-----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, UV3d+deTYxbOz8VUnRo0e+bAw0wY/XBMqOXGaSZ9MBDczcAP7V71IKbe61poQvt4 zSpo0IJGlGO32GtW9g3TwA== 0001004858-98-000045.txt : 19981110 0001004858-98-000045.hdr.sgml : 19981110 ACCESSION NUMBER: 0001004858-98-000045 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981109 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-Q SEC ACT: SEC FILE NUMBER: 001-12927 FILM NUMBER: 98741094 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-Q 1 NCE 3RD QTR '98 10Q PSCO AND SPS INFO. INCLUDED UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 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 Commission offices and Registrant's Telephone Number,including IRS Employer File Number area code 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 ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes X No On November 6, 1998, 114,303,004 shares of the Registrant's Common Stock were outstanding. The aggregate market value of this common stock held by nonaffiliates based on the closing price on the New York Stock Exchange was approximately $5,557,983,570. Public Service Company of Colorado and Southwestern Public Service Company meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H (2) to such Form 10-Q. Table of Contents PART I - FINANCIAL INFORMATION Item l. Financial Statements.............................................. 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................... 35 PART II - OTHER INFORMATION Item 1. Legal Proceedings................................................. 56 Item 6. Exhibits and Reports on Form 8-K.................................. 56 This combined Form 10-Q 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, Year 2000 readiness, 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 TERMS The abbreviations or acronyms used in the text and notes are defined below: Abbreviation or Acronym Term - ----------------------- ---- AEP....................................... American Electric Power Company, Inc. CDPHE...................................... Colorado Department of Public Health and Environment Cheyenne..................................Cheyenne Light, Fuel and Power Company CPUC....................The Public Utilities Commission of the State of Colorado Denver District Court ............................District Court in and for the City and County of Denver DOE.........................................................Department of Energy DSM.......................................................Demand Side Management Dth....................................................................Dekatherm e prime...........................................e prime, inc. and subsidiaries ECA.......................................................Energy Cost Adjustment FERC........................................Federal Energy Regulatory Commission Fort St. Vrain ......................Fort St. Vrain Electric Generating Station, formerly a nuclear generating station ICA....................................................Incentive Cost Adjustment IRS.....................................................Internal Revenue Service Kwh................................................................kilowatt-hour Merger.............................the business combination between PSCo and SPS Natural Fuels.........................................Natural Fuels Corporation NCE or Company........................................New Century Energies, Inc. NC Enterprises..............................................NC Enterprises, Inc. NCI..............................................New Century International, Inc. NMPUC.......................................New Mexico Public Utility Commission NOx...............................................................Nitrogen Oxide PSCo..........................................Public Service Company of Colorado PUHCA.................................Public Utility Holding Company Act of 1935 PSCCC.............................................PS Colorado Credit Corporation PUCT..........................................Public Utility Commission of Texas QF...........................................................Qualifying Facility QSP......................................................Quality of Service Plan Quixx.........................................Quixx Corporation and subsidiaries SEC...........................................Securities and Exchange Commission SO2...............................................................Sulfur Dioxide SPS..........................................Southwestern Public Service Company SFAS 71.....................Statement of Financial Accounting Standards No. 71 - "Accounting for the Effects of Certain Types of Regulation" SFAS 112...................Statement of Financial Accounting Standards No. 112 - "Employers' Accounting for Postemployment Benefits" Thunder Basin.........................................Thunder Basin Coal Company TNP...............................................Texas-New Mexico Power Company UE..............................Utility Engineering Corporation and subsidiaries WGI.....................................................WestGas InterState, Inc. WPSC...........................................Wyoming Public Service Commission Yorkshire Electricity............................Yorkshire Electricity Group plc Yorkshire Power.......................................Yorkshire Power Group Ltd. ii NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) (Thousands of Dollars) ASSETS September 30, December 31, 1998 1997 ---- ---- Property, plant and equipment, at cost: Electric........................................... $6,938,975 $6,703,863 Gas................................................ 1,186,166 1,136,231 Steam and other.................................... 121,838 120,322 Common to all departments.......................... 475,008 437,636 Construction in progress........................... 388,426 318,124 ------- ------- 9,110,413 8,716,176 Less: accumulated depreciation .................... 3,349,321 3,182,800 --------- --------- Total property, plant and equipment.............. 5,761,092 5,533,376 --------- --------- Investments, at cost: Investment in Yorkshire Power and other unconsolidated subsidiaries (Note 2) ......... 301,460 295,316 Other.............................................. 65,604 71,411 ------- ------ Total investments................................. 367,064 366,727 ------- ------- Current assets: Cash and temporary cash investments................ 70,827 72,623 Accounts receivable, less reserve for uncollectible accounts ($5,861 at September 30, 1998; $5,355 at December 31, 1997)............................ 313,951 315,539 Accrued unbilled revenues.......................... 116,200 110,877 Recoverable purchased gas and electric energy costs - net ..................................... 46,884 129,292 Materials and supplies, at average cost............ 68,872 68,411 Fuel inventory, at average cost.................... 22,861 23,162 Gas in underground storage, at cost (LIFO)......... 54,359 47,394 Prepaid expenses and other......................... 66,212 56,868 ------- ------ Total current assets.............................. 760,166 824,166 ------- ------- Deferred charges: Regulatory assets (Note 1)......................... 388,143 430,475 Unamortized debt expense........................... 27,829 20,833 Other.............................................. 157,534 134,704 ------- ------- Total deferred charges............................ 573,506 586,012 ------- ------- $7,461,828 $7,310,281 ========== ========== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 1 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) (Thousands of Dollars) CAPITAL AND LIABILITIES September 30, December 31, 1998 1997 ---- ---- Common stock......................................... $1,737,585 $1,694,195 Retained earnings.................................... 698,685 659,050 ------- ------- Total common equity.............................. 2,436,270 2,353,245 Preferred stock of subsidiaries: Not subject to mandatory redemption............... - 140,002 Subject to mandatory redemption at par............ - 39,253 PSCo and SPS obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debentures of PSCo and SPS (Note 6)........................................ 294,000 100,000 Long-term debt of subsidiaries........................ 2,222,143 1,987,955 --------- --------- 4,952,413 4,620,455 --------- --------- Noncurrent liabilities: Employees' postretirement benefits other than pensions ........................................ 73,684 62,716 Employees' postemployment benefits................. 27,332 27,953 ------- ------ Total noncurrent liabilities...................... 101,016 90,669 ------- ------ Current liabilities: Notes payable and commercial paper................. 563,307 588,343 Long-term debt due within one year................. 121,117 257,469 Preferred stock subject to mandatory redemption within one year ................................. - 2,576 Accounts payable................................... 236,464 298,469 Dividends payable.................................. 67,670 68,296 Customers' deposits................................ 29,805 27,993 Accrued taxes...................................... 98,893 66,587 Accrued interest................................... 41,263 52,615 Current portion of accumulated deferred income taxes 10,682 27,391 Other.............................................. 110,573 87,380 ------- ------ Total current liabilities......................... 1,279,774 1,477,119 --------- --------- Deferred credits: Customers' advances for construction............... 54,495 53,041 Unamortized investment tax credits................. 102,311 106,147 Accumulated deferred income taxes.................. 921,693 922,341 Other.............................................. 50,126 40,509 ------- ------ Total deferred credits............................ 1,128,625 1,122,038 --------- --------- Commitments and contingencies (Notes 4 and 5)......... --------- --------- $7,461,828 $7,310,281 ========== ========== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 2 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Three Months Ended September 30, 1998 1997 ---- ---- Operating revenues: Electric........................................... $ 784,465 $ 670,787 Gas................................................ 115,526 109,396 Other.............................................. 15,907 13,289 ------- ------ 915,898 793,472 Operating expenses: Fuel used in generation............................ 200,039 199,726 Purchased power.................................... 223,685 138,149 Cost of gas sold................................... 70,054 63,403 Other operating and maintenance expenses........... 157,851 144,241 Depreciation and amortization...................... 65,520 61,359 Taxes (other than income taxes).................... 34,576 33,426 ------- ------ 751,725 640,304 ------- ------- Operating income...................................... 164,173 153,168 Other income and deductions: Merger expenses.................................... - (18,584) Equity in earnings of Yorkshire Power and other unconsolidated subsidiaries (Note 2)............. 10,247 17,047 Miscellaneous income and deductions - net.......... 905 (163) ------- ------ 11,152 (1,700) Interest charges and preferred dividends of subsidiaries: Interest on long-term debt......................... 42,737 41,892 Other interest..................................... 7,602 10,503 Allowance for borrowed funds used during construction (3,962) (2,874) Dividends on PSCo and SPS obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debentures of PSCo and SPS (Note 6)......................... 5,763 1,963 Dividend requirements on preferred stock of subsidiaries .................................... - 2,929 ----- ----- 52,140 54,413 ------ ------ Income before income taxes and extraordinary item..... 123,185 97,055 Income taxes.......................................... 32,413 33,715 ------- ------ Income before extraordinary item...................... 90,772 63,340 Extraordinary item - U.K. windfall tax (Note 2)....... - (110,565) ------- -------- Net income (loss)..................................... $90,772 $(47,225) ======= ======== Weighted average common shares outstanding............ 111,606 104,481 ======= ======= Basic and diluted earnings per share of common stock outstanding: Income before extraordinary item................... $ 0.82 $ 0.61 Extraordinary item................................. - (1.06) ------- ------ Net income......................................... $ 0.82 $(0.45) ======= ====== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 3 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Nine Months Ended September 30, 1998 1997 ---- ---- Operating revenues: Electric........................................... $2,044,218 $1,853,809 Gas................................................ 613,363 571,494 Other.............................................. 57,442 33,332 ------- ------ 2,715,023 2,458,635 Operating expenses: Fuel used in generation............................ 512,238 512,498 Purchased power.................................... 526,742 389,925 Cost of gas sold................................... 419,364 385,898 Other operating and maintenance expenses........... 468,499 427,757 Depreciation and amortization...................... 195,012 182,843 Taxes (other than income taxes).................... 100,492 100,007 ------- ------- 2,222,347 1,998,928 --------- --------- Operating income...................................... 492,676 459,707 Other income and deductions: Merger expenses.................................... (790) (33,040) Write-off of investment in Carolina Energy Project (Note 3) - (16,052) Equity in earnings of Yorkshire Power and other unconsolidated subsidiaries (Note 2)............ 6,430 21,319 Miscellaneous income and deductions - net.......... (250) (8,438) ------- ------ 5,390 (36,211) Interest charges and preferred dividends of subsidiaries: Interest on long-term debt......................... 125,928 123,969 Other interest..................................... 25,054 22,243 Allowance for borrowed funds used during construction (12,883) (7,624) Dividends on PSCo and SPS obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debentures of PSCo and SPS (Note 6)............................. 11,799 5,888 Dividend requirements on preferred stock of subsidiaries 5,332 8,814 ----- ----- 155,230 153,290 ------- ------- Income before income taxes and extraordinary item..... 342,836 270,206 Income taxes.......................................... 109,322 94,665 ------- ------ Income before extraordinary item...................... 233,514 175,541 Extraordinary item - U.K. windfall tax (Note 2)....... - (110,565) ------- -------- Net income............................................ $233,514 $ 64,976 ======== ======== Weighted average common shares outstanding............ 111,320 104,247 ======= ======= Basic and diluted earnings per share of common stock outstanding: Income before extraordinary item................... $ 2.10 $ 1.68 Extraordinary item................................. - (1.06) ------- ------- Net income......................................... $ 2.10 $ 0.62 ======= ======= The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 4 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands of Dollars) Nine Months Ended September 30, 1998 1997 ---- ---- Operating activities: Net income......................................... $233,514 $ 64,976 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.................... 203,036 188,969 Amortization of investment tax credits........... (3,836) (3,943) Deferred income taxes............................ (12,328) 40,957 Equity in earnings of Yorkshire Power and other unconsolidated subsidiaries, net............... (6,430) (20,099) Allowance for funds used during construction..... - (4) Write-off of investment in Carolina Energy Project - 16,052 Change in accounts receivable.................... 7,220 9,384 Change in inventories............................ (7,002) (11,951) Change in other current assets................... 67,840 (43,100) Change in accounts payable....................... (62,319) (87,503) Change in other current liabilities.............. 50,545 (33,716) Change in deferred amounts....................... 22,398 (32,371) Change in noncurrent liabilities................. 10,347 1,885 Other............................................ (8) 921 ------- ------- Net cash provided by operating activities...... 502,977 201,022 Investing activities: Construction expenditures.......................... (411,778) (307,338) Allowance for equity funds used during construction - 4 Proceeds from disposition of property, plant and equipment 3,755 2,163 Investment in Yorkshire Power...................... - (362,430) Acquisition of subsidiary, net of cash acquired (Note 3) (13,725) - Purchase of other investments...................... (4,006) (26,283) Sale of other investments.......................... 6,313 17,971 ------- ------- Net cash used in investing activities.......... (419,441) (675,913) Financing activities: Proceeds from sale of common stock................. 34,280 25,027 Proceeds from sale of PSCo obligated mandatorily redeemable preferred securities (Note 6)........ 187,700 - Proceeds from sale of long-term debt............... 247,961 333,517 Redemption of long-term notes and bonds............ (156,838) (85,468) Short-term borrowings - net........................ (25,036) 374,331 Redemption of preferred stock of subsidiaries (Note 6) ........................... (181,824) (666) Dividends on common stock.......................... (191,575) (164,432) -------- -------- Net cash (used in) provided by financing activities (85,332) 482,309 ------- ------- Net (decrease) increase in cash and temporary cash investments (1,796) 7,418 Cash and temporary cash investments at beginning of period 72,623 50,015 ------ ------ Cash and temporary cash investments at end of period $ 70,827 $ 57,433 ======== ======== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements 5 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) (Thousands of Dollars) ASSETS September 30, December 31, 1998 1997 ---- ---- Property, plant and equipment, at cost: Electric ......................................... $4,237,141 $4,088,447 Gas................................................ 1,146,250 1,100,003 Steam and other.................................... 79,113 78,740 Common to all departments.......................... 470,202 432,840 Construction in progress........................... 262,444 170,503 ------- ------- 6,195,150 5,870,533 Less: accumulated depreciation..................... 2,261,903 2,145,673 --------- --------- Total property, plant and equipment.............. 3,933,247 3,724,860 --------- --------- Investments, at cost: Investment in Yorkshire Power (Note 2)............. - 286,703 Note receivable from affiliate (Note 2)............ 292,620 - Other.............................................. 21,492 43,311 ------- ------ Total investments................................. 314,112 330,014 ------- ------- Current assets: Cash and temporary cash investments................ 30,043 18,909 Accounts receivable, less reserve for uncollectible accounts ($2,917 at September 30, 1998; $2,272 at December 31, 1997) ........................... 156,671 191,155 Accrued unbilled revenues.......................... 100,556 94,284 Recoverable purchased gas and electric energy costs - net .................................... 39,659 103,197 Materials and supplies, at average cost............ 46,597 48,030 Fuel inventory, at average cost.................... 20,568 20,862 Gas in underground storage, at cost (LIFO)......... 53,287 46,576 Prepaid expenses and other......................... 36,282 39,594 ------- ------ Total current assets.............................. 483,663 562,607 ------- ------- Deferred charges: Regulatory assets (Note 1)......................... 275,736 310,658 Unamortized debt expense........................... 18,136 10,800 Other.............................................. 78,949 55,794 ------- ------ Total deferred charges............................ 372,821 377,252 ------- ------- $5,103,843 $4,994,733 ========== ========== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 6 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) (Thousands of Dollars) CAPITAL AND LIABILITIES September 30, December 31, 1998 1997 ---- ---- Common stock........................................ $1,302,119 $1,302,119 Retained earnings................................... 315,392 319,280 ------- ------- Total common equity............................. 1,617,511 1,621,399 Preferred stock: Not subject to mandatory redemption.............. - 140,002 Subject to mandatory redemption at par........... - 39,253 PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo (Note 6) ......... 194,000 - Long-term debt...................................... 1,568,409 1,338,138 --------- --------- 3,379,920 3,138,792 --------- --------- Noncurrent liabilities: Employees' postretirement benefits other than pensions ................................. 69,530 58,695 Employees' postemployment benefits............... 25,031 25,031 ------- ------- Total noncurrent liabilities.................... 94,561 83,726 ------- ------- Current liabilities: Notes payable and commercial paper............... 404,200 348,555 Long-term debt due within one year............... 120,417 257,160 Preferred stock subject to mandatory redemption within one year ............................... - 2,576 Accounts payable................................. 156,120 218,773 Dividends payable................................ 58,640 40,975 Customers' deposits.............................. 23,263 21,888 Accrued taxes.................................... 60,901 42,549 Accrued interest................................. 31,603 39,177 Current portion of accumulated deferred income taxes 8,267 19,872 Other............................................ 66,595 59,880 ------- ------- Total current liabilities....................... 