-----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, FcbgmZ/t30pCGSa1Q5Iiw5psqR0xednvsmP1YhGd/4Oa+X3BjspMZ1dt15n4zjl8 0YBCeaW6MQ5EXkXXQWBe+w== 0001004858-98-000030.txt : 19980817 0001004858-98-000030.hdr.sgml : 19980817 ACCESSION NUMBER: 0001004858-98-000030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW CENTURY ENERGIES INC CENTRAL INDEX KEY: 0001004858 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 841334327 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12927 FILM NUMBER: 98688115 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 1998 2ND QTR 10Q TO THE SEC 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 June 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 offices Commission and Registrant's Telephone Number, including area 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 August 12, 1998, 111,500,430 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 $4,829,362,374. 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 ......................................... 33 PART II - OTHER INFORMATION Item 1. Legal Proceedings................................................. 52 Item 4. Submission of Matters to a Vote of Security Holders .............. 52 Item 5. Other Information ................................................ 52 Item 6. Exhibits and Reports on Form 8-K.................................. 55 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, 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 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 DSMCA.....................................Demand Side Management Cost Adjustment 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 Fuelco..........Fuel Resources Development Co., a dissolved Colorado Corporation GCA..........................................................Gas Cost Adjustment ICA....................................................Incentive Cost Adjustment 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 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" SFAS 121..................Statement of Financial Accounting Standards No. 121 - "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" Thunder Basin.........................................Thunder Basin Coal Company 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 June 30, December 31, 1998 1997 ---- ---- Property, plant and equipment, at cost: Electric .......................................... $6,877,629 $ 6,703,863 Gas................................................ 1,170,404 1,136,231 Steam and other.................................... 118,697 120,322 Common to all departments.......................... 465,460 437,636 Construction in progress........................... 335,550 318,124 ------- ------- 8,967,740 8,716,176 Less: accumulated depreciation .................... 3,295,264 3,182,800 --------- --------- Total property, plant and equipment.............. 5,672,476 5,533,376 --------- --------- Investments, at cost: Investment in Yorkshire Power and other unconsolidated subsidiaries (Note 2)........... 291,546 295,316 Other.............................................. 66,159 71,411 ------- ------ Total investments................................. 357,705 366,727 ------- ------- Current assets: Cash and temporary cash investments................ 107,581 72,623 Accounts receivable, less reserve for uncollectible accounts ($5,623 at June 30, 1998; $5,355 at December 31, 1997) .............................. 308,325 315,539 Accrued unbilled revenues.......................... 100,000 110,877 Recoverable purchased gas and electric energy costs - net ........................................... 77,604 129,292 Materials and supplies, at average cost............ 70,098 68,411 Fuel inventory, at average cost.................... 25,194 23,162 Gas in underground storage, at cost (LIFO)......... 24,613 47,394 Prepaid expenses and other......................... 67,024 56,868 ------- ------ Total current assets.............................. 780,439 824,166 ------- ------- Deferred charges: Regulatory assets (Note 1)......................... 404,081 430,475 Unamortized debt expense .......................... 21,354 20,833 Other.............................................. 134,348 134,704 ------- ------- Total deferred charges............................ 559,783 586,012 ------- ------- $7,370,403 $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 June 30, December 31, 1998 1997 ---- ---- Common stock ......................................... $1,727,281 $1,694,195 Retained earnings..................................... 672,718 659,050 ------- ------- Total common equity............................... 2,399,999 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 ....................... 2,228,128 1,987,955 --------- --------- 4,922,127 4,620,455 --------- --------- Noncurrent liabilities: Employees' postretirement benefits other than pensions ........................................ 68,809 62,716 Employees' postemployment benefits ................ 26,819 27,953 ------ ------ Total noncurrent liabilities...................... 95,628 90,669 ------ ------ Current liabilities: Notes payable and commercial paper ................ 454,063 588,343 Long-term debt due within one year................. 190,983 257,469 Preferred stock subject to mandatory redemption within one year ................................. - 2,576 Accounts payable................................... 239,942 298,469 Dividends payable.................................. 