO EXHIBIT 21 SUBSIDIARIES OF NEW CENTURY ENERGIES, INC As of December 31, 1997 Subsidiary State of Incorporation 1. Public Service Company of Colorado Colorado 2. Southwestern Public Service Company New Mexico 3. Cheyenne Light, Fuel and Power Company Wyoming 4. WestGas InterState, Inc. Colorado 5. New Century Services, Inc. Delaware 6. NC Enterprises, Inc. Delaware SUBSIDIARIES OF PUBLIC SERVICE COMPANY OF COLORADO As of December 31, 1997 Subsidiary State of Incorporation 1. 1480 Welton, Inc. Colorado 2. PSR Investments, Inc. Colorado 3. PS Colorado Credit Corporation Colorado 4. Green and Clear Lakes Company New York 5. Fuel Resources Development Co. (a dissolved Colorado corporation) Colorado 6. New Century International, Inc. Delaware EX-27.1 8 NCE FDS WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NEW CENTURY ENERGIES, INC. CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 1,000 YEAR DEC-31-1997 DEC-31-1997 PER-BOOK 5,533,376 366,727 824,166 586,012 0 7,310,281 110,749 1,583,446 659,050 2,353,245 139,253 140,002 1,948,136 301,743 0 286,600 252,542 2,576 39,819 4,927 1,841,438 7,310,281 3,342,525 133,919 2,713,300 2,713,300 629,225 (27,189) 602,036 206,630 150,922 0 0 264,957 165,560 344,439 1.44 1.44
EX-27.2 9 PSCO FDS WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 DEC-31-1997 PER-BOOK 3,724,860 330,014 562,607 377,252 0 4,994,733 1 1,302,118 319,280 1,621,399 39,253 140,002 1,298,538 50,000 0 298,555 252,369 2,576 39,600 4,791 1,247,650 4,994,733 2,229,643 90,813 1,801,477 1,892,290 337,353 2,891 340,244 136,202 93,477 11,752 81,725 152,295 118,438 263,912 0.000 0.000
EX-27.3 10 SPS FDS
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHWESTERN PUBLIC SERVICE COMPANY BALANCE SHEET AS OF DECEMBER 31, 1997 AND STATEMENTS OF INCOME AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 DEC-31-1997 PER-BOOK 1,714,544 124,868 158,093 183,988 0 2,181,493 0 348,402 349,988 698,390 100,000 0 620,598 25,160 0 154,244 173 0 0 0 582,928 2,181,493 979,283 48,795 771,207 820,002 159,281 (26,602) 132,679 57,104 75,575 0 75,575 108,937 46,356 116,311 0.000 0.000
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