930,006 1,051,405 ------- --------- Deferred credits: Customers' advances for construction............. 53,342 51,830 Unamortized investment tax credits............... 95,764 99,355 Accumulated deferred income taxes................ 519,754 534,246 Other............................................ 30,496 35,379 ------- ------- Total deferred credits.......................... 699,356 720,810 ------- ------- Commitments and contingencies (Notes 4 and 5)....... ---------- ---------- $5,103,843 $4,994,733 ========== ========== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 7 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Three Months Ended September 30, 1998 1997 ---- ---- Operating revenues: Electric........................................... $466,221 $382,360 Gas................................................ 74,635 83,372 Other.............................................. 745 850 ------- ------- 541,601 466,582 Operating expenses: Fuel used in generation............................ 61,019 56,535 Purchased power.................................... 182,852 126,668 Gas purchased for resale........................... 32,928 39,503 Other operating and maintenance expenses........... 99,529 97,768 Depreciation and amortization...................... 45,344 42,374 Taxes (other than income taxes).................... 21,279 21,101 Income taxes....................................... 21,816 12,261 ------- ------- 464,767 396,210 ------- ------- Operating income...................................... 76,834 70,372 Other income and deductions: Merger expenses.................................... - (11,384) Equity earnings in Yorkshire Power (Note 2)........ - 17,317 Miscellaneous income and deductions - net.......... 3,558 (2,397) ------- ------- 3,558 3,536 Interest charges: Interest on long-term debt......................... 29,628 28,949 Amortization of debt discount and expense less premium 1,153 1,019 Other interest..................................... 4,816 8,196 Allowance for borrowed funds used during construction (3,020) (1,736) Dividends on PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo (Note 6)... 3,800 - ----- ------ 36,377 36,428 ------ ------ Income before extraordinary item...................... 44,015 37,480 Extraordinary item - U.K. windfall tax (Note 2)....... - (110,565) ------- -------- Net income (loss)..................................... 44,015 (73,085) Dividend requirements on preferred stock.............. - 2,929 ------- ------- Earnings (loss) available for common stock............ $44,015 $(76,014) ======= ========= The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 8 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Nine Months Ended September 30, 1998 1997 ---- ---- Operating revenues: Electric........................................... $1,211,607 $1,116,457 Gas................................................ 473,288 545,470 Other.............................................. 5,946 6,542 ------- ------- 1,690,841 1,668,469 Operating expenses: Fuel used in generation............................ 161,202 148,278 Purchased power.................................... 430,783 370,313 Gas purchased for resale........................... 293,468 361,998 Other operating and maintenance expenses........... 296,038 296,668 Depreciation and amortization...................... 135,035 127,413 Taxes (other than income taxes).................... 62,185 64,832 Income taxes....................................... 72,184 59,205 ------- ------- 1,450,895 1,428,707 --------- --------- Operating income...................................... 239,946 239,762 Other income and deductions: Merger expenses.................................... 418 (17,801) Equity earnings in Yorkshire Power (Note 2)........ 3,446 21,430 Miscellaneous income and deductions - net.......... 2,223 (10,980) ------- -------- 6,087 (7,351) Interest charges: Interest on long-term debt......................... 86,899 85,902 Amortization of debt discount and expense less premium 3,148 2,964 Other interest..................................... 14,967 17,145 Allowance for borrowed funds used during construction (8,712) (4,568) Dividends on PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo (Note 6)... 5,911 - ----- ------ 102,213 101,443 ------- ------- Income before extraordinary item...................... 143,820 130,968 Extraordinary item - U.K. windfall tax (Note 2)....... - (110,565) ------- -------- Net income............................................ 143,820 20,403 Dividend requirements and redemption premium on preferred stock ..................................... 5,332 8,814 ------- ----- Earnings available for common stock................... $138,488 $11,589 ======== ======= The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 9 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands of Dollars) Nine Months Ended September 30, 1998 1997 ---- ---- Operating activities: Net income......................................... $143,820 $ 20,403 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.................... 139,227 130,692 Amortization of investment tax credits........... (3,591) (3,241) Deferred income taxes............................ (14,798) 37,010 Equity in earnings of Yorkshire Power............ (3,446) (21,430) Change in accounts receivable.................... 37,457 23,121 Change in inventories............................ (4,984) (10,061) Change in other current assets................... 60,580 (20,894) Change in accounts payable....................... (61,444) (93,266) Change in other current liabilities.............. 18,111 (28,341) Change in deferred amounts....................... (16,389) 8,432 Change in noncurrent liabilities................. 10,834 479 Other............................................ - 514 ------- ------- Net cash provided by operating activities...... 305,377 153,983 Investing activities: Construction expenditures.......................... (338,663) (217,656) Proceeds from disposition of property, plant and equipment ............................ 6,207 1,806 Investment in Yorkshire Power (Note 2)............. - (362,430) Transfer of subsidiaries to NCE (Note 1)........... - (2,229) Purchase of other investments...................... (466) (6,675) Sale of other investments.......................... 4,394 11,979 ------- ------- Net cash used in investing activities.......... (328,528) (575,205) Financing activities: Proceeds from sale of common stock................. - 20,517 Proceeds from sale of PSCo obligated mandatorily redeemable preferred securities (Note 6)......... 187,700 - Proceeds from sale of long-term debt............... 247,274 332,484 Redemption of long-term notes and bonds............ (156,414) (69,275) Short-term borrowings - net........................ 67,600 252,536 Dividends on common stock.......................... (121,790) (102,663) Redemption of preferred stock (Note 6)............. (181,824) (665) Dividends and redemption premium on preferred stock (Note 6) .................................. (8,261) (8,828) ------- ------ Net cash provided by financing activities...... 34,285 424,106 ------- ------- Net increase in cash and temporary cash investments 11,134 2,884 Cash and temporary cash investments at beginning of period ................................... 18,909 9,406 ------ ----- Cash and temporary cash investments at end of period ................................... $30,043 $12,290 ======= ======= The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 10 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEETS (Unaudited) (Thousands of Dollars) ASSETS September 30, December 31, 1998 1997 ---- ---- Property, plant and equipment, at cost: Electric ....................................... $2,640,497 $2,557,579 Construction in progress........................ 120,523 144,452 ------- ------- 2,761,020 2,702,031 Less: accumulated depreciation.................. 1,033,792 987,487 --------- ------- Total property, plant and equipment............ 1,727,228 1,714,544 --------- --------- Investments, at cost: Notes receivable from affiliate................. 119,036 119,036 Other........................................... 5,646 5,832 ------- ------- Total investments.............................. 124,682 124,868 ------- ------- Current assets: Cash and temporary cash investments............. 5,647 986 Accounts receivable, less reserve for uncollectible accounts ($1,996 at September 30, 1998; $2,442 at December 31, 1997)........ 98,613 96,548 Accrued unbilled revenues....................... 13,727 15,468 Recoverable electric energy costs - net......... 4,721 23,086 Materials and supplies, at average cost......... 17,339 16,337 Fuel inventory, at average cost................. 2,293 2,301 Prepaid expenses and other...................... 4,558 3,367 ------- ------- Total current assets........................... 146,898 158,093 ------- ------- Deferred charges: Regulatory assets (Note 1)...................... 111,921 119,244 Unamortized debt expense........................ 8,912 9,395 Other........................................... 32,022 55,349 ------- ------- Total deferred charges......................... 152,855 183,988 ------- ------- $2,151,663 $2,181,493 ========== ========== The accompanying notes to condensed financial statements are an integral part of these financial statements. 11 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEETS (Unaudited) (Thousands of Dollars) CAPITAL AND LIABILITIES September 30, December 31, 1998 1997 ---- ---- Common stock........................................ $348,402 $348,402 Retained earnings................................... 386,822 349,988 ------- ------- Total common equity............................. 735,224 698,390 SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS .................... 100,000 100,000 Long-term debt....................................... 620,699 620,598 ------- ------- 1,455,923 1,418,988 --------- --------- Noncurrent liabilities: Employees' postretirement benefits other than pensions .................................. 3,432 3,800 Employees' postemployment benefits................ 1,825 2,446 ------- ------- Total noncurrent liabilities..................... 5,257 6,246 ------- ------- Current liabilities: Notes payable and commercial paper................ 126,107 154,244 Notes payable to affiliates....................... 9,000 25,160 Long-term debt due within one year................ 113 173 Accounts payable.................................. 75,119 107,465 Dividends payable................................. 6,168 22,546 Customers' deposits............................... 5,725 5,471 Accrued taxes..................................... 37,682 28,051 Accrued interest.................................. 9,219 12,715 Current portion of accumulated deferred income taxes 1,872 10,740 Other............................................. 20,591 7,415 ------- ------- Total current liabilities........................ 291,596 373,980 ------- ------- Deferred credits: Unamortized investment tax credits................ 5,281 5,469 Accumulated deferred income taxes................. 377,978 372,447 Other............................................. 15,628 4,363 ------- ------- Total deferred credits........................... 398,887 382,279 ------- ------- Commitments and contingencies (Notes 4 and 5)........ --------- --------- $2,151,663 $2,181,493 ========== ========== The accompanying notes to condensed financial statements are an integral part of these financial statements. 12 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Three Months Ended September 30, 1998 1997 ---- ---- Operating revenues: Electric........................................... $284,648 $279,511 Other.............................................. - 4,645 ------- ------- 284,648 284,156 Operating expenses: Fuel used in generation............................ 139,021 141,907 Purchased power.................................... 9,946 3,957 Other operating & maintenance expenses............. 34,189 35,187 Depreciation and amortization...................... 17,754 17,272 Taxes (other than income taxes).................... 12,525 11,969 Income taxes....................................... 21,755 22,888 ------- ------- 235,190 233,180 ------- ------- Operating income...................................... 49,458 50,976 Other income and deductions: Merger expenses.................................... - (7,200) Interest income and other - net................... 2,233 1,692 ----- ----- 2,233 (5,508) Interest charges: Interest on long-term debt......................... 10,992 11,000 Amortization of debt discount and expense less premium 561 560 Other interest..................................... 2,163 1,963 Allowance for borrowed funds used during construction (917) (1,129) Dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS ............ 1,963 1,963 ----- ----- 14,762 14,357 ------ ------ Net income............................................ $36,929 $31,111 ======= ======= Theaccompanying notes to condensed financial statements are an integral part of these financial statements. 13 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Nine Months Ended September 30, 1998 1997 ---- ---- Operating revenues: Electric........................................... $748,386 $728,436 Other.............................................. - 20,236 ------- ------- 748,386 748,672 Operating expenses: Fuel used in generation............................ 351,036 364,221 Purchased power.................................... 19,666 12,088 Other operating & maintenance expenses............. 103,650 119,755 Depreciation and amortization...................... 53,291 53,717 Taxes (other than income taxes).................... 35,918 34,819 Income taxes....................................... 54,709 36,894 ------- ------- 618,270 621,494 ------- ------- Operating income...................................... 130,116 127,178 Other income and deductions: Merger expenses.................................... (1,208) (15,239) Write-off of investment in Carolina Energy Project (Note 3) ................................ - (16,052) Interest income and other - net................... 6,779 2,113 ------- ------- 5,571 (29,178) Interest charges: Interest on long-term debt......................... 32,972 33,057 Amortization of debt discount and expense less premium 1,682 1,683 Other interest..................................... 7,275 4,710 Allowance for borrowed funds used during construction (4,115) (3,047) Dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS ............ 5,888 5,888 ----- ----- 43,702 42,291 ------ ------ Net income............................................ $91,985 $55,709 ======= ======= Theaccompanying notes to condensed financial statements are an integral part of these financial statements. 14 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands of Dollars) Nine Months Ended September 30, 1998 1997 ---- ---- Operating activities: Net income......................................... $91,985 $55,709 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................... 56,593 56,290 Write-off of investment in Carolina Energy Project - 16,052 Amortization of investment tax credits........... (188) (188) Deferred income taxes............................ (1,524) 1,957 Allowance for funds used during construction..... - (5) Change in accounts receivable.................... (2,065) (37,112) Change in inventories............................ (994) (1,419) Change in other current assets................... 18,915 1,543 Change in accounts payable....................... (32,346) 39,276 Change in other current liabilities.............. 19,565 (10,565) Change in deferred amounts....................... 38,588 (52,143) Change in noncurrent liabilities................. (989) 1,419 Other............................................ - 312 ------- ------- Net cash provided by operating activities...... 187,540 71,126 Investing activities: Construction expenditures.......................... (64,838) (87,707) Allowance for equity funds used during construction - 5 Proceeds from (cost of) disposition of property, plant and equipment ............................. (2,345) 61 Proceeds from the sale of Quixx and UE, net of cash disposed (Note 1) ............................... - (29,567) Sale (purchase) of other investments............... 186 (4,583) ------- -------- Net cash used in investing activities.......... (66,997) (121,791) Financing activities: Redemption of long-term notes and bonds............ (58) (16,099) Short-term borrowings - net........................ (44,297) 101,495 Dividends on common stock.......................... (71,527) (61,769) ------- ------- Net cash (used in) provided by financing activities .................................. (115,882) 23,627 -------- ------ Net increase (decrease) in cash and temporary cash investments ............................ 4,661 (27,038) Cash and temporary cash investments at beginning of period ......................... 986 40,610 --- ------ Cash and temporary cash investments at end of period $ 5,647 $ 13,572 ======= ======== The accompanying notes to condensed financial statements are an integral part of these financial statements 15 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 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. The Merger was accounted for as a pooling-of-interests. 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, was 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. Subsequent to the Merger and effective March 31, 1998, PSCo sold its investment in NCI to NC Enterprises (see Note 2. Investment in Yorkshire Power). Business, Utility Operations and Regulation NCE is a registered holding company under 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, distribution, sale and transportation of natural gas. Both the Company and its subsidiaries are subject to the regulatory provisions of 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. 16 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) The following regulatory assets are reflected in the accompanying consolidated condensed balance sheets (in thousands): September 30, 1998 NCE PSCo SPS ------ ------ ----- Income taxes ....................... $149,874 $ 73,057 $ 77,348 Nuclear decommissioning costs....... 71,571 71,571 - Employees' postretirement benefits other than pensions .............. 58,771 55,847 2,924 Early retirement costs.............. 1,091 - 1,091 Employees' postemployment benefits (Note 4) ................ 24,093 23,643 - Demand-side management costs........ 38,938 34,009 4,929 Unamortized debt reacquisition costs 34,033 16,274 17,192 Thunder Basin judgment (Note 4)..... 1,784 - 1,784 Other............................... 7,988 1,335 6,653 ------ ------ ------ Total............................. $388,143 $275,736 $111,921 ======== ======== ======== December 31, 1997 NCE PSCo SPS ------ ------ ----- Income taxes........................ $162,985 $ 84,356 $ 79,161 Nuclear decommissioning costs....... 76,881 76,881 - Employees' postretirement benefits other than pensions............... 63,023 59,995 3,028 Early retirement costs.............. 8,008 6,645 1,363 Employees' postemployment benefits (Note 4) ................ 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 4)..... 5,912 - 5,912 Other............................... 9,991 2,540 7,451 ------ ------ ------ Total............................. $430,475 $310,658 $119,244 ======== ======== ======== The regulatory assets of the Company's regulated subsidiaries that are currently being recovered as of September 30, 1998 and December 31, 1997 are reflected in rates charged to customers over periods ranging from two to thirty years. The recovery of regulatory assets over the next five years is estimated to exceed $200 million. For further discussion, see the NCE, PSCo and SPS 1997 Annual Report on Form 10-K. The Company believes its utility subsidiaries will continue to be subject to rate regulation. In the event that a portion of regulated subsidiaries' operations are 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 and cash flows. 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. PSCo has appealed in the Denver District Court the decision related to this issue. PSCo believes that it will be successful on appeal and that the associated regulatory asset is realizable. On April 1, 1998, in connection with PSCo's annual electric department earnings test filing, PSCo requested approval to recover its electric jurisdictional portion of the postemployment benefits cost regulatory asset totaling approximately $15 million over three years. The CPUC staff and Colorado Office of Consumer Counsel are proposing to exclude these costs from the electric department earnings test. PSCo believes that it will be allowed recovery of SFAS 112 costs on an accrual basis. If PSCo is ultimately unsuccessful in its appeal of the gas rate case decision and/or in its request to recover its electric 17 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) jurisdictional regulatory asset, all unrecoverable amounts will be written-off (see Note 4. Regulatory Matters - Electric Department Earnings Test and Quality of Service Plan). As of September 30, 1998, SPS has approximately $1.8 million in remaining regulatory assets associated with the Thunder Basin judgment. The judgment amount which has been paid by SPS is recoverable from customers, subject to review by various regulatory agencies (see Note 4. Regulatory Matters - Electric Cost Adjustment Mechanisms). 