67,536 68,296 Customers' deposits................................ 29,678 27,993 Accrued taxes...................................... 48,968 66,587 Accrued interest................................... 54,092 52,615 Current portion of accumulated deferred income taxes 24,142 27,391 Other.............................................. 92,526 87,380 ------- ------ Total current liabilities......................... 1,201,930 1,477,119 --------- --------- Deferred credits: Customers' advances for construction............... 52,441 53,041 Unamortized investment tax credits ................ 103,589 106,147 Accumulated deferred income taxes.................. 930,021 922,341 Other.............................................. 64,667 40,509 ------- ------ Total deferred credits............................ 1,150,718 1,122,038 --------- --------- Commitments and contingencies (Notes 4 and 5)......... $7,370,403 $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 June 30, 1998 1997 ---- ---- Operating revenues: Electric........................................... $659,765 $594,665 Gas................................................ 178,130 170,824 Other.............................................. 21,726 11,253 ------- ------ 859,621 776,742 Operating expenses: Fuel used in generation............................ 171,280 165,178 Purchased power.................................... 154,193 124,029 Cost of gas sold................................... 124,398 115,106 Other operating and maintenance expenses........... 162,967 149,152 Depreciation and amortization...................... 67,074 60,378 Taxes (other than income taxes) ................... 33,043 32,563 ------- ------ 712,955 646,406 ------- ------- Operating income..................................... 146,666 130,336 Other income and deductions: Merger expenses.................................... (5) (10,430) Write-off of investment in Carolina Energy Project (Note 3) ....................................... - (16,052) Equity in earnings (losses) of Yorkshire Power and other unconsolidated subsidiaries (Note 2)..... (7,569) 4,006 Miscellaneous income and deductions - net.......... 1,028 (6,597) ------- ------- (6,546) (29,073) Interest charges and preferred dividends of subsidiaries: Interest on long-term debt......................... 42,718 42,657 Other interest..................................... 8,958 6,785 Allowance for borrowed funds used during construction (4,415) (2,449) Dividends on PSCo and SPS obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debentures of PSCo and SPS (Note 6).......................... 4,073 1,962 Dividend requirements on preferred stock of subsidiaries ...................................... 2,403 2,942 ----- ----- 53,737 51,897 Income before income taxes............................ 86,383 49,366 Income taxes.......................................... 29,790 15,321 ------- ------ Net income............................................ $56,593 $34,045 ======= ======= Weighted average common shares outstanding............ 111,372 104,267 ======= ======= Basic and diluted earnings per share of common stock outstanding ........................................ $ 0.50 $ 0.33 ====== ======= 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) Six Months Ended June 30, 1998 1997 ---- ---- Operating revenues: Electric........................................... $1,259,753 $1,183,022 Gas................................................ 497,837 462,448 Other.............................................. 41,535 21,283 ------- ------ 1,799,125 1,666,753 Operating expenses: Fuel used in generation............................ 312,199 314,057 Purchased power.................................... 303,057 251,862 Cost of gas sold................................... 349,310 322,095 Other operating and maintenance expenses........... 310,648 284,273 Depreciation and amortization...................... 129,492 121,545 Taxes (other than income taxes) ................... 65,916 66,585 ------ ------ 1,470,622 1,360,417 --------- --------- Operating income..................................... 328,503 306,336 Other income and deductions: Merger expenses.................................... (790) (14,488) Write-off of investment in Carolina Energy Project (Note 3) ....................................... - (16,052) Equity in earnings (losses) of Yorkshire Power and other unconsolidated subsidiaries (Note 2)..... (3,817) 4,259 Miscellaneous income and deductions - net.......... (1,155) (8,131) ------- ------- (5,762) (34,412) Interest charges and preferred dividends of subsidiaries: Interest on long-term debt......................... 83,191 82,078 Other interest..................................... 17,452 11,702 Allowance for borrowed funds used during construction (8,921) (4,750) Dividends on PSCo and SPS obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debentures of PSCo and SPS (Note 6)............................. 6,036 3,925 Dividend requirements on preferred stock of subsidiaries ..................................... 5,332 5,885 ----- ----- 103,090 98,840 ------- ------ Income before income taxes............................ 219,651 173,084 Income taxes.......................................... 76,909 60,883 ------- ------- Net income............................................ $142,742 $112,201 ======== ======== Weighted average common shares outstanding............ 111,174 103,994 ======= ======= Basic and diluted earnings per share of common stock outstanding $ 1.28 $ 1.08 ====== ====== 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) Six Months Ended June 30, 1998 1997 ---- ---- Operating activities: Net income......................................... $142,742 $112,201 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................... 134,512 125,576 Amortization of investment tax credits........... (2,558) (2,629) Deferred income taxes............................ 4,598 23,273 Equity in (earnings) losses of Yorkshire Power and other unconsolidated subsidiaries, net...... 3,817 (3,565) Allowance for funds used during construction..... - (4) Write-off of investment in Carolina Energy Project - 16,052 Change in accounts receivable.................... 12,845 17,742 Change in inventories............................ 19,184 14,053 Change in other current assets................... 52,508 (19,941) Change in accounts payable....................... (58,842) (90,956) Change in other current liabilities.............. (4,727) (35,574) Change in deferred amounts....................... 53,688 (27,207) Change in noncurrent liabilities................. 4,959 7,702 Other............................................ 45 (327) ------- -------- Net cash provided by operating activities...... 362,771 136,396 Investing activities: Construction expenditures.......................... (261,302) (201,538) Allowance for equity funds used during construction - 4 Proceeds from disposition of property, plant and equipment 2,848 2,325 Investment in Yorkshire Power...................... - (362,387) Acquisition of subsidiary, net of cash acquired (Note 3) ......................................... (13,725) - Purchase of other investments...................... (2,014) (9,862) Sale of other investments.......................... 3,426 2,376 ------- ------- Net cash used in investing activities.......... (270,767) (569,082) Financing activities: Proceeds from sale of common stock................. 23,976 14,777 Proceeds from sale of PSCo obligated mandatorily redeemable preferred securities ................. 194,000 - Proceeds from sale of long-term debt............... 248,380 333,435 Redemption of long-term notes and bonds............ (80,392) (38,031) Short-term borrowings - net........................ (134,281) 228,369 Redemption of preferred stock...................... (181,824) - Dividends on common stock.......................... (126,905) (113,308) ------- ------- Net cash provided by (used in) financing activities (57,046) 425,242 ------- ------- Net increase (decrease) in cash and temporary cash investments................................. 34,958 (7,444) Cash and temporary cash investments at beginning of period .................................. 72,623 50,016 ------ ------ Cash and temporary cash investments at end of period ..................................... $ 107,581 $ 42,572 ========= ======== 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 June 30, December 31, 1998 1997 ---- ---- Property, plant and equipment, at cost: Electric .......................................... $4,168,343 $4,088,447 Gas................................................ 1,131,081 1,100,003 Steam and other.................................... 78,846 78,740 Common to all departments.......................... 457,957 432,840 Construction in progress........................... 238,582 170,503 ------- ------- 6,074,809 5,870,533 Less: accumulated depreciation .................... 2,223,787 2,145,673 --------- --------- Total property, plant and equipment.............. 3,851,022 3,724,860 --------- --------- Investments, at cost: Investment in Yorkshire Power (Note 2)............. - 286,703 Note receivable from affiliate (Note 2)............ 292,620 - Other.............................................. 24,446 43,311 ------- ------ Total investments................................. 317,066 330,014 ------- ------- Current assets: Cash and temporary cash investments................ 21,732 18,909 Accounts receivable, less reserve for uncollectible accounts ($2,547 at June 30, 1998; $2,272 at December 31, 1997) .............................. 147,281 191,155 Accrued unbilled revenues ......................... 76,770 94,284 Recoverable purchased gas and electric energy costs - net ........................................... 59,180 103,197 Materials and supplies, at average cost............ 48,315 48,030 Fuel inventory, at average cost.................... 22,895 20,862 Gas in underground storage, at cost (LIFO)......... 24,118 46,576 Prepaid expenses and other......................... 42,843 39,594 ------- ------ Total current assets.............................. 443,134 562,607 ------- ------- Deferred charges: Regulatory assets (Note 1)......................... 288,460 310,658 Unamortized debt expense .......................... 11,507 10,800 Other.............................................. 78,825 55,794 ------- ------ Total deferred charges............................ 378,792 377,252 ------- ------- $4,990,014 $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 June 30, December 31, 1998 1997 ---- ---- Common stock.......................................... $1,302,119 $1,302,119 Retained earnings..................................... 330,018 319,280 ------- ------- Total common equity............................... 1,632,137 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........................................ 1,574,705 1,338,138 --------- --------- 3,400,842 3,138,792 --------- --------- Noncurrent liabilities: Employees' postretirement benefits other than pensions 60,963 58,695 Employees' postemployment benefits................. 