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, 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 (see Note 4. Regulatory Matters - Electric Department Earnings Test and Quality of Service Plan). Diversified Energy Businesses The Company's energy-related businesses are principally involved in engineering, design and construction management, energy trading and marketing, energy management and consulting services, 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. Investment in Yorkshire Power). Financial statements of foreign subsidiaries are translated into U.S. dollars at current exchange rates, except for revenues, costs and expenses which are translated at average current exchange rates during each reporting period. Statements of Cash Flows - Non-cash Transactions: Effective February 26, 1998, the Company issued 222,362 shares of its common stock, valued at the market price on the date of issuance of approximately $10 million to the Employees' Savings and Stock Ownership Plan of Public Service Company of Colorado and Participating Subsidiary Companies. Prior to the Merger, during 1997, PSCo issued 250,058 shares of its common stock to the Employees' Savings and Stock Ownership Plan of Public Service Company of Colorado and Participating Subsidiary Companies valued at the market price on the date of issuance of approximately $10 million. The estimated issuance values were recognized in other operating expenses during the respective preceding years. Comprehensive Income The Company and its subsidiaries adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," effective January 1, 1998. The individual and cumulative components of other comprehensive income are not material to the Company and its subsidiaries. General See Note 1. of the Notes to Consolidated Financial Statements in NCE's, PSCo's and SPS' 1997 Annual Report on Form 10-K for a summary of the companies and their subsidiaries significant accounting policies. Certain prior year amounts have been reclassified to conform to the current year's classification. 18 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 2. Investment in Yorkshire Power (NCE and PSCo) Acquisition During the second quarter of 1997, Yorkshire Power, a subsidiary equally owned by PSCo, through NCI, and AEP, acquired indirectly all of the outstanding ordinary shares of Yorkshire Electricity, a United Kingdom ("U.K.") regional electricity company. NCI 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 the April 1, 1997 acquisition date. NCI's equity in earnings of Yorkshire Power is 50%, the same as its ownership share. In July 1997, the U.K. government enacted a windfall tax on certain privatized business entities, payable in two installments with the first in December 1997 and the second in December 1998. 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. The Company's share of this tax was approximately $110.6 million. Effective March 31, 1998, PSCo sold its common stock investment in NCI to NC Enterprises, an NCE subsidiary. NCI's primary investment is Yorkshire Power. PSCo received as consideration a 20 year promissory note from NC Enterprises in the amount of approximately $292.6 million. Annual interest payments are required for the first three years followed by principal and interest payments for the remaining seventeen years. The interest rate on the note is 7.02%. NCE intends to make additional capital contributions to NC Enterprises to provide the necessary cash flow requirements to make payments on the promissory note to PSCo. In late October 1998, NCE contributed $100 million to NC Enterprises and NC Enterprises used the cash to reduce the principle balance of the promissory note to PSCo. Investment in Ionica In June 1998, Yorkshire Power recognized a $54.7 million after-tax impairment of its investment in Ionica, a wireless telecommunications company, upon the May 22, 1998, announcement by Ionica that negotiations for release of lines of credit from existing providers of bank facilities had been unsuccessful. The impairment, reflecting a write-down to fair market value, was offset, in part, by an unrelated tax adjustment of approximately $21.5 million. Generation Sale In October 1998, Yorkshire Electricity announced that it had agreed to sell its 75% interest in Regional Power Generators, Ltd., which owns a 272-megawatt combined cycle, gas fired plant located in North Lincolnshire, England. Proceeds from the sale will be used to reduce the debt of Yorkshire Electricity. Yorkshire Electricity is focusing its main business on the distribution and supply of electricity and the supply of natural gas. Yorkshire Power expects to complete the sale by the end of 1998. 19 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) Summarized income statement information for the nine months ended September 30, 1998, and from the date of acquisition, April 1, 1997 to September 30, 1997, is presented below (in millions): 1998 1997 ---- ---- Yorkshire Power: Operating revenues....................... $1,677.3 $ 917.6 -------- -------- Operating income......................... 264.8 124.1 -------- -------- Income before extraordinary item......... 13.6 42.8 -------- -------- Extraordinary item - U.K. windfall tax... - (221.1) ------ ------ Net income (loss)........................ $ 13.6 $ (178.3) ======== ========= NCI's equity in earnings (losses): Equity in earnings of Yorkshire Power.... 6.8 21.4 Extraordinary item - U.K. windfall tax... - (110.6) ------ --------- $ 6.8 $ (89.2) ======== ========= The unaudited pro forma financial information presented below for NCE assumes that Yorkshire Power was acquired on January 1, 1997. The pro forma adjustments include recognition of equity in the estimated earnings of Yorkshire Power, an adjustment for interest expense on debt associated with the 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 (losses) of Yorkshire Power has been converted at the average exchange rates for the nine months ended September 30, 1998 and September 30, 1997, of $1.652/pound and $1.631/pound, respectively. Based on the above assumptions, shown below is unaudited pro forma financial information for the nine months ended September 30, 1998 and 1997 (in millions, except per share amounts): NCE Earnings Available for common stock Per share (1) ------------ ------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net income before extraordinary item... $233.5 $175.5 $2.10 $1.68 ===== ===== Pro forma adjustments: Equity in earnings of Yorkshire Power, net of U.S. tax benefits (2)............... - (10.1) Interest expense, net of tax......... - (3.5) ----- ------ Pro forma result....................... $233.5 $161.9 $2.10 $1.55 ====== ====== ===== ===== (1) Based on the weighted average number of common shares outstanding for the period. (2) The nine months ended September 30, 1997 amount includes $24.0 million ($17.9 million after-tax) of write-offs related to certain computer development costs, acquisition expenses and costs incurred for the preparation for deregulation. 20 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) The unaudited pro forma financial information presented below for PSCo assumes that NCI (primarily representing Yorkshire Power) was sold to NC Enterprises effective January 1, 1997. NCI was formed in connection with the investment in Yorkshire Power and had no operations during the first three months of 1997. The pro forma adjustments represent the removal of NCI's net income from PSCo and the inclusion of interest income, net of tax, from the promissory note to PSCo from NC Enterprises. Based upon the above assumptions, shown below is unaudited pro forma financial information for the nine months ended September 30, 1998 and 1997 (in millions): PSCo Earnings 1998 1997 ---- ---- Net income before extraordinary item..................... $143.8 $131.0 Pro forma adjustments: NCI's net income before extraordinary item............. (2.8) (22.4) Interest income from promissory note, net of tax....... 3.2 6.3 ----- ----- Pro forma result......................................... $144.2 $114.9 ====== ====== 3. Acquisition and Divestiture of Investments Acquisition of the Planergy Group (NCE) Effective April 1, 1998, the Company acquired all of the outstanding common stock of Falcon Seaboard Energy Services, Inc. ("the Planergy Group") and assumed other outstanding debt. The Planergy Group includes Planergy, Inc. and Planergy Services. Such acquisition was 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. The Planergy Group has been consolidated as a subsidiary of NC Enterprises in the Company's consolidated financial statements. The Planergy Group is primarily engaged in energy consulting, energy efficiency management, conservation programs and mass market services. 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. As a consequence, 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. 21 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 4. 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. Subsequent to the CPUC's decision approving the Merger, the CPUC approved the recovery of merger costs, amortized from the effective date of the Merger through December 31, 2001. PSCo has expensed merger costs as incurred and recovery of such costs will be reflected in the electric department earnings test, discussed below in Electric Department Earnings Test and Quality of Service Plan. Merger costs attributable to Colorado gas retail customers were included in the gas rate case approved by the CPUC, discussed below in Rate Cases- PSCo Retail Gas. 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 (which will be discontinued effective with the new retail rates as discussed below in Rate Cases - SPS - 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 August 1, 1997, the effective date of the Merger. Cheyenne expects to file a combined gas and electric rate case with the WPSC in 1999, following the expiration of the two year moratorium. 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: 22 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 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 provides up to $3 million of annual rewards if PSCo achieves certain performance measures relating to electric reliability. During the third quarter of 1998, PSCo reached a settlement agreement with the Staff of the CPUC and the Colorado Office of Consumer Counsel ("OCC") which modifies the current bill credit structure and eliminates the reward structure for the years 1999 through 2001. Approval of this modification, by the CPUC, is expected in the fourth quarter of 1998. On April 1, 1998, PSCo filed with the CPUC its proposed Performanced-Based Regulatory Plan adjustment for calendar year 1997. This adjustment will provide the means for implementing the sharing mechanism for the customers' portion of earnings over PSCo's authorized return on equity threshold resulting from the 1997 electric department earnings test, net of QSP reward earned revenue. As of December 31, 1997, PSCo recorded an estimated customer refund obligation of approximately $16.4 million related to the 1997 electric department earnings test, net of QSP rewards. A final refund obligation has not been determined. PSCo believes that its accrued obligation will be adequate. PSCo, the OCC and the CPUC staff have all filed testimony in connection with the 1997 electric earnings test. The significant issues, which have not been resolved and will impact the determination of the final refund, include the recovery of postemployment benefit costs under SFAS 112, regulatory capital structure and the recovery of costs associated with certain future use plant and water rights (see Note 1. Summary of Significant Accounting Policies - Business, Utility Operations and Regulation - Other Property). Hearings are scheduled to begin on November 16, 1998 and settlement discussions are continuing. For the nine months ended September 30, 1998, PSCo has recorded an estimated refund obligation of approximately $7.4 million for the 1998 electric department earnings test. 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 during the fourth quarter of 1998. On November 2, 1998, PSCo filed a retail gas rate case with the CPUC requesting an annual increase in rates of approximately $23.4 million. The request for a rate increase reflects revenues for additional plant investment, a 12.0% return on equity and the recovery of incremental year 2000 costs (see Note 5. Commitments and Contingencies - Year 2000 Costs). The recovery of postemployment benefit costs was not included in this request pending a decision from the Denver District Court, as discussed above. If approved, the new rates would become effective July 1, 1999. 23 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) SPS New Mexico On November 17, 1997, the NMPUC issued an order investigating SPS's rates. In the order, the NMPUC determined that because of the rapid changes occurring in the electric industry the NMPUC would 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. SPS made a compliance filing on May 5, 1998, which proposed a $1.7 million annual rate reduction for certain retail customers in New Mexico, and incorporated the $1.2 million guaranteed minimum annual credits, discussed above. On October 2, 1998, SPS entered into an uncontested stipulation agreement settling the rate investigation case. As part of this settlement, SPS would institute a $6 million annual reduction in base rates (discontinuing the $1.2 million in guaranteed minimum annual credits) for certain retail customers with an anticipated effective date during December 1998. Additionally, SPS will implement full normalization in its accounting for income taxes with recovery of the New Mexico jurisdictional portion of the tax regulatory asset over 16.8 years. This settlement is currently pending NMPUC approval. 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 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, were not achieved. On May 5, 1998, the FERC issued its opinion substantially modifying the ALJ's initial decision. The net positive impact from this decision, which was recorded in June 1998, was approximately $7.7 million ($4.9 million after tax). SPS, Golden Spread and Lyntegar Electric Cooperative have sought rehearing by FERC of its order. The requests for rehearing are pending. 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 Cost Adjustment Mechanisms 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. In June 1998, SPS filed its reconciliation for the generation and fuel management activities totaling 24 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) approximately $690 million, for the period from January 1995 through December 1997. For this same period, SPS had approximately $21.4 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. The Company has also requested the prospective sharing of margins from wholesale non-firm sales. The outcome of this fuel reconciliation proceeding is pending. 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 and the expense recorded in April 1996. Additionally, the order required SPS to pass through to customers 100% of margins from wholesale non-firm 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 a 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. On March 16, 1998, SPS filed an appeal to the Supreme Court of Texas which, on August 25, 1998, refused to hear the appeal. 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 were 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 pending fuel reconciliation proceeding. SPS believes that recovery of the Thunder Basin costs for the Texas retail jurisdiction will be approved in the pending fuel reconciliation proceeding. 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 approximately $8.5 million, with approximately $4.6 million net savings attributable to Texas retail jurisdictional customers. 5. 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. 25 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) Environmental Site Cleanup As described below, PSCo has been or is currently involved with the cleanup of contamination from certain hazardous substances. In many 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 is pursuing, or intends to pursue, recovery from other Potentially Responsible Parties ("PRPs") and 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 certain policies. 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. Both sides of the litigation filed petitions for certiorari to the Colorado Supreme Court which granted a hearing on several issues, although the matter is still pending. 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 that 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. In March 1998, PSCo sold the remaining Barter properties, and the total proceeds were $1.2 million. Polychlorinated Biphenyl ("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, in October 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. In August, 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 District Court. In June 1997, the Court ruled in favor of the carriers on summary judgment motions addressing late notice and other issues. In August 1997, PSCo filed an appeal of the decision with the Colorado Court of Appeals, which is still pending. One carrier was excluded from the summary judgment; subsequently, that carrier received approval to be dismissed on the same basis as the other carriers. In March 1998, PSCo reached a settlement with another carrier who was not part of the Denver District Court action. PSCo is pursuing the recovery of approximately $3.3 million net costs in the electric department earnings test. 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 will pursue the recovery of all significant costs incurred for such projects through insurance claims and/or the rate regulatory process. 26 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 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. In addition, 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 total approximately $14.4 million and pertain to the following plants: PSCo's Cherokee Unit 1 and 2 and Arapahoe Unit 3. 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. Legislation was passed and signed into law during the second quarter of 1998. During the third quarter of 1998, PSCo and the CDPHE entered into a voluntary emissions reduction agreement under the legislation. The Company intends to file for recovery of these costs with the CPUC in the fourth quarter of 1998. The voluntary emissions reduction agreement will be effective only if the CPUC approves a cost recovery mechanism acceptable to PSCo. Hayden Steam Electric Generating Station In May 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 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. Installation of emission control equipment is in process and on schedule in accordance with the settlement agreement. Craig Steam Electric Generating Station In October 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 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, although no settlement was achieved. There have been no further settlement discussions. Resolution of this matter may require the 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. 27 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) Pepsi Center Hazardous substances resulting from manufactured gas plant operations have been identified at the site of the Pepsi Center, a sports arena under construction in lower downtown Denver. In September 1998, a settlement with the site owners was achieved, and subsequently, a cleanup plan was approved by the state of Colorado. Neither the settlement nor the approved cleanup plan will have a material adverse impact on PSCo's financial position, results of operations or cash flows. 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 Nuclear Regulatory Commission ("NRC") to transfer the title of the ISFSI. This request is being reviewed by the NRC and PSCo anticipates approval in late-1998. 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. Leyden Gas Storage Facility During August 1998, a Jefferson County, Colorado District Court jury found PSCo liable for approximately $1.8 million for the reduction in land value and related damages resulting from the allegations that natural gas had migrated from the Leyden Gas Storage facility. The affected land is located north of, but not immediately adjacent to, the storage facility. PSCo intends to appeal the judgment. Employee Matters The Company and its subsidiaries are engaged in certain employment related litigation and intend to contest, or are actively contesting, all such claims, and believe that the ultimate outcome will not have a material adverse impact on the Company's financial position, results of operations or cash flows. Tax Matters PSR Investments, Inc., a subsidiary of PSCo, owns and manages permanent life insurance policies on certain past and present employees. These corporate owned life insurance ("COLI") policies were entered into prior to July 1, 1986. In 1996, Congress passed legislation to phase out the tax benefits with certain COLI policies, however, the Company's policies were grandfathered under this legislation. On August 27, 1998, the IRS issued a Notice of Proposed 28 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) Adjustment proposing to disallow the 1993 and 1994 deductions of interest expense related to policy loans on the COLI policies totaling approximately $54.6 million. The IRS Auditing Agent is requesting technical advice from the IRS National Office with respect to the proposed adjustment. Management plans to vigorously contest this issue. PSCo has not recorded any provision for income tax or interest expense related to this matter. Management believes that the Company's tax deduction of interest expense on life insurance policy loans was in full compliance with IRS regulations and believes that the resolution of this matter will not have a material adverse impact on PSCo's financial position, results of operations or cash flows. Year 2000 Issue The Year 2000 ("Y2K") issue is a result of a universal programming standard that records dates as six digits, e.g., mm/dd/yy, using only the last two digits for the year. Any automated system software or firmware that uses two-digit fields could understand the year 2000 as the year 1900 if the issue is not corrected. This situation is not limited to computers; it has the potential to affect many systems, components and devices which have embedded computer chips which may be date sensitive. The Y2K issue could result in a major system failure or miscalculations and does impact many NCE systems considered critical or important to the Company's business operations. The Company will assess and modify all potential Y2K failure points identified in its critical automated systems to maintain service to its customers and to mitigate legal and financial risks. In 1997, the Company established the Y2K Program Office to oversee all corporate-wide Y2K initiatives. These initiatives encompass all computer software, embedded systems, as well as contingency planning. Teams of internal and external specialists were established to inventory and assess and test critical computer programs and automated operational systems and modify those that may not be Y2K compliant. The inventory phase and assessment phase for information technology ("IT") systems have been completed. Approximately seventy percent of the remediation and testing phase for all critical IT systems will be completed in 1998 with the remaining portion being completed in the first quarter of 1999. For non-IT systems, which exist primarily in the generation, transmission and distribution areas of the business, the inventory and assessment phases are complete. Remediation and testing for non-IT systems is expected to be completed in the third quarter of 1999. The Company has identified third parties with which it has material business relationships, including interconnected utilities, telecommunications service providers, fuel and water suppliers, equipment suppliers, leased facilities and financial institutions. Inquiries as to the status of their Y2K readiness have been made and follow-ups are scheduled to be completed in late 1998. Subject matter experts, along with functional managers, continue to evaluate the current list of third parties and have ongoing discussions with these and other critical suppliers about their Y2K readiness and contingency planning efforts. The Company has refined its second quarter cost estimate of approximately $30 million for such activities and currently expects to incur costs of approximately $25 million to modify its computer software, hardware and other automated systems used in operations enabling proper data processing relating to the year 2000 and beyond. Furthermore, the Company expects to spend approximately $15 million more for the accelerated replacement of eight non-compliant IT systems. The work associated with the replacement of these eight systems is scheduled to be completed throughout 1999. The majority of these costs will be incurred by PSCo and SPS. A significant portion of the costs incurred to address the Company's Y2K issues will represent the redeployment of existing information technology resources. The table below details the actual costs incurred to date and the estimated costs to be incurred in subsequent periods. 29 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) Estimated Actual Fourth Costs Quarter Estimated Estimated To Date 1998 1999 Total ------- ---- ---- ----- (in millions) Operating expenses..................... $ 6.1 $ 7.8 $ 11.4 $ 25.3 Capital expenditures .................. 2.0 4.9 7.8 14.7 The most reasonably likely worst case scenario resulting during Y2K critical dates is a significant loss of electric system capacity, along with loss of a portion of the communication system that is critical to generation and distribution control. If this were to occur, the Company's operating utilities may be required to "island" (separate from neighboring interconnected utilities) their generation and distribution systems in their service territories. As part of this scenario, difficulty could be encountered with the restart of generating units. The overall blackout recovery plan for NCE is designed so that this most reasonably likely worst case scenario would be addressed and electricity restored. Critical components of this plan will be tested to provide assurance that the Company will be prepared for risks which could result from the Y2K millennium change. The Company continues to evaluate appropriate courses of preventive corrective action, including the replacement of certain systems. If such modifications and conversions are not completed on a timely basis, the Y2K issues may have a material impact on the operations of the Company and its subsidiaries. Management, however, 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. 6. Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debentures (NCE, PSCo and SPS) In May 1998, PSCo Capital Trust I, a wholly-owned trust of PSCo, issued 7,760,000 shares of its 7.60% Trust Originated Preferred Securities for $194 million. The sole asset of the trust is $200 million principal amount of PSCo's 7.60% Deferrable Interest Subordinated Debentures, due June 30, 2038. Holders of the securities are entitled to receive quarterly dividends at an annual rate of 7.60% of the liquidation preference value of $25. The securities are redeemable at the option of PSCo on and after May 11, 2003 at 100% of the principal amount outstanding plus accrued interest. In addition to PSCo's obligations under the Subordinated Debentures, PSCo has agreed, pursuant to a guarantee issued to the trust and the provisions of the trust agreement establishing the trust, on a subordinated basis, payment of distributions on the preferred securities (but not if the trust does not have sufficient funds to pay such distributions) and to pay all of the expenses of the trust (collectively, the "Back-up Undertakings"). Considered together, the Back-up Undertakings constitute a full and unconditional guarantee by the Company of the trust obligations under the preferred securities. The proceeds from the sale of the 7.60% Trust Originated Preferred Securities were used to redeem all $181.8 million of PSCo's outstanding preferred stock on June 10, 1998 and for general corporate purposes. In October 1996, Southwestern Public Service Capital I, a wholly-owned trust of SPS, issued in a public offering $100 million of its 7.85% Trust Preferred Securities, Series A. The sole asset of the trust is $103 million principal amount of the Company's 7.85% Deferrable Interest Subordinated Debentures, Series A due September 1, 2036. The securities are redeemable at the option of SPS on and after October 21, 2001 at 100% of the principal amount plus accrued interest. In addition to SPS's obligations under the Subordinated Debentures, SPS has agreed, pursuant to a guarantee issued to the trust, the provisions of the trust agreement establishing the trust and a related expense agreement to guarantee, on a subordinated basis, payment of distributions on the preferred securities (but not if the trust does not have sufficient funds to pay such distributions) and to pay all of the expenses of the trust. Considered together, the Back-up Undertakings constitute a full and unconditional guarantee by the Company of the trust obligations under the preferred securities. 30 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 7. Management's Representations (NCE, PSCo and SPS) In the opinion of the registrants, the accompanying unaudited consolidated condensed financial statements for NCE, PSCo and SPS include all adjustments necessary for the fair presentation of the financial position of the Company and its subsidiaries at September 30, 1998 and December 31, 1997 and the results of operations for the three and nine months ended September 30, 1998 and 1997 and cash flows for the nine months ended September 30, 1998 and 1997. The unaudited consolidated condensed financial information and notes thereto should be read in conjunction with the consolidated financial statements and notes included in the combined 1997 Form 10-K for NCE, PSCo and SPS. Because of seasonal and other factors, the results of operations for the three and nine months ended September 30, 1998 should not be taken as an indication of earnings for all or any part of the balance of the year. 31 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO NEW CENTURY ENERGIES, INC.: We have reviewed the accompanying consolidated condensed balance sheet of New Century Energies, Inc. (a Delaware corporation) and subsidiaries as of September 30, 1998, and the related consolidated condensed statements of income for the three and nine-month periods ended September 30, 1998 and 1997 and the consolidated condensed statements of cash flows for the nine-month periods ended September 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of New Century Energies, Inc. and subsidiaries as of December 31, 1997, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended (not presented separately herein), and in our report dated February 13, 1998, we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Denver, Colorado, ARTHUR ANDERSEN LLP November 5, 1998 32 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO PUBLIC SERVICE COMPANY OF COLORADO: We have reviewed the accompanying consolidated condensed balance sheet of Public Service Company of Colorado (a Colorado corporation) and subsidiaries as of September 30, 1998, and the related consolidated condensed statements of income for the three and nine-month periods ended September 30, 1998 and 1997 and the consolidated condensed statements of cash flows for the nine-month periods ended September 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and statement of capitalization of Public Service Company of Colorado and subsidiaries as of December 31, 1997, and the related consolidated statements of income, shareholder's equity and cash flows for the year then ended (not presented separately herein), and in our report dated February 13, 1998, we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Denver, Colorado, ARTHUR ANDERSEN LLP November 5, 1998 33 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO SOUTHWESTERN PUBLIC SERVICE COMPANY: We have reviewed the accompanying condensed balance sheet of Southwestern Public Service Company (a New Mexico corporation) as of September 30, 1998, and the related condensed statements of income for the three and nine-month periods ended September 30, 1998 and 1997 and the condensed statements of cash flows for the nine-month periods ended September 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet and statement of capitalization of Southwestern Public Service Company as of December 31, 1997, and the related statements of income, shareholder's equity and cash flows for the year then ended (not presented separately herein), and in our report dated February 13, 1998, we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. Denver, Colorado, ARTHUR ANDERSEN LLP November 5, 1998 34 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (NCE, PSCo and SPS) NCE's Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended September 30, 1998 Compared to the Three Months Ended September 30, 1997 Earnings Earnings per share were $0.82 for the third quarter of 1998 as compared to a net loss of $0.45 per share for the third quarter of 1997. The net loss in 1997 was primarily attributed to the recognition of an extraordinary charge related to the U.K. windfall tax of approximately $110.6 million, or $1.06 per share, by Yorkshire Electricity, a 50% owned investment (see Note 2. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). Income before this extraordinary charge increased approximately $27.4 million, or $0.21 per share from the previous year. Higher earnings were primarily attributed to increased electric sales resulting from continued customer growth and warmer than normal weather. Electric Operations The following table details the change in electric operating revenues and energy costs for the third quarter of 1998 as compared to the same period in 1997 (thousands of dollars). Increase (Decrease) ------------------- Electric operating revenues: Retail............................................... $31,284 Wholesale............................................ 55,620 Non-regulated power marketing........................ 19,949 Other (including unbilled revenues and provision for rate refunds) ................................ 6,825 ----- Total revenues...................................... 113,678 Fuel used in generation............................... 313 Purchased power....................................... 85,536 ------- Net increase in electric margin..................... $27,829 ======= The following table compares electric Kwh sales by major customer classes for the third quarter of 1998 and 1997. Millions of Kwh Sales 1998 1997 % Change * ---- ---- ---------- Residential ............................... 2,885 2,634 9.5% Commercial and Industrial ................ 7,572 7,334 3.2 Public Authority .......................... 247 219 12.8 ----- ----- Total Retail............................. 10,704 10,187 5.1 Wholesale.................................. 5,189 3,516 47.6 Non-regulated power marketing.............. 666 205 ** ----- ----- Total...................................... 16,559 13,908 19.1 ====== ====== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful Electric margin increased in the third quarter of 1998, when compared to the third quarter of 1997, due primarily to a 5.1% increase in total retail sales and a 19.1% increase in total sales resulting from customer growth and hotter than normal weather. In addition, PSCo's margin was positively impacted by lower accruals of approximately $5.6 million for the customer refund obligation associated with the earnings test in Colorado (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). PSCo's higher wholesale electric sales, reflecting increased marketing activities for economy, short-term firm and off-system sales, contributed to 35 increased operating revenues, but the margin on such sales was minimal. SPS's higher retail and wholesale sales resulted primarily from hotter and dryer than normal weather during the third quarter of 1998 and a resulting increase in the air conditioning and irrigation load in Texas and New Mexico. 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. PSCo's ICA, which allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders, did not significantly impact electric margin for the third quarter of 1998 or 1997. Fuel used in generation expense increased slightly during the third quarter of 1998 as compared to the same quarter in 1997 due primarily to increased generation levels. Purchased power expense increased $85.5 million during the third quarter of 1998, as compared to the same quarter in 1997, primarily due to purchases related to wholesale marketing activities at PSCo ($56.2 million) and an increase in power marketing activities at the Company's non-regulated subsidiaries ($23.3 million). Purchased power at SPS increased $6.0 million due to a 48% increase in wholesale purchases and higher spot market prices. SPS generates substantially all of its power for sale to 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. Gas Operations The following table details the change in revenues from gas sales and gas purchased for resale for the third quarter of 1998 as compared to the same period in 1997 (thousands of dollars). Increase (Decrease) ------------------- Revenues from gas sales (including unbilled revenues). $ 6,130 Gas purchased for resale.............................. 6,651 ------- Net decrease in gas sales margin..................... $ (521) ======== The following table compares gas Dth deliveries by major customer classes for the third quarter of 1998 and 1997. Millions of Dth Deliveries 1998 1997 % Change * ---- ---- ---------- Residential................................ 6.6 6.2 5.9% Commercial................................. 4.1 4.0 3.0 Non-regulated gas marketing................ 16.4 13.7 19.3 ----- ----- Total Sales.............................. 27.1 23.9 13.1 Transportation............................. 25.8 22.3 15.6 ----- ----- Total.................................... 52.9 46.2 14.3 ===== ===== * Percentages are calculated using unrounded amounts Gas sales margin decreased slightly during the third quarter of 1998, when compared to the third quarter of 1997. Total gas sales increased 13.1% during the third quarter of 1998 as compared with the prior year primarily as a result of non-regulated sales. However, the gross margin on these non-regulated gas sales declined $0.4 million. PSCo's gas sales increased 3.7% during the quarter primarily due to a 2.8% increase in customers. Gas transportation, gathering and processing revenues increased approximately $0.4 million during the third quarter of 1998, when compared to the third quarter of 1997, primarily due to higher deliveries. The increase in transport deliveries continues to be impacted by the shifting of various commercial customers to transport customers. 36 PSCo and Cheyenne have 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 during the third quarter of 1998, as compared to the third quarter of 1997, 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. The higher per-unit average cost of gas during the third quarter of 1998, along with an increase in the quantity of gas purchased, contributed to the increase in cost of gas purchased for resale. Other Operating Revenues Other operating revenues increased approximately $2.6 million due to higher revenues from diversified energy businesses, primarily engineering, design and construction management, energy management and consulting services. Non-Fuel Operating Expenses and Other Income and Deductions Other operating and maintenance expenses increased $13.6 million during the third quarter of 1998, as compared to the same period in 1997, due in large part to higher operating costs from non-regulated operations ($7.0 million) as a result of the acquisition of new businesses, severence payments made to former executives and growth of existing businesses. Increases in other operating and maintenance expenses at PSCo is primarily due to higher gas and electric distribution expenses and at SPS the result of higher maintenance costs at generation stations. Depreciation and amortization expense increased $4.2 million primarily due to an increase in electric property, plant and equipment at PSCo and SPS and higher amortization of software costs at PSCo. Other income and deductions increased approximately $12.9 million during the third quarter of 1998, when compared to the third quarter of 1997, primarily due to the absence of merger related expenses in 1998 ($18.6 million). Interest charges and preferred dividends of subsidiaries decreased $2.3 million during the third quarter of 1998, when compared to the same quarter in 1997. Proceeds from the issuance, by PSCo, of $250 million of long-term debt in April 1998 were used, in part, to reduce short-term debt. Higher interest costs on additional long-term debt, net of retirements, was offset, in part, by lower interest rates. Other interest expense decreased primarily due to lower short-term borrowings. The increase in dividends on PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo resulted from the May 1998 issuance of such securities (see Note 6. PSCo Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debentures in Item 1. FINANCIAL STATEMENTS). Income taxes declined $1.3 million during the third quarter of 1998, when compared to the same quarter in 1997 primarily due to an increase in foreign tax credits recognized and non-deductible merger costs in 1997 offset, in part, by higher pre-tax income. Nine Months Ended September 30, 1998 Compared to the Nine Months Ended September 30, 1997 Earnings Earnings per share were $2.10 for the first nine months of 1998 as compared to $0.62 for the first nine months of 1997. The higher earnings were primarily attributable to increases in electric and gas sales resulting from continued customer growth, hotter than normal weather during the second and third quarters of 1998, the 37 recognition of an extraordinary item related to the one-time U.K. windfall tax of approximately $110.6 million, or $1.06 per share, by Yorkshire Power in 1997, the absence of significant merger costs in 1998, and the write-off of the Carolina Energy Project in June 1997. Earnings for the nine months ended September 30, 1998 were reduced by an investment impairment, net of non-recurring tax adjustments, by Yorkshire Power in the second quarter of 1998, which reduced earnings approximately 15 cents per share (see Note 2. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). Electric Operations The following table details the change in electric operating revenues and energy costs for the first nine months of 1998 as compared to the same period in 1997 (thousands of dollars). Increase (Decrease) ------------------- Electric operating revenues: Retail............................................... $ 55,424 Wholesale............................................ 88,633 Non-regulated power marketing........................ 43,862 Other (including unbilled revenues and provision for rate refunds) ..................................... 2,490 ----- Total revenues...................................... 190,409 Fuel used in generation............................... (260) Purchased power....................................... 136,817 ------- Net increase in electric margin..................... $53,852 ======= The following table compares electric Kwh sales by major customer classes for the first nine months of 1998 and 1997. Millions of Kwh Sales 1998 1997 %Change * ---- ---- --------- Residential ............................... 7,781 7,370 5.6% Commercial and Industrial ................ 20,849 20,370 2.4 Public Authority .......................... 625 578 8.0 ----- ----- Total Retail............................. 29,255 28,318 3.3 Wholesale.................................. 11,623 8,478 37.1 Non-regulated power marketing.............. 2,269 783 ** ----- ----- Total ..................................... 