25,031 25,031 ------- ------- Total noncurrent liabilities...................... 85,994 83,726 ------- ------- Current liabilities: Notes payable and commercial paper................. 234,531 348,555 Long-term debt due within one year................. 190,302 257,160 Preferred stock subject to mandatory redemption within one year ................................. - 2,576 Accounts payable................................... 164,481 218,773 Dividends payable.................................. 40,830 40,975 Customers' deposits................................ 23,467 21,888 Accrued taxes...................................... 13,008 42,549 Accrued interest................................... 40,984 39,177 Current portion of accumulated deferred income taxes 19,446 19,872 Other.............................................. 68,149 59,880 ------- ------- Total current liabilities......................... 795,198 1,051,405 ------- --------- Deferred credits: Customers' advances for construction............... 51,233 51,830 Unamortized investment tax credits ................ 96,961 99,355 Accumulated deferred income taxes.................. 527,521 534,246 Other.............................................. 32,265 35,379 ------- ------- Total deferred credits............................ 707,980 720,810 ------- ------- Commitments and contingencies (Notes 4 and 5)......... $4,990,014 $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 June 30, 1998 1997 ---- ---- Operating revenues: Electric........................................... $369,940 $360,234 Gas................................................ 133,170 170,824 Other.............................................. 1,488 2,462 ------- ------- 504,598 533,520 Operating expenses: Fuel used in generation............................ 49,554 47,482 Purchased power.................................... 123,874 121,105 Gas purchased for resale........................... 84,058 115,106 Other operating and maintenance expenses........... 102,564 101,548 Depreciation and amortization...................... 46,795 42,163 Taxes (other than income taxes) ................... 20,937 21,239 Income taxes ..................................... 13,550 11,606 ------- ------- 441,332 460,249 ------- ------- Operating income...................................... 63,266 73,271 Other income and deductions: Merger expenses.................................... - (5,169) Equity earnings in Yorkshire Power (Note 2)........ - 4,113 Miscellaneous income and deductions - net.......... 1,968 (6,897) ------- ------- 1,968 (7,953) Interest charges: Interest on long-term debt......................... 29,671 30,048 Amortization of debt discount and expense less premium 1,017 1,017 Other interest..................................... 4,498 5,017 Allowance for borrowed funds used during construction (2,971) (1,371) Dividends on PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo (Note 6).... 2,111 - ----- ----- 34,326 34,711 ------ ------ Net income............................................ 30,908 30,607 Dividend requirements and redemption premium on preferred stock ................................... 2,403 2,942 ----- ----- Earnings available for common stock................... $28,505 $27,665 ======= ======= 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) Six Months Ended June 30, 1998 1997 ---- ---- Operating revenues: Electric........................................... $745,386 $734,097 Gas................................................ 398,653 462,448 Other.............................................. 5,201 5,692 ------- ------- 1,149,240 1,202,237 Operating expenses: Fuel used in generation............................ 100,183 91,743 Purchased power.................................... 247,931 243,731 Gas purchased for resale........................... 260,540 322,095 Other operating and maintenance expenses........... 196,509 199,705 Depreciation and amortization...................... 89,691 85,100 Taxes (other than income taxes) ................... 40,906 43,735 Income taxes ..................................... 50,368 46,876 ------- ------- 986,128 1,032,985 ------- --------- Operating income...................................... 163,112 169,252 Other income and deductions: Merger expenses.................................... 418 (6,449) Equity earnings in Yorkshire Power (Note 2)........ 3,446 4,113 Miscellaneous income and deductions - net.......... (1,335) (8,405) ------- ------- 2,529 (10,741) Interest charges: Interest on long-term debt......................... 57,271 56,954 Amortization of debt discount and expense less premium 1,995 1,945 Other interest..................................... 10,151 8,956 Allowance for borrowed funds used during construction (5,692) (2,832) Dividends on PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo (Note 6)... 2,111 - ----- ------ 65,836 65,023 Net income............................................. 99,805 93,488 Dividend requirements and redemption premium on preferred stock ..................................... 5,332 5,885 ----- ----- Earnings available for common stock................... $94,473 $87,603 ======= ======= 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) Six Months Ended June 30, 1998 1997 ---- ---- Operating activities: Net income......................................... $99,805 $93,488 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................... 