43,147 37,579 14.8 ====== ====== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful Electric margin increased in the first nine months of 1998, when compared to the prior year, primarily due to higher retail sales resulting from hotter than normal weather during the second and third quarters of 1998. Also contributing to the higher margin was the favorable $7.7 million impact of a FERC decision in a 1985 wholesale rate case proceeding at SPS (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). Higher wholesale and non-regulated power marketing electric sales, reflecting marketing activities for economy, short-term firm and off-system sales, contributed to increased 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. PSCo's ICA, which allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders, did not significantly impact electric margin for the first nine months of 1998 or 1997. Fuel used in generation expense for the first nine months of 1998 and 1997 were comparable. Lower per unit cost of coal and natural gas were offset by increased generation levels. 38 Purchased power expense increased $136.8 million during the first nine months of 1998, as compared to the same period in 1997, due to an increase in power marketing activities at the Company's non-regulated subsidiaries and purchases related to wholesale marketing activities at PSCo. Gas Operations The following table details the change in revenues from gas sales and gas purchased for resale for the first nine months of 1998 as compared to the same period in 1997 (thousands of dollars). Increase -------- Revenues from gas sales (including unbilled revenues). $39,565 Gas purchased for resale.............................. 33,466 ------- Net increase in gas sales margin..................... $ 6,099 ======= The following table compares gas Dth deliveries by major customer classes for the first nine months of 1998 and 1997. Millions of Dth Deliveries 1998 1997 % Change * ---- ---- ---------- Residential................................ 65.2 64.3 1.3% Commercial................................. 32.8 35.1 (6.6) Non-regulated gas marketing................ 48.2 44.4 8.7 ----- ----- Total Sales.............................. 146.2 143.8 1.6 Transportation, gathering and processing... 80.6 69.9 15.6 ----- ----- Total.................................... 226.8 213.7 6.2 ===== ===== * Percentages are calculated using unrounded amounts Gas sales margin increased during the first nine months of 1998, when compared to the first nine months of 1997, due to higher margin at PSCo of approximately $2.8 million resulting primarily from a rate increase effective February 1, 1997, an increase in the margin at Cheyenne of approximately $1.5 million resulting from increases in base rates and an increase in the quantity of gas sold, and growth of the Company's non-regulated gas marketing business. Gas transportation, gathering and processing revenues increased $2.3 million during the first nine months of 1998, when compared to the first nine months of 1997, primarily due to higher transportation rates effective February 1, 1997, resulting from PSCo's 1996 rate case and an increase in transport deliveries. The increase in transport deliveries continues to be impacted by the shifting of various commercial customers to transport customers as retail customers procure their unbundled gas supply from other sources. PSCo and Cheyenne have 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 during the first nine months of 1998, as compared to the first nine months of 1997, 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. The higher per-unit average cost of gas during the first nine months of 1998, along with an increase in the quantity of gas purchased, contributed to the increase in cost of gas purchased for resale. 39 Other Operating Revenues Other operating revenues increased approximately $24.1 million due to higher revenues from diversified energy businesses, primarily engineering, design and construction management and consulting services. Non-Fuel Operating Expenses and Other Income and Deductions Other operating and maintenance expenses increased $40.7 million during the first nine months of 1998, as compared to the same period in 1997, primarily due to higher operating costs from non-regulated operations ($30.5 million). The increase in non-regulated operations operating and maintenance expenses is due to the acquisition of subsidiaries and growth of existing businesses. The remaining increase is primarily due to higher electric operating and distribution expenses and a reduction, in 1997, of the nuclear defueling and decommissioning liability, which served to lower expense, at PSCo ($12.2 million) offset, in part, by lower pension and benefit costs at SPS ($2.5 million). Other income and deductions increased approximately $41.6 million during the first nine months of 1998, when compared to the first nine months of 1997, primarily due to a decrease in merger expenses ($32.2 million), the write-off of the investment in the Carolina Energy Project in 1997, (see Note 3. Acquisition and Divestiture of Investments in Item 1. FINANCIAL STATEMENTS), ($16.1 million) and accruals for estimated legal and other costs associated with employee lawsuits in 1997. Equity in earnings of Yorkshire Power were lower ($14.6 million) as a result of the second quarter 1998 impairment of its investment in Ionica, a wireless telecommunications company, which was partially offset by unrelated tax adjustments. Interest charges and preferred dividends of subsidiaries increased $1.9 million during the first nine months of 1998, when compared to the same period in 1997, primarily due to interest on borrowings utilized to finance capital expenditures and the April 1997 investment in Yorkshire Power (see Note 2. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). Commitments and Contingencies Year 2000 Issue The Year 2000 ("Y2K") issue is a result of a universal programming standard that records dates as six digits, e.g., mm/dd/yy, using only the last two digits for the year. Any automated system software or firmware that uses two-digit fields could understand the year 2000 as the year 1900 if the issue is not corrected. This situation is not limited to computers; it has the potential to affect many systems, components and devices which have embedded computer chips which may be date sensitive. The Y2K issue could result in a major system failure or miscalculations and does impact many NCE systems considered critical or important to the Company's business operations. The Company will assess and modify all potential Y2K failure points identified in its critical automated systems to maintain service to its customers and to mitigate legal and financial risks. In 1997, the Company established the Y2K Program Office to oversee all corporate-wide Y2K initiatives. These initiatives encompass all computer software, embedded systems, as well as contingency planning. Teams of internal and external specialists were established to inventory and assess and test critical computer programs and automated operational systems and modify those that may not be Y2K compliant. The inventory phase and assessment phase for information technology ("IT") systems have been completed. Approximately seventy percent of the remediation and testing phase for all critical IT systems will be completed in 1998 with the remaining portion being completed in the first quarter of 1999. For non-IT systems, which exist primarily in the generation, transmission and distribution areas of the business, the inventory and assessment phases are complete. Remediation and testing for non-IT systems is expected to be completed in the third quarter of 1999. The Company has identified third parties with which it has material business relationships, including interconnected utilities, telecommunications service providers, fuel and water suppliers, equipment suppliers, 40 leased facilities and financial institutions. Inquiries as to the status of their Y2K readiness have been made and follow-ups are scheduled to be completed in late 1998. Subject matter experts, along with functional managers, continue to evaluate the current list of third parties and have ongoing discussions with these and other critical suppliers about their Y2K readiness and contingency planning efforts. The Company has refined its second quarter cost estimate of approximately $30 million for such activities and currently expects to incur costs of approximately $25 million to modify its computer software, hardware and other automated systems used in operations enabling proper data processing relating to the year 2000 and beyond. Furthermore, the Company expects to spend approximately $15 million more for the accelerated replacement of eight non-compliant IT systems. The work associated with the replacement of these eight systems is scheduled to be completed throughout 1999. The majority of these costs will be incurred by PSCo and SPS. A significant portion of the costs incurred to address the Company's Y2K issues will represent the redeployment of existing information technology resources. The table below details the actual costs incurred to date and the estimated costs to be incurred in subsequent periods. Estimated Actual Fourth Costs Quarter Estimated Estimated To Date 1998 1999 Total ------- ----- ---- ----- (in millions) Operating expenses..................... $ 6.1 $ 7.8 $ 11.4 $ 25.3 Capital expenditures .................. 2.0 4.9 7.8 14.7 The most reasonably likely worst case scenario resulting during Y2K critical dates is a significant loss of electric system capacity, along with loss of a portion of the communication system that is critical to generation and distribution control. If this were to occur, the Company's operating utilities may be required to "island" (separate from neighboring interconnected utilities) their generation and distribution systems in their service territories. As part of this scenario, difficulty could be encountered with the restart of generating units. The overall blackout recovery plan for NCE is designed so that this most reasonably likely worst case scenario would be addressed and electricity restored. Critical components of this plan will be tested to provide assurance that the Company will be prepared for risks which could result from the Y2K millennium change. The Company continues to evaluate appropriate courses of preventive corrective action, including the replacement of certain systems. If such modifications and conversions are not completed on a timely basis, the Y2K issues may have a material impact on the operations of the Company and its subsidiaries. Management, however, 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. Tax Matters PSR Investments, Inc., a subsidiary of PSCo, owns and manages permanent life insurance policies on certain past and present employees. These corporate owned life insurance ("COLI") policies were entered into prior to July 1, 1986. In 1996, Congress passed legislation to phase out the tax benefits with certain COLI policies, however, the Company's policies were grandfathered under this legislation. On August 27, 1998, the IRS issued a Notice of Proposed Adjustment proposing to disallow the 1993 and 1994 deductions of interest expense related to policy loans on the COLI policies totaling approximately $54.6 million. The IRS Auditing Agent is requesting technical advice from the IRS National Office with respect to the proposed adjustment. Management plans to vigorously contest this issue. PSCo has not recorded any provision for income tax or interest expense related to this matter. Management believes that the Company's tax deduction of interest expense on life 41 insurance policy loans was in full compliance with IRS regulations and believes that the resolution of this matter will not have a material adverse impact on PSCo's financial position, results of operations or cash flows. Other Issues relating to regulatory matters, environmental issues and employee lawsuits are discussed in Notes 4 and 5 in Item 1. FINANCIAL STATEMENTS. These matters and the future resolution thereof may impact the Company's future financial position, results of operations or cash flows. Common Stock Dividend The Board of Directors approved a $0.58 per share dividend payable to shareholders of the Company for the third quarter of 1998 and $1.74 per share for the year-to-date. The Company's common stock dividend level is dependent upon the Company's financial position, results of operations, cash flows and other factors. The Board of Directors of the Company will continue to evaluate the common stock dividend on a quarterly basis. Liquidity and Capital Resources Cash Flows - Nine Months Ended September 30 1998 1997 Increase ---- ---- -------- Net cash provided by operating activities (in millions) ............... $503.0 $201.0 $302.0 Cash provided by operating activities increased during the first nine months of 1998, when compared to the first nine months of 1997, primarily due to higher earnings from utility operations and a decrease in payments to gas suppliers resulting from lower gas costs during the 1998 period. A portion of these lower gas costs have been deferred through the GCA and have reduced the amount to be recovered from customers in the future. Additionally, SPS and a non-regulated subsidiary of NCE recorded combined cash proceeds of approximately $67 million for the recovery of deferred costs and income from the investment in a non-regulated energy development project during the second quarter of 1998. 1998 1997 Decrease ---- ---- -------- Net cash used in investing activities (in millions) ................ $(419.4) $(675.9) $(256.5) Cash used in investing activities decreased during 1998, when compared to 1997, primarily due to the acquisition of Yorkshire Electricity in 1997 partially offset by higher 1998 construction expenditures and payment for the purchase of an energy management and consulting services company in 1998. 1998 1997 Decrease ---- ---- -------- Net cash (used in) provided by financing activities (in millions) ................. $(85.3) $482.3 $(567.6) Cash provided by financing activities decreased during 1998, when compared to 1997, primarily due to PSCo's issuance of medium-term notes in January and March 1997. The proceeds from the $75 million financing by PSCo in January 1997 and the $250 million financing by PSCo in March 1997 were used to fund construction expenditures and the investment in Yorkshire Power (See Note 2. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). Proceeds from PSCo's issuance of $250 million of long-term debt in April 1998 were used to repay short-term and other debt. In May 1998, the PSCo Capital Trust I issued $194 million of Trust Originated Preferred Securities the proceeds of which were used to redeem all of PSCo's outstanding preferred stock (totaling $181.8 million) on June 10, 1998. Additionally, cash provided by operations during 1998 has increased significantly allowing the Company to reduce its short-term borrowings. 42 Financing Activities Common Stock NCE has an effective registration statement covering the issuance of 9 million shares of common stock. NCE sold 5.9 million shares under this registration statement in December 1997 and sold 2.5 million of the remaining shares in November 1998. The proceeds of this November 1998 financing, totaling approximately $116.6 million, were used for general corporate purposes and to reduce short-term borrowings. Long-Term Debt On April 20, 1998, PSCo issued $250 million of 6% First Collateral Trust Bonds due April 15, 2003, which are not redeemable prior to maturity. The principal and accrued interest on the bonds are secured by PSCo's First Mortgage Bonds. Substantially all properties of PSCo are subject to the liens securing its First Mortgage Bonds. The proceeds from the issuance were used for general corporate purposes and to repay short-term and other debt incurred for such purposes. PSCo Obligated Mandatorily Redeemable Preferred Securities In May 1998, PSCo Capital Trust I, a wholly-owned trust of PSCo, issued in a public offering $194 million of its 7.60% Trust Originated Preferred Securities. The sole asset of the trust is $200 million principal amount of PSCo's 7.60% Deferrable Interest Subordinated Debentures, due June 30, 2038. The net proceeds from the sale of the 7.60% Trust Originated Preferred Securities were used to redeem all of PSCo's outstanding preferred stock totaling $181.8 million on June 10, 1998 and for general corporate purposes. Bank Lines of Credit and Compensating Bank Balances In August of 1997, NCE entered into a $225 million credit facility with several banks. Originally, the credit facility provided for $100 million of direct borrowings by NCE until the outstanding common stock of PSCCC, a wholly-owned subsidiary of PSCo, was transferred to NCE. On June 30, 1998, the credit facility was amended to eliminate the PSCCC common stock restriction and to provide for $200 million of direct borrowings by NCE. In addition, Cheyenne was added as a borrower of up to $25 million with an NCE guaranty. The credit facility expires August 11, 2002. During the second quarter of 1998, PSCo entered into a credit facility, which provides for $150 million in committed lines of credit, replacing an existing $125 million credit facility. During the first quarter of 1998, SPS entered into a credit facility which provides for $200 million in committed lines of credit, replacing the two existing credit facilities totaling $180 million. Electric Utility Industry Electric utilities have historically operated in a highly regulated environment in which they have an obligation to provide electric service to their customers in return for an exclusive franchise within their service territory with an opportunity to earn a regulated rate of return. This regulatory environment is changing. The generation sector has experienced competition from nonutility power producers and the FERC is requiring utilities, including the Company's subsidiaries, to provide wholesale transmission service to others and may order electric utilities to enlarge their transmission systems to facilitate transmission services without impairing reliability. State regulatory authorities are in the process of changing utility regulations in response to federal and state statutory changes and evolving markets, including consideration of providing open access to retail customers. All of the Company's jurisdictions continue to evaluate utility regulations with respect to competition. The Company is unable to predict what financial impact or effect the adoption of these proposals would have on its operations. 43 New Accounting Standards In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed for Internal Use". This statement requires companies expense costs as incurred in the preliminary project stage, training, data conversion, internal maintenance and other indirect payroll related costs. This Statement is not expected to have a material impact on the Company's consolidated financial statements. This Statement is effective for fiscal years beginning after December 15, 1998, with earlier adoption encouraged. The Company will adopt this accounting standard as required by January 1, 1999. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company is currently evaluating the potential impact of this new accounting standard. This Statement is effective for fiscal years beginning after June 15, 1999, with earlier adoption encouraged. The Company will adopt this accounting standard as required by January 1, 2000. 44 PSCo's Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended September 30, 1998 Compared to the Three Months Ended September 30, 1997 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 1. FINANCIAL STATEMENTS for additional discussion regarding PSCo, the Merger and the transfer of Cheyenne, WGI, e prime and Natural Fuels. The consolidated condensed statements of income for the three and nine months ended September 30, 1997 and statement of cash flows for the nine months ended September 30, 1997, reflect the results of operations through July 31, 1997 for Cheyenne, WGI, e prime and Natural Fuels. Where relevant, additional information has been presented to discuss the impact of the transfer of these subsidiaries. Earnings Available for Common Stock Earnings available for common stock increased to approximately $44.0 million for the third quarter of 1998, as compared a net loss of approximately $76.0 million for the third quarter of 1997. The increase was primarily attributable to the recognition of an extraordinary charge related to the U.K. windfall tax of approximately $110.6 million in the third quarter of 1997 (see Note 2. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). Excluding the impact of this extraordinary charge, quarterly earnings increased approximately $9.5 million or 27% from the previous year. The increase was attributable to an increase in the current period electric margin resulting from higher electric sales in 1998 and the recognition of merger and business integration costs in 1997. Electric Operations The following table details the change in electric operating revenues and energy costs for the three months ended September 30, 1998, as compared to the same period in 1997 (in thousands of dollars). Increase (Decrease) ------------------- Cheyenne PSCo Only &e prime Consolidated --------- -------- ------------ Electric operating revenues: Retail....................................... $16,046 $ (2,944) $13,102 Wholesale - regulated........................ 42,999 - 42,999 Non-regulated power marketing................ - (1,715) (1,715) Other (including unbilled revenues and provision for rate refunds) ................ 29,593 (118) 29,475 ------ --- ------ Total revenues.............................. 88,638 (4,777) 83,861 Fuel used in generation....................... 4,484 - 4,484 Purchased power............................... 60,170 (3,986) 56,184 ------- -------- ------- Net increase (decrease) in electric margin.. $23,984 $ (791) $23,193 ======= ======== ======= 45 The following table compares electric Kwh sales by major customer classes for the three months ended September 30, 1998 and 1997. Millions of Kwh Sales % Change * 1998 1997 Consolidated PSCo Only ---- ---- ----------- --------- Residential ..................... 1,779 1,669 6.6% 7.6% Commercial and Industrial ....... 4,278 4,224 1.3 2.5 Public Authority ................ 54 49 10.2 10.9 ------ ------ Total Retail................... 6,111 5,942 2.9 4.0 Wholesale - Regulated............ 2,389 1,232 94.0 94.0 Non-regulated Power Marketing.... - 81 ** - ------ ------ Total............................ 8,500 7,255 17.2 19.6 ====== ====== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful Electric margin increased in the third quarter of 1998, when compared to the third quarter of 1997, primarily due to an overall 4% increase in PSCo's electric retail sales resulting primarily from customer growth (approximately 1.9%) and the effects of warmer than normal weather. Estimated customer refund obligations decreased in the third quarter of 1998, when compared to the third quarter of 1997, by approximately $5.6 million in connection with the sharing of earnings in excess of an 11% return on equity resulting from the 1996 settlement of the Merger proceedings in Colorado (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). Higher wholesale electric sales, reflecting increased marketing activities for economy, short-term firm and off-system sales, also contributed to increased operating revenues; however, the margin on such sales is minimal. 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. PSCo's ICA, which allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders, did not significantly impact the electric margin for the third quarter of 1998 or 1997. Fuel used in generation expense increased approximately $4.5 million during the third quarter of 1998, as compared to the same quarter in 1997, primarily due to increased generation levels at PSCo's power plants. Purchased power expense increased $56.2 million during the third quarter of 1998, as compared to the same quarter in 1997, primarily due to purchases related to wholesale marketing activities. Gas Operations The following table details the change in revenues from gas sales and gas purchased for resale for the third quarter of 1998, as compared to the same period in 1997 (in thousands of dollars). Increase (Decrease) ------------------- Cheyenne, Natural Fuels, WGI & PSCo Only e prime Consolidated --------- ------- ------------ Revenues from gas sales (including unbilled revenues) $3,744 $(12,699) $ (8,955) Gas purchased for resale........................ 4,086 (10,661) (6,575) ------ ------- ------- Net decrease in gas sales margin.............. $ (342) $ (2,038) $ (2,380) ====== ======= ======== 46 The following table compares gas Dth deliveries by major customer classes for the third quarter of 1998 and 1997. Millions of Dth Deliveries % Change * 1998 1997 Consolidated PSCo Only ---- ---- ------------ --------- Residential................... 6.4 6.1 4.5% 5.7% Commercial.................... 3.8 3.9 (1.3) 0.5 Non-regulated gas marketing... - 4.5 ** - ------ -------- Total sales................. 10.2 14.5 (29.6) 3.7 Transportation, gathering and processing ................ 22.2 19.8 12.6 18.5 ----- -------- Total....................... 32.4 34.3 (5.3) 13.4 ======= ======== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful Gas sales margin decreased slightly during the third quarter of 1998, when compared to the third quarter of 1997, primarily due to a $1.4 million decrease in unbilled revenues, which is gas delivered to customers that has not been billed, offset, in part by the effects of higher gas sales. Gas sales increased 3.7% during the third quarter of 1998 primarily due to a 2.8% increase in customers. 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 during the third quarter of 1998, as compared to the second quarter of 1997, 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 decrease in the quantity of gas purchased in the third quarter of 1998 resulted in an overall decrease in the total cost of gas purchased for resale. Gas transportation, gathering and processing revenues increased $0.2 million during the third quarter of 1998, compared to the third quarter of 1997, primarily due to higher deliveries. The increase in transport deliveries continues to be impacted by the shifting of various commercial customers to transport customers. Non-Fuel Operating Expenses and Other Income and Deductions Depreciation and amortization increased $3.0 million during the third quarter of 1998, as compared to the third quarter of 1997, primarily due to the depreciation of property additions and the higher amortization of software costs. Income taxes increased approximately $9.6 million during the third quarter of 1998, as compared to the third quarter of 1997, primarily due to higher pre-tax income. Other income and deductions was relatively flat when comparing the third quarter of 1998 to the third quarter of 1997. On March 31, 1998, NCI and its subsidiaries were transferred through the sale by PSCo of all the outstanding common stock of NCI at net book value (approximately $292.6 million), to NC Enterprises, an intermediate holding company of NCE, and received as consideration a promissory note from NC Enterprises (see Note 2. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). The third quarter of 1998 includes approximately $5.1 million of interest income on the promissory note compared to the recognition of equity earnings associated with PSCo's investment in Yorkshire Power of approximately $17.3 million in the third quarter of 1997. The third quarter of 1997 also reflects the recognition of merger and business integration costs of approximately $11.4 million. Interest charges and dividends on preferred stock decreased approximately $3.0 million during the third quarter of 1998 as compared to the third quarter of 1997. Proceeds from the issuance of $250 million of long- 47 term debt in April 1998 were used, in part, to reduce short-term debt. Higher interest costs on additional long-term debt, net of retirements, was offset, in part, by lower interest rates. Other interest expense decreased primarily due to lower short-term borrowings. The increase in dividends on PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo resulted from the issuance in May 1998 (see Note 6. PSCo Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debentures in Item 1. FINANCIAL STATEMENTS). Nine Months Ended September 30, 1998 Compared to the Nine Months Ended September 30, 1997 Earnings Available for Common Stock Earnings available for common stock were $138.5 million for the first nine months of 1998, as compared to $11.6 million for the first nine months of 1997. The significant increase was primarily attributable to the recognition of an extraordinary charge related to the U.K. windfall tax of approximately $110.6 million in 1997. Excluding the impact of this extraordinary charge, earnings increased approximately $16.3 million or 13% from the previous year. The increase was primarily attributable to an increase in electric margin resulting from higher sales in 1998 and higher merger and business integration costs in 1997. Electric Operations The following table details the change in electric operating revenues and energy costs for the nine months ended September 30, 1998 as compared to the same period in 1997 (in thousands of dollars). Increase (Decrease) Cheyenne PSCo Only &e prime Consolidated --------- -------- ------------ Electric operating revenues: Retail....................................... $34,806 $(21,492) $13,314 Wholesale - regulated........................ 64,915 - 64,915 Non-regulated power marketing................ - (10,448) (10,448) Other (including unbilled revenues and provision for rate refunds) ................ 27,388 (19) 27,369 Total revenues.............................. 127,109 (31,959) 95,150 ------- ------- ------ Fuel used in generation....................... 12,924 - 12,924 Purchased power............................... 86,281 (25,811) 60,470 ------- -------- ------- Net increase (decrease) in electric margin. $27,904 $ (6,148) $21,756 ======= ======== ======= The following table compares electric Kwh sales by major customer classes for the nine months ended September 30, 1998 and 1997. Millions of Kwh Sales % Change * --------------------- ---------- 1998 1997 Consolidated PSCo Only ---- ---- ------------ --------- Residential ..................... 5,135 5,044 1.8% 4.4% Commercial and Industrial ...... 11,754 11,909 (1.3) 1.8 Public Authority ................ 140 138 1.8 3.5 ------ ------ Total Retail................... 17,029 17,091 (0.4) 2.6 Wholesale - Regulated............ 5,291 3,110 70.2 70.2 Non-regulated Power Marketing.... - 660 ** - ------ ------ Total............................ 22,320 20,861 7.0 13.2 ====== ====== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful Electric margin increased (excluding the results of Cheyenne and e prime) in the first nine months of 1998, when compared to the first nine months of 1997, primarily due to an overall increase in PSCo's retail sales 48 of 2.6% resulting from customer growth of approximately 1.9% and a $25.1 million increase in unbilled revenues, which is electricity delivered to customers that has not been billed at the end of the period. Higher wholesale electric sales, reflecting increased marketing activities for economy, short-term firm and off-system sales, contributed to increased operating revenues; however, the margin on such sales is minimal. 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. PSCo's ICA, which allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders, did not significantly impact the electric margin for the first nine months of 1998 or 1997. Fuel used in generation expense increased approximately $12.9 million during the first nine months of 1998, as compared to the same period in 1997 due to increased generation levels at PSCo's power plants. Purchased power expense increased approximately $60.5 million during the first nine months of 1998, as compared to the same period in 1997, primarily due to purchases related to wholesale marketing activities. Gas Operations The following table details the change in revenues from gas sales and gas purchased for resale for the first nine months of 1998 as compared to the same period in 1997 (in thousands of dollars). Increase (Decrease) ------------------- Cheyenne Natural Fuels WGI & PSCo Only e prime Consolidated --------- ------- ------------ Revenues from gas sales (including unbilled revenues) ......................... $35,959 $(110,064) $(74,105) Gas purchased for resale...................... 33,120 (101,650) (68,530) ------ -------- -------- Net increase (decrease) in gas sales margin. $2,839 $ (8,414) $(5,575) ====== ========= ======= The following table compares gas Dth deliveries by major customer classes for the first nine months of 1998 and 1997. Millions of Dth Deliveries % Change * -------------------------- ---------- 1998 1997 Consolidated PSCo Only ---- ---- ------------ --------- Residential................... 63.3 64.2 (1.5)% 1.2% Commercial.................... 31.1 35.1 (11.3) (7.8) Non-regulated gas marketing... - 35.2 ** - ------ -------- Total sales................. 94.4 134.5 (29.8) (1.9) Transportation, gathering and processing ................. 68.3 67.3 1.5 18.1 ---- ---- Total....................... 162.7 201.8 (19.4) 5.6 ======= ======== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful Gas sales margin increased (excluding the results of Cheyenne, WGI, Natural Fuels and e prime) during the first nine months of 1998, when compared to the first nine months of 1997, primarily due to an increase in PSCo's base revenues associated with the higher rates effective February 1, 1997, resulting from the 1996 general rate case. This increase was offset, in part, by a 1.9% decrease in PSCo's sales which resulted from warmer weather during the first nine months of 1998, despite a 2.8% increase in customers. Gas transportation, gathering and processing revenues increased approximately $1.9 million during the first nine months of 1998, when compared to the first nine months of 1997, primarily due to higher transportation 49 rates, effective February 1, 1997, resulting from PSCo's 1996 general rate case and an increase in transport deliveries. The increase in transport deliveries continues to be impacted by the shifting of various commercial customers to transport customers as such customers procure their unbundled gas supply from other sources. 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 costs on a timely basis. As a result, the changes in revenues associated with these mechanisms during the first nine months of 1998, as compared to the first nine months of 1997, 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 decrease in the quantity of gas purchased during the first nine months of 1998 resulted in a decrease in cost of gas purchased for resale. Non-Fuel Operating Expenses and Other Income and Deductions Depreciation and amortization expense increased $7.6 million in the first nine months of 1998, as compared to the same period in 1997, primarily due to the depreciation of property additions and the higher amortization of software costs. Income taxes increased approximately $13.0 million during the first nine months of 1998, as compared to the first nine months of 1997, primarily due to higher pre-tax income. Other income and deductions increased approximately $13.4 million during the first nine months of 1998, when compared to the first nine months of 1997, primarily due to the recognition of merger and business integration costs in 1997. On March 31, 1998, NCI and its subsidiaries, including Yorkshire Power, were transferred through the sale by PSCo of all the outstanding common stock at net book value (approximately $292.6 million), to NC Enterprises, an intermediate holding company for NCE, and received as consideration a promissory note from NC Enterprises (see Note 2. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). The second and third quarter of 1998 include approximately $10.2 million of interest income on the promissory note compared to equity earnings associated with the Company's investment in Yorkshire Power ($3.4 million) during the first quarter of 1998 offset, in part, equity earnings of Yorkshire Power during the second and third quarter of 1997 ($21.4 million). Accruals for estimated legal and other costs associated with various employee lawsuits are also included in 1997. Interest charges and dividends on preferred stock decreased approximately $2.7 million during the first nine months of 1998 as compared to the first nine months of 1997. Proceeds from the issuance of $250 million of long-term debt in April 1998 were used, in part, to reduce short-term debt. Higher interest costs on additional long-term debt, net of retirements, was offset, in part, by lower interest rates. Other interest expense decreased primarily due to lower short-term borrowings. The increase in dividends on PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo resulted from the issuance in May 1998 (see Note 6. PSCo Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debentures in Item 1. FINANCIAL STATEMENTS). 50 Commitments and Contingencies See Note 5. Commitments and Contingencies in Item 1. FINANCIAL STATEMENTS. Liquidity and Capital Resources Cash Flows - Nine Months Ended September 30 1998 1997 Increase ---- ---- -------- Net cash provided by operating activities (in millions) ........... $305.4 $154.0 $151.4 Cash provided by operating activities increased during the first nine months of 1998, when compared to the first nine months of 1997, primarily due to the decrease in payments to gas suppliers resulting from lower gas costs during the first nine months of 1998 as compared to the first nine months of 1997. A portion of these lower gas costs have been deferred through the GCA and have reduced the amount to be recovered from customers in the future. Higher earnings from utility operations have also contributed to the increase. 1998 1997 Decrease ---- ---- -------- Net cash used in investing activities (in millions) ............ $(328.5) $(575.2) $246.7 Cash used in investing activities decreased during the first nine months of 1998, when compared to the first nine months of 1997, primarily due to PSCo's acquisition of Yorkshire Electricity in April 1997 for approximately $360 million offset, in part by higher construction expenditures and the purchase of certain leased assets in 1998. 1998 1997 Decrease ---- ---- -------- Net cash provided by financing activities (in millions) ............ $34.3 $424.1 $(389.8) Cash provided by financing activities decreased during the first nine months of 1998, when compared to the first nine months of 1997, primarily due to the issuance of $75 million and $250 million of medium-term notes in January and March 1997, respectively. The proceeds from these financings were used to fund PSCo's construction program and the investment in Yorkshire Power. See Note 2. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS. In April 1998, $250 million of 5 year 6% First Collateral Trust Bonds were issued. The proceeds were used for general corporate purposes. Additionally, in May 1998, $194 million of Trust Originated Preferred Securities were issued. The proceeds were used to redeem all of PSCo's outstanding preferred stock (totaling $181.8 million) on June 10, 1998. See Note 6. Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debentures in Item 1. FINANCIAL STATEMENTS. Financing Activities Discussion relating to PSCo's financing activities is covered under "Financing Activities" in NCE's Management's Discussion and Analysis of Financial Condition and Results of Operations. 51 SPS's Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended September 30, 1998 Compared to the Three Months Ended September 30, 1997 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. The statements of income for the three and nine months ended September 30, 1997 and the statement of cash flows for the nine months ended September 30, 1997 reflect the results of operations of Quixx and UE through July 31, 1997. Earnings Available for Common Stock Earnings available for common stock increased $5.8 million during the third quarter of 1998 compared to the same quarter in 1997. Earnings in the prior year were impacted by the recognition of merger related costs ($7.2 million). 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 change in electric operating revenues and energy costs for the three months ended September 30, 1998, as compared to the same period in 1997 (thousands of dollars). Increase (Decrease) ------------------- Electric operating revenues: Retail.............................. $15,244 Wholesale........................... 12,619 Other (including unbilled revenues). (22,726) ------- Total revenues.................... 5,137 Fuel used in generation.............. (2,886) Purchased power...................... 5,989 ------- Net increase in electric margin... $ 2,034 ======= The following table compares electric Kwh sales by major customer classes for the three months ended September 30, 1998 and 1997. Millions of Kwh Sales --------------------- 1998 1997 % Change* ---- ------ --------- Residential ............ 1,060 936 13.2% Commercial ............ 940 881 6.7 Industrial ............ 2,193 2,120 3.5 Public Authority ....... 192 170 13.4 ----- ----- Total Retail.......... 4,385 4,107 6.8 Wholesale............... 2,800 2,284 22.6 ----- ----- Total................... 7,185 6,391 12.4 ===== ===== * Percentages are calculated using unrounded amounts. 52 Electric operating revenues increased $5.1 million or 1.8% during the third quarter in 1998, when compared to the same period in 1997, primarily due to higher retail and wholesale electric sales offset, in part by approximately $1.0 million of merger savings which are passed on to customers. The hotter than normal weather contributed to the increased sales in 1998, with an increase in the irrigation load in Texas and New Mexico. 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 (which will be discontinued effective with the new retail rate decrease, see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS), $100,000 in Oklahoma, $10,000 in Kansas and $1.5 million to wholesale customers. Fuel used in generation expense decreased $2.9 million or 2.0% during the third quarter of 1998, when compared to the same period in 1997, primarily due to lower coal expense for the quarter offset, in part, by higher gas expense and increased generation levels required to serve retail and wholesale customers. The decrease in coal expense is primarily due to the expiration of a coal supply contract in 1997 and negotiation with a new supplier in 1998 for consumption at the Harrington generating station. SPS coal generation levels increased slightly in 1998 as compared to the same period of the prior year. Cost of natural gas used in generation increased $1.7 million during the third quarter of 1998 primarily due to generation at the new Cunningham Station combustion turbine unit offset, in part, by lower gas prices during the current period. 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 during the third quarter of 1998, when compared to the third quarter of 1997, had little impact on net income. Purchased power increased $6.0 million during the third quarter of 1998, when compared to the same period in 1997, due to higher spot market prices and a 48% increase wholesale purchases. SPS generates substantially all of its power for sale to its firm retail and wholesale customers and sells non-firm energy as the market demands. Similarly, SPS will purchase low-cost non-firm energy when available and as needed to meet customer requirements. Other Operating Revenues Other operating revenues decreased $4.6 million during the third quarter of 1998, when compared to the same period in 1997, primarily due to the sale of Quixx and UE in connection with the Merger as discussed above. Non-Fuel Operating Expenses Other operating and maintenance expenses decreased $1.0 million or 2.8% during the third quarter of 1998 as compared to the same period in 1997. Excluding the effects of Quixx and UE, other operating and maintenance expenses increased $1.7 million primarily due to higher maintenance costs at generation stations. Income taxes decreased $1.1 million during the third quarter of 1998, as compared to the same period in 1997, primarily due to the additional income tax expense recognized in 1997 for non-deductible merger costs offset, in part, by the effect of higher pre-tax income. The effective income tax rates for the third quarters of 1998 and 1997 were 37.1% and 42.4%, respectively. Other Income and Deductions Other income and deductions increased $7.7 million during the third quarter of 1998, as compared to the same period in 1997, primarily due to the absence of merger and business integration expenses in 1998 ($7.2 53 million in 1997) and higher interest income in 1998 related to the note receivable from NC Enterprises for the sale of Quixx and UE. Nine Months ended September 30, 1998 Compared to the Nine Months ended September 30, 1997 Earnings Available for Common Stock Earnings available for common stock were $92.0 million and $55.7 million during the nine months ended September 30, 1998 and 1997, respectively. Operating income increased due to the increase in electric margin and lower operating and maintenance expense. The 1997 write-off of the investment in the Carolina Energy Project and lower merger related costs in 1998 also favorably impacted 1998 net income compared to the prior period. 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 change in electric operating revenues and energy costs for the nine months ended September 30, 1998 as compared to the same period in 1997 (thousands of dollars). Increase (Decrease) ------------------- Electric operating revenues: Retail.............................. $20,429 Wholesale........................... 23,717 Other (including unbilled revenues). (24,196) ------- Total revenues.................... 19,950 Fuel used in generation.............. (13,185) Purchased power...................... 7,578 ------- Net increase in electric margin... $25,557 ======= The following table compares electric Kwh sales by major customer classes for the nine months ended September 30, 1998 and 1997. Millions of Kwh Sales --------------------- 1998 1997 % Change* ----- ------ --------- Residential ............ 2,490 2,296 8.5% Commercial ............ 2,315 2,246 3.1 Industrial ............ 6,306 6,106 3.3 Public Authority ....... 481 439 9.5 ----- ----- Total Retail.......... 11,592 11,087 4.6 Wholesale............... 6,332 5,368 18.0 ----- ----- Total................... 17,924 16,455 8.9 ====== ====== * Percentages are calculated using unrounded amounts. Electric operating revenues increased $20.0 million or 2.7% during the nine months ended September 30, 1998, when compared to the same period in 1997, primarily due to higher retail and wholesale electric sales. The increase in revenues is substantially attributable to the effects of hotter than normal weather during the second and third quarters of 1998 resulting in an increase in the irrigation load in Texas and New Mexico. The decrease in other electric operating revenues was due in part to the recognition in 1997 of higher deferred fuel revenues related to the Texas jurisdictional portion of the Thunder Basin judgment offset, in part, by $7.7 million of 54 additional revenue recognized in 1998 from the resolution of a 1985 FERC rate case. 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 (which will be discontinued effective with the new retail rate decrease, see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS), $100,000 in Oklahoma, $10,000 in Kansas and $1.5 million to wholesale customers. Fuel used in generation expense decreased $13.2 million or 3.6% during the nine months ended September 30, 1998, when compared to the same period in 1997, primarily due to lower prices of coal and natural gas offset, in part, by increased generation levels to required to serve retail and wholesale customers. The decrease in coal costs was primarily due to: a) the expiration of a coal supply contract in 1997 and negotiation with a new supplier in 1998 for consumption at the Harrington generating station, and b) the recognition of the Thunder Basin judgment costs in 1997. Cost of natural gas used in generation and SPS gas generation levels for the nine months ended September 30, 1998 increased, when compared to the same period in 1997, primarily due to generation at the new Cunningham Station combustion turbine unit. 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 during the nine months ended September 30, 1998, when compared to the same period in 1997, had little impact on net income. Purchased power increased $7.6 million or 63% during the nine months ended September 30, 1998, when compared to the same period in 1997, primarily due to an increase in spot market prices and a 15.2% increase in wholesale purchases. SPS generates substantially all of its power for sale to 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 and as needed to meet customer requirements. Other Operating Revenues Other operating revenues decreased $20.2 million during the nine months ended September 30, 1998, when compared to the same period in 1997, primarily due to the sale of Quixx and UE in connection with the Merger as discussed above. Non-Fuel Operating Expenses Other operating and maintenance expenses decreased $16.1 million or 13.4% during the nine months ended September 30, 1998, as compared to the same period in 1997. Excluding the effects of the sale of Quixx and UE, other operating and maintenance expenses decreased $2.5 million, primarily due to lower pension and benefit costs. Income taxes increased $17.8 million during the nine months ended September 30, 1998, when compared to the same period in 1997, primarily due to higher pre-tax income. Additional income tax expense was recognized in 1997 for non-deductible merger costs. The effective income tax rate for the nine months ended September 30 was 37.3% in 1998 and 39.8% in 1997. Other Income and Deductions Other income and deductions increased $34.7 million during the nine months ended September 30, 1998, as compared to the same period in 1997, primarily due to the 1997 write-off of the investment in the Carolina Energy Project ($16.1 million), the absence of merger and business integration expenses in 1998 ($14.0 million) and higher interest income in 1998 related to the note receivable from NC Enterprises for the sale of Quixx and UE. 55 PART II - OTHER INFORMATION Item 1. Legal Proceedings Part 1. See Note 5. Commitments and Contingencies in Item 1, Part 1. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10(a) Employment Agreement, effective December 15, 1997, between the Company and Mr. Paul J. Bonavia. 12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges for PSCo is set forth at page 59 herein. 12(b) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges for SPS is set forth at page 60 herein. 15(a) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 61 herein for NCE. 15(b) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 62 herein for PSCo. 15(c) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 63 herein for SPS. 27(a) Financial Data Schedule for NCE as of September 30, 1998. 27(b) Financial Data Schedule for PSCo as of September 30, 1998. 27(c) Financial Data Schedule for SPS as of September 30, 1998. (b) Reports on Form 8-K The following report on Form 8-K was filed by NCE since the beginning of the third quarter of 1998. - A report on Form 8-K dated October 19, 1998, was filed by NCE on October 19, 1998. The item reported was Item 5. Other Events: The Company's earnings release for the quarter ended September 30, 1998, including summary income statement information. - A report on Form 8-K dated October 29, 1998, 1998, was filed by NCE on November 2, 1998. The item reported was Item 5. Other Events: Filing of a Purchase Agreement in connection with the sale of 2,500,000 shares of common stock together with associated preferred stock purchase rights. 56 NEW CENTURY ENERGIES, INC. SIGNATURE 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 9th day of November, 1998. NEW CENTURY ENERGIES, INC. By /s/ R. C. Kelly --------------------------------- R. C. Kelly Executive Vice President and and Chief Financial Officer PUBLIC SERVICE COMPANY OF COLORADO SIGNATURE 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 9th day of November, 1998. PUBLIC SERVICE COMPANY OF COLORADO By /s/Brian P. Jackson --------------------------------- Brian P. Jackson Senior Vice President, Finance and Administrative Services and Chief Financial Officer SOUTHWESTERN PUBLIC SERVICE COMPANY SIGNATURE 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 9th day of November, 1998. SOUTHWESTERN PUBLIC SERVICE COMPANY By /s/Brian P. Jackson --------------------------------- Brian P. Jackson Senior Vice President, Finance and Administrative Services and Chief Financial Officer 57 EXHIBIT INDEX 10(a) Employment Agreement, effective December 15, 1997, between the Company and Mr. Paul J. Bonavia. 12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges for PSCo is set forth at page 59 herein. 12(b) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges for SPS is set forth at page 60 herein. 15(a) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 61 herein for NCE. 15(b) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 62 herein for PSCo. 15(c) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 63 herein for SPS. 27(a) Financial Data Schedule for NCE as of September 30, 1998. 27(b) Financial Data Schedule for PSCo as of September 30, 1998. 27(c) Financial Data Schedule UT for SPS as of September 30, 1998. 58 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) Nine Months Ended September 30, 1998 1997 ---- ---- (Thousands of Dollars, except ratios) Fixed charges: Interest on long-term debt................... $ 86,899 $85,902 Interest on borrowings against corporate-owned life insurance contracts................... 38,004 34,049 Other interest............................... 14,967 17,150 Amortization of debt discount and expense less premium .............................. 3,148 2,964 Interest component of rental expense......... 6,166 6,887 Dividends on PSCo obligated mandatorily redeemable preferred securities............ 5,911 - ------ ------ Total ..................................... $155,095 $146,952 ======== ======== Earnings (before fixed charges and taxes on income): Net income................................... $143,820 $130,968 Fixed charges as above....................... 155,095 146,952 Provisions for Federal and state taxes on income, net of investment tax credit amortization.... 72,184 59,205 ------ ------ Total...................................... $371,099 $337,125 ======== ======== Ratio of earnings to fixed charges.............. 2.39 2.29 ====== ====== 59 EXHIBIT 12(b) SOUTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO CONSOLIDATED FIXED CHARGES (not covered by Report of Independent Public Accountants) Nine Months Ended September 30, 1998 1997 ---- ---- (Thousands of Dollars, except ratios) Fixed charges: Interest on long-term debt................... $ 32,972 $ 33,057 Dividends on SPS obligated mandatorily redeemable preferred securities............ 5,888 5,888 Other interest............................... 7,275 4,710 Amortization of debt discount and expense less premium .............................. 1,682 1,683 Interest component of rental expense......... 606 934 ------ ------ Total ..................................... $ 48,423 $ 46,272 ======== ======== Earnings (before fixed charges and taxes on income): Net income................................... $ 91,985 $ 55,709 Fixed charges as above....................... 48,423 46,272 Provisions for Federal and state taxes on income, net of investment tax credit amortization.... 54,709 36,894 -------- -------- Total...................................... $195,117 $138,875 ======== ======== Ratio of earnings to fixed charges.............. 4.03 3.00 ===== ===== 60 EXHIBIT 15(a) November 5, 1998 New Century Energies, Inc.: We are aware that New Century Energies, Inc. has incorporated by reference in its Registration Statement (Form S-8, File No. 333-28639) pertaining to the Omnibus Incentive Plan; its Registration Statement (Form S-3, File No. 333-28637) pertaining to the Dividend Reinvestment and Cash Payment Plan and its Registration Statements (Form S-3, File Nos. 333-40361 and 333-64067) pertaining to the registration of NCE Common Stock; its Registration Statement (Form S-8, File No. 333-58117) pertaining to the NCE Employee Investment Plan and NCE Employees' Savings and Stock Ownership Plan and its Form 10-Q for the quarter ended September 30, 1998, which includes our report dated November 5, 1998, covering the unaudited consolidated condensed financial statements contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our Firm or a report prepared or certified by our Firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP 61 EXHIBIT 15(b) November 5, 1998 Public Service Company of Colorado: We are aware that Public Service Company of Colorado has incorporated by reference in its Registration Statement (Form S-3, File No. 33-62233) pertaining to the Automatic Dividend Reinvestment and Common Stock Purchase Plan; its 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; its Registration Statement (Form S-8, File No. 33-55432) pertaining to the Omnibus Incentive Plan; its 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; its 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 its Form 10-Q for the quarter ended September 30, 1998, which includes our report dated November 5, 1998, covering the unaudited consolidated condensed financial statements contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our Firm or a report prepared or certified by our Firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP 62 EXHIBIT 15(c) November 5, 1998 Southwestern Public Service Company: We are aware that Southwestern Public Service Company has incorporated by reference in its Registration Statement (Form S-3, File No. 333-05199) pertaining to Southwestern Public Service Company's Preferred Stock and Debt Securities; its Registration Statement (Form S-8, File No. 33-27452) pertaining to Southwestern Public Service Company's 1989 Stock Incentive Plan and its Registration Statement (Form S-8, File No. 33-57869) pertaining to Southwestern Public Service Company's Employee Investment Plan and Non-Qualified Salary Deferral Plan and its Form 10-Q for the quarter ended September 30, 1998, which includes our report dated November 5, 1998, covering the unaudited condensed financial statements contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our Firm or a report prepared or certified by our Firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP 63 EXHIBIT 10(a) EMPLOYMENT AGREEMENT BETWEEN NEW CENTURY ENERGIES, INC. AND PAUL J. BONAVIA Contents Section 1. Term of Employment Section 2. Position and Responsibilities Section 3. Executive to Devote Full Time Section 4. Compensation Section 5. Expenses Section 6. Disability Section 7. Termination of Employment Section 8. Compensation Upon Termination Section 9. Offset for Compensation Earned Subsequent to Termination Section 10. Covenants Section 11. Indemnification Section 12. Assignment Section 13. Income Tax Section 14. Dispute Resolution and Notice Section 15. Miscellaneous Section 16. Governing Law This Employment Agreement is made and entered into this 28th day of September, 1998, and is effective retroactive to December 15, 1997, by and between New Century Energies, Inc., (hereinafter referred to as "NCE" or, as defined in Section 12, below, as the "Company"), having its principal offices at 1225 17th Street, Denver, Colorado, and Paul J. Bonavia (hereinafter referred to as the "Executive"): WHEREAS, Executive possesses considerable experience in, and knowledge of, the electric and natural gas utility industries; and WHEREAS, the Company desires to employ Executive in an executive capacity for the Company; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements of the parties set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: Section 1. Term of Employment The Company hereby agrees to employ Executive, and Executive hereby agrees to serve the Company, in accordance with the terms and conditions set forth herein, commencing as of the effective date of this Agreement, as indicated above, and ending on December 14, 2000, unless earlier terminated as provided herein. Section 2. Position and Responsibilities Executive shall serve as Senior Vice President and General Counsel of the Company, or in any other similar executive capacity for the Company, if so elected by the Board of Directors, and shall report to either the Chief Executive Officer or Chief Operating Officer of the Company . Any change in these terms will be by mutual agreement of the Executive and the Board of Directors. Section 3. Executive to Devote Full Time During the term of this Agreement, Executive agrees to devote substantially his full time, attention, and energies to the Company's business and shall not be engaged directly or indirectly in any other business activity, whether or not such business activity is pursued for gain, profit, or other pecuniary advantage without prior approval of the Board of Directors, as expressed by formal resolution. This prohibition does not include charitable, civic, nonprofit, or other community service activities, nor shall it be construed as preventing the Executive from investing assets in such form or manner as will not require his services in the daily operations of the affairs of the companies in which such investments are made, or serving as a director of other companies (subject to the covenants of Section 10 herein). Section 4. Compensation 4.1 Base Salary. The Company shall pay Executive a salary at a rate (hereinafter referred to as "Base Salary") that shall be established from time to time by the Board of Directors of the Company or the Board's designee; provided, however, that such Base Salary shall not be less than Two Hundred and Seventy Thousand Dollars ($270,000.00) per year. This Base Salary shall be paid to Executive in equal semi-monthly installments throughout the year, consistent with the normal payroll practices of the Company. Base Salary shall be reviewed periodically by the Board of Directors or the Board's designee following the effective date of this Agreement, while this Agreement is in force, to ascertain whether, in the judgment of the Board or the Board's designee, such Base Salary should be increased (but not decreased). If so increased, that salary shall become the Base Salary for all purposes of this Agreement. 4.2 Incentive Compensation. (a) Annual Bonus. During the term of this Agreement, the Executive shall be eligible to participate in the New Century Energies, Inc. Annual Incentive Plan. Executive's annual target bonus potential shall not be less than forty-five (45%) of Base Salary. Awards under this Plan may be made in cash or stock, at the election of Executive, and are conditioned upon the attainment of certain goals established by Company management and approved by the Compensation Committee of the Board. In addition, upon the commencement of Executive's employment with the Company, Executive shall receive a guaranteed award of $20,000 under the Annual Incentive Plan for the plan year 1997, payable not earlier than January 5, 1998. This is in addition to Executive's actual participation in the Plan for the month of December 1997. (b) Long Term Incentive Plan. Executive will participate in the New Century Energies, Inc., Long Term Incentive Plan with a target award of not less than 65% of Base Salary. As currently designed, two-thirds of the awards under this Plan are provided through the issuance of non-qualified stock options and the remaining one-third is provided through a Value Creation Plan. Executive's initial stock option grant under this Plan is 88,000 shares of New Century Energies, Inc., common stock, which shall vest on December 15, 1998. This grant covers the years 1998, 1999, and 2000. The grant price will be the fair market value (the closing price) of New Century Energies Inc., common stock on December 15, 1997. The Company reserves the right to amend or modify the design of the Long Term Incentive Plan subject to approval of the Compensation Committee. 4.3 Executive Benefits. The Company shall provide to the Executive all benefits which other officers and employees of the Company are entitled to receive, as commensurate with the Executive's position, pursuant and subject to the terms and conditions of all then applicable plans. Such benefits shall include, but not be limited to, group term life insurance, comprehensive health and major medical insurance, long-term disability, accidental death and dismemberment insurance, travel accident insurance, and participation in any supplemental benefit plans (including a supplemental executive retirement plan), employee savings plans, supplemental savings plan, all employee welfare benefit plans, and employee pension benefit plans. 4.4 Supplemental Retirmenet Benefit. Executive shall be entitled under this Agreement to a supplemental retirement benefit. Assuming full vesting and accrual, such benefit shall be equal each year to fifty-five percent (55%) of Executive's Annual Compensation, minus any benefit received by Executive in that year pursuant to any Company qualified retirement plan or Company SERP Plan. "Annual Compensation" is defined as the average of the highest three of Executive's last five years of both Annual Base Salary and annual incentives earned in the corresponding year. The Company may modify its salary and incentive compensation structure after the date hereof, provided that no such modification shall have the effect of reducing the monetary value of Executive's benefit under this Section. So long as Executive shall be employed by the Company, the benefit shall accrue at the rate of five percent (5%) of Annual Compensation per year of service, to reach fifty-five (55%) of Annual Compensation not later than December 15, 2008. The benefit shall become one hundred percent (100%) vested on December 15, 2002, or upon a Change in Control as that term is defined in the Change in Control Agreement, whichever occurs earlier. Yearly benefit payments shall commence at age 60 or at separation from service, whichever occurs later. The benefit shall be funded in a mutually acceptable manner through a rabbi trust or other funding vehicle. 4.4A SERP Plan. Executive shall be a participant in the Supplemental Executive Retirement Plan for key management employees, which may be amended or revised from time to time by the Company ("SERP Plan"). Terms and conditions applicable to any benefit to which Executive may be entitled thereunder shall be governed by the SERP Plan documents. 4.5 Executive Life Insurance. The Company shall provide Executive with a life insurance policy with a death benefit equal to 400% of Base Salary if death occurs during employment, and equal to 200% of final Base Salary if death occurs during retirement. 4.6 Paid time Off. Executive shall be entitled each calendar year to paid vacation in accordance with the standard vacation policy of the Company with regard to vacations of Executive Officers. Executive shall receive a sick leave accrual according to standard Company policy with regard to sick leave for Executive Officers as of the date hereof. 4.7 Perquisites. The Company shall provide to Executive, at the Company's cost, all perquisites to which other officers of the Company are entitled. The Company also shall provide such other perquisites which are suitable to the character of Executive's position with the Company and adequate for the performance of his duties hereunder, including, but not limited to, In addition, executive shall receive: (i) a monthly flexible perquisite allowance of $750.00; (ii) an annual allowance for financial/estate planning and tax preparation of $3500.00; (iii) an annual medical examination at the Company's expense; and (iv) a furnished executive office and a full-time secretary located at the Company's corporate headquarters. Executive shall likewise have the benefit of any additional benefits, as may be established during the term of this Agreement, by written policy of the Company 4.8 Participation in Programs. In addition, and without limiting the generality of the foregoing, during the term hereof: (A) the Executive shall be entitled to participate in all applicable incentive, savings and retirement plans, practices, policies and programs of the Company and its affiliates to the same extent as other senior executives of the Company; and (B) the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in, and shall receive all benefits under, all applicable welfare benefit plans, practices, policies and programs provided by the Company and its affiliates, other than severance plans, practices, policies and programs but including, without limitation, medical, prescription, dental, disability, sick leave, employee life insurance, group life insurance, accidental death and travel accident plans and programs, to the same extent as other senior executives of the Company. 4.9 Modifications to Programs. Sections 4.2, 4.3, 4.4A, and 4.5 herein refer to plans or programs in effect or under consideration as of the date hereof. By reason of such sections, the Company shall not be obligated to institute, maintain, or refrain from changing, amending, or discontinuing any benefit plan, program, or perquisite, so long as such changes are similarly applicable to the Company's senior executive employees generally. However, notwithstanding any change or amendment to, discontinuance of, or benefit limitation set forth in any plan or program, Executive shall be entitled under this Agreement (a) during Executive's term of employment under this Agreement, to incentive compensation opportunities at least equal in monetary value to those provided for in Section 4.2, above, and (b) during and after Executive's term of employment, to the supplemental retirement benefit as provided in Section 4.4, above. Section 5. Expenses 5.1 Moving and Relocation Expenses. The Company shall pay, or reimburse Executive, for reasonable and necessary moving and relocation expenses incurred in the relocation of Executive's principal residence, in accordance with the Company's existing relocation policy. 5.2 Ongoing Expenses. The Company shall pay, or reimburse Executive in accordance with Company policies, for all ordinary and necessary expenses, in a reasonable amount, which Executive incurs in performing his duties under this Agreement, including, but not limited to, travel, entertainment, professional dues and subscriptions, and all dues, fees, and expenses associated with membership in various professional, business, social, and civic associations and societies in which Executive's participation is in the best interests of the Company. Section 6. Disability 6.1 Long Term Disability. The Company will provide to the Executive benefits pursuant and subject to the terms and conditions of the Long Term Disability Plan then in effect. Section 7. Termination of Employment 7.1 Termination for Good Reason. "Good Reason" means the occurrence, on or after the date of a Change In Control (as that term is defined in the Change in Control Agreement between Paul J. Bonavia and New Century Energies, Inc., effective December 15, 1997, referred to in this Agreement as the "Change in Control Agreement") and which is 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: 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. 7.2 Termination by Notice. Either the Company or the Executive may terminate this Agreement without cause by delivering proper written notice to the other party, as follows: (a) Notice by Executive. Executive may terminate this Agreement at any time by giving the Company's Board of Directors a minimum of ninety (90) days' prior written notice of his intent to terminate. In such case, the Company shall pay Executive his full Base Salary through the ninety (90) day period, with termination being effective on whatever date during that period is designated by the Board of Directors, but in any event not later than the last day of the ninety (90) day period. As of the last day of the ninety (90) day period, Executive shall forfeit all rights and benefits (other than vested benefits) he would otherwise have been entitled to receive under this Agreement (including, if applicable, the Executive's annual expected target bonus for that year). The Company and Executive thereafter shall have no further obligations under this Agreement. (b) Notice by the Company. The Company may terminate this Agreement at any time by the Board of Directors giving Executive written notice of the Company's intent to terminate. Subject to the consulting requirements of Section 8 herein, Executive's obligation to serve the Company, and the Company's obligation to employ Executive under the terms of this Agreement shall terminate simultaneously on the date specified in the written notice, and the Executive shall receive those benefits specified in Section 8 herein. 7.3 Termination for Cause. Nothing in this Agreement shall be construed to prevent the Company's Board of Directors from terminating Executive's employment under this Agreement for cause. "Termination for cause" shall have the same definition herein as the term "Discharge for Cause" in the Change in Control Agreement. In the event this Agreement is terminated by the Company for cause, the Company shall pay Executive his full Base Salary through the date of termination, and Executive shall immediately thereafter forfeit all rights and benefits (other than vested benefits) he would otherwise have been entitled to receive under this Agreement (including, if applicable, the Executive's annual expected target bonus for that year). The Company and Executive thereafter shall have no further obligations under this Agreement, except as set forth in Section 15.6. 7.4 Termination After a Change in Control. In the event of a Change in Control (as defined in Executive's Change in Control Agreement), the Executive shall be entitled to the greater of: (a) the payments he would otherwise be entitled to receive for the remaining term of employment under this Agreement; or (b) those payments provided for under the Change in Control Agreement. If it is determined that payments will be made pursuant to this Agreement following a Change in Control, the Executive shall be entitled to tax-free reimbursements of any excise taxes that may arise as a result of such payments. Section 8. Compensation Upon Termination In the event this Agreement is terminated for good reason (as provided in Section 7.1 herein) or by notice by the Company as provided in Section 7.2(b) herein, the Company shall continue the Executive's total compensation package for the remaining term of this Agreement which shall constitute the following amounts upon the effective date of such termination, or as otherwise specified: (a) Executive's annual Base Salary (as stated in Section 4.1 herein and adjusted by the Board from time to time), continued for the remaining term of this Agreement, paid to the Executive in equal semi-monthly installments consistent with the normal payroll practices of the Company; (b) For annual incentive plan(s) in place and operational on the date of termination, the greater of target or actual bonus paid for the year in which employment termination occurs, as provided in the annual incentive plan and subject to the authority of the Board under such plan, continued for the remaining term of this Agreement; (c) For long-term incentive plan(s) in place and operational on the date of termination, an immediate vesting of all outstanding long-term incentive awards held by the Executive, plus the economic equivalent value of any long-term incentive awards the Executive would have received had the Executive remained employed for the remaining term of this Agreement, as provided in the long-term incentive plan and subject to the authority of the Board under such plan; (d) For the supplemental retirement benefit provided for in Section 4.4 and the SERP Plan (or any successor plan) in place and operational on the date of termination, payment, in accordance with the terms of the plan, of the Executive's accrued benefits, vested or otherwise; plus, Executive shall receive credit for such additional years of service equal to the number of years, or partial years, remaining under this Agreement at the time of termination; (e) For the Supplemental Savings Plan (or any successor plan) in place and operational on the date of termination, payment, in accordance with the terms of the plan, within thirty (30) days of termination, of the Executive's account balances therein; plus credit for the maximum additional Company contributions the Executive would have been entitled to receive had the Executive remained employed for the remaining term of this Agreement; (f) For welfare benefit plan(s) in place and operational on the date of termination, Executive shall receive full benefit coverage for the remaining term of this Agreement; (g) For all qualified retirement plans in place and operational on the date of termination, Executive shall receive, by direct payment from the Company, the present value of the benefits that would have been paid under the qualified plans if the Executive had received credit for additional years of service equal to the number of years remaining under this Agreement at the time of termination; plus the maximum Company matching contributions and accruals under any such retirement plans Executive would have been entitled to receive had his employment continued for the remaining term of this Agreement; and (h) For all perquisite programs in place and operational on the date of termination, Executive shall receive full perquisites for the remaining term of this Agreement. As consideration for the continuation of the above-stated benefits, Executive agrees to make himself available during the remaining term of the Agreement, at reasonable times and location, to the Company and/or to the successor to his position at the Company, to provide consulting advice (as requested). Section 9. Offset for Compensation Earned Subsequent to Termination In the event this Agreement is terminated for good reason (as provided in Section 7.1 herein) or by notice by the Company as provided in Section 7.2 herein, the continuation of the Executive's Base Salary (as provided in Section 8(a) herein), any annual incentive award, if applicable (as provided in Section 8(b) herein), long-term incentive plan(s) awards, if any (as provided in Section 8(c) herein), the SERP Plan and supplemental retirement benefit, if any (as provided in Section 8(d) herein), and the Supplemental Savings Plan, if any (as provided in Section 8(e) herein), shall not be offset by compensation earned from a subsequent employer during the remaining term of employment under this Agreement. Section 10. Covenants 10.1 Non-competition. Without the prior written consent of the Company, for the greater of twenty-four (24) months following the termination of Executive's employment under Section 7 of this Agreement, or the remaining term of employment under this Agreement, the Executive shall not, as a shareholder, employee, officer, director, partner, consultant, or otherwise, engage directly or indirectly in any business or enterprise which is "in competition" with the Company or its successors or assigns. A business or enterprise is deemed to be "in competition" if it is engaged in the business of generation, purchase, transmission, distribution, or sale of electricity, or in the purchase, transmission, distribution, sale or transportation of natural gas, within the states of Colorado, Wyoming or Texas. 10.2 Disclosure of Information. Executive recognizes that he will have access to and knowledge of certain confidential and proprietary information of the Company and its subsidiaries which is essential to the performance of his duties under this Agreement. Executive will not, during or after the term of his employment by the Company, in whole or in part, disclose such information to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever, nor shall he make any use of any such information for his own purposes. 10.3 Covenants Regarding Other Employees. For the greater of twenty-four (24) months following a termination under Section 7 of this Agreement, or the remaining term of employment under this Agreement, the Executive agrees not to induce any employees of the Company to terminate their employment, accept employment with anyone else, or to interfere in a similar manner with the business of the Company. Section 11. Indemnification The Company hereby covenants and agrees to indemnify and hold harmless Executive fully, completely, and absolutely against, and in respect to any and all actions, suits, proceedings, claims, demands, judgments, costs, expenses (including attorneys' fees), losses, and damages resulting from Executive's good faith performance of his duties and obligations under the terms of this Agreement. Section 12. Assignment and Successors This Agreement shall be binding upon and shall inure to the benefit of any successor to or assign of NCE. The term "Company" as used in this Agreement is defined as NCE and any successor or assign. The term "successor" is defined to include any person, firm, corporation or entity which at any time and by any means, directly or indirectly (a) merges or consolidates with NCE; (b) acquires all or the majority of NCE's voting shares or assets; or (c) obtains control of NCE, its voting shares, assets or business activities. NCE (if it should continue to exist following the occurrence of any such event) shall remain jointly and severally liable for all of its obligations hereunder. Except as herein provided, this Agreement may not be assigned by the Company without the written consent of the Executive This Agreement shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, and administrators, successors, heirs, distributees, devisees, and legatees. If Executive should die while any amounts payable to Executive hereunder remain outstanding, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, in the absence of such designee, the Executive's estate. Other than a transfer by reason of death, the rights and duties of Executive hereunder are personal and may not be assigned or transferred. Section 13. Income Tax The Company may withhold, from any benefits payable under this Agreement, all federal, state, city, or other taxes as may be required pursuant to any law or governmental regulation or ruling. Section 14. Dispute Resolution and Notice 14.1 Dispute Resolution. The parties agree that any dispute or controversy arising under or in connection with this Agreement shall be submitted to arbitration as the exclusive forum; provided that if a party gives notice to the other party of his or its desire that the arbitration hearing be held forthwith and a hearing is not conducted within ninety (90) days following said notice, the party having given such notice may initiate litigation, in which case the Court's jurisdiction shall supersede and replace that of the arbitrators. The arbitrators shall have all powers of a court to grant legal or equitable relief to remedy any breach of this Agreement. Arbitration proceedings shall be conducted before a panel of three (3) arbitrators sitting in a location selected by the Executive within fifty (50) miles from the location of his principal place of employment, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the award of the arbitrators in any court having competent jurisdiction. The arbitrators' fees shall be divided and paid equally by Executive and the Company. Executive and the Company shall pay his/its own costs and attorneys' fees, if any, in the arbitration proceedings, preliminary and ancillary proceedings, and any court proceedings to enforce or vacate an arbitration award, provided that if Executive recovers through such action some amount or benefit (regardless of size or value) in excess of what NCE had offered prior to commencement of the proceeding, NCE will pay or reimburse Executive for all arbitration expenses, costs and attorney's fees. 14.2 Notice. Any notices, requests, demands, and other communications provided for by this Agreement he be sufficient if in writing and if sent by registered or certified mail to Executive at the last address he has filed in writing with the Company or, in the case of the Company, at its principal executive offices. Section 15. Miscellaneous 15.1 Waiver. A waiver of any breach of this Agreement, or a failure to enforce any provision hereof, shall not be a waiver of any subsequent breach of the Agreement. 15.2 Modification. This Agreement shall not be varied, altered, modified, canceled, changed, or in any way amended except by mutual agreement of the parties in a written instrument executed by the parties hereto or their legal representatives. 15.3 Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. 15.4 Integration Clause. This Agreement and the Change in Control Agreement set forth the complete agreement between the parties, and supersede all prior statements, stipulations, representations, promises, or agreements, if any, between the parties. No other consideration, other than that set forth in this Agreement and the Change in Control Agreement, is due between the parties. 15.5 Counterparts. This Agreement may be executed in one (1) or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one (1) and the same Agreement. 15.6 Survival of Obligations According to Their Terms. The provisions of Sections 4.4, 4.9, 8, 9, 10, 11, 12, 13 and 14 shall survive the termination of this Agreement for any reason, whether such termination is by NCE, by Executive, or otherwise, and shall survive the expiration of Executive's term of employment. Such obligations shall continue thereafter in full force and effect. 15.7 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 such action shall be null, void and of no effect. Section 16. Governing Law This Agreement shall be construed and enforced in accordance with the laws of the State of Colorado. The parties understand and intend that this Agreement is a fully enforceable contract and not a benefit plan within the meaning of ERISA. IN WITNESS WHEREOF, Executive has executed, and the Company (pursuant to a resolution adopted at a duly constituted meeting of its Board of Directors) has executed this Agreement, effective as December 15, 1997. ATTEST: NEW CENTURY ENERGIES, INC. /s/Cathy Hart /s/ Wayne Brunetti - --------------------------- ---------------------------- By: Cathy Hart By: __________________________ Its: Corporate Secretary Its: __________________________ EXECUTIVE /s/ Paul Bonavia ---------------------------- Paul J. Bonavia EX-27 2 NCE FDS 3RD QTR 98 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 CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND CONSOLIDATED CONDENSED STATMENTS OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS. 1,000 9-MOS DEC-31-1997 SEP-30-1998 PER-BOOK 5,761,092 367,064 760,166 573,506 0 7,461,828 111,731 1,625,854 698,685 2,436,270 294,000 0 2,186,241 33,000 0 530,307 116,040 0 35,902 5,077 1,824,991 7,461,828 2,715,023 109,322 2,222,347 2,222,347 492,676 5,390 498,066 155,230 233,514 0 0 194,169 125,928 502,977 2.10 2.10
EX-27 3 PSCO FDS 3RD QTR 98 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 CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 SEP-30-1998 PER-BOOK 3,933,247 314,112 483,663 372,821 0 5,103,843 0 1,302,119 315,392 1,617,511 194,000 0 1,532,611 0 0 404,200 115,442 0 35,798 4,975 1,199,306 5,103,843 1,690,841 72,184 1,378,711 1,450,895 239,946 6,087 246,033 102,213 143,820 5,332 138,488 142,383 86,899 305,377 0.000 0.000
EX-27 4 SPS FDS 3RD QTR 98
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND CONDENSED STATEMENTS OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 SEP-30-1998 PER-BOOK 1,727,228 124,682 146,898 152,855 0 2,151,663 0 348,402 386,822 735,224 100,000 0 620,699 9,000 0 126,107 113 0 0 0 560,520 2,151,663 748,386 54,709 563,561 618,270 130,116 5,571 135,687 43,702 91,985 0 91,985 55,150 32,972 187,540 0.000 0.000
-----END PRIVACY-ENHANCED MESSAGE-----