92,182 87,211 Amortization of investment tax credits........... (2,394) (2,504) Deferred income taxes............................ (63) 30,978 Equity in earnings of Yorkshire Power............ (3,446) (4,113) Allowance for equity funds used during construction - 1 Change in accounts receivable.................... 46,847 20,985 Change in inventories............................ 20,140 14,335 Change in other current assets................... 58,282 (3,256) Change in accounts payable....................... (53,082) (83,380) Change in other current liabilities.............. (18,643) (37,334) Change in deferred amounts....................... (20,083) 573 Change in noncurrent liabilities................. 2,268 2,892 Other............................................ - 548 ------- ------- Net cash provided by operating activities...... 221,813 120,424 Investing activities: Construction expenditures.......................... (213,677) (135,650) Allowance for equity funds used during construction - (1) Proceeds from disposition of property, plant and equipment ................................... 4,808 1,956 Investment in Yorkshire Power (Note 2)............. - (362,387) Purchase of other investments...................... (2,172) (5,996) Sale of other investments.......................... 3,145 2,376 ------- ------- Net cash used in investing activities.......... (207,896) (499,702) Financing activities: Proceeds from sale of common stock................. - 14,777 Proceeds from sale of PSCo obligated mandatorily redeemable preferred securities ................. 194,000 - Proceeds from sale of long-term debt .............. 248,130 333,435 Redemption of long-term notes and bonds............ (80,111) (23,021) Short-term borrowings - net........................ (102,069) 137,875 Dividends on common stock.......................... (80,959) (68,298) Redemption of preferred stock (Note 6)............. (181,824) - Dividends and redemption premium on preferred stock (Note 6) ....................................... (8,261) (5,885) ------ ------ Net cash provided by (used in) financing activities ................................... (11,094) 388,883 ------- ------- Net increase in cash and temporary cash investments .................................. 2,823 9,605 Cash and temporary cash investments at beginning of period .......................... 18,909 9,406 ------ ----- Cash and temporary cash investments at end of period .................................... $21,732 $19,011 ======= ======= 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 June 30, December 31, 1998 1997 ---- ---- Property, plant and equipment, at cost: Electric .......................................... $2,649,120 $2,557,579 Construction in progress........................... 93,257 144,452 ------ ------- 2,742,377 2,702,031 Less: accumulated depreciation .................... 1,019,161 987,487 --------- ------- Total property, plant and equipment............... 1,723,216 1,714,544 --------- --------- Investments, at cost: Notes receivable from affiliate ................... 119,036 119,036 Other.............................................. 5,958 5,832 ------- ------- Total investments................................. 124,994 124,868 ------- ------- Current assets: Cash and temporary cash investments................ 6,432 986 Accounts receivable, less reserve for uncollectible accounts ($2,162 at June 30, 1998; $2,442 at December 31, 1997) .............................. 104,578 96,548 Accrued unbilled revenues ......................... 22,407 15,468 Recoverable electric energy costs - net............ 16,540 23,086 Materials and supplies, at average cost............ 17,034 16,337 Fuel inventory, at average cost.................... 2,299 2,301 Prepaid expenses and other......................... 3,708 3,367 ------- ------- Total current assets.............................. 172,998 158,093 ------- ------- Deferred charges: Regulatory assets (Note 1)......................... 115,105 119,244 Unamortized debt expense .......................... 9,063 9,395 Other.............................................. 12,095 55,349 ------- ------- Total deferred charges............................ 136,263 183,988 ------- ------- $2,157,471 $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 June 30, December 31, 1998 1997 ---- ---- Common stock.......................................... $348,402 $348,402 Retained earnings..................................... 356,062 349,988 ------- ------- Total common equity............................... 704,464 698,390 SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS ..................... 100,000 100,000 Long-term debt........................................ 620,621 620,598 ------- ------- 1,425,085 1,418,988 --------- --------- Noncurrent liabilities: Employees' postretirement benefits other than pensions 4,079 3,800 Employees' postemployment benefits................. 1,312 2,446 ------- ------- Total noncurrent liabilities...................... 5,391 6,246 ------- ------- Current liabilities: Notes payable and commercial paper................. 169,532 154,244 Notes payable to affiliates........................ - 25,160 Long-term debt due within one year................. 114 173 Accounts payable................................... 73,008 107,465 Dividends payable.................................. 23,980 22,546 Customers' deposits................................ 5,556 5,471 Accrued taxes...................................... 22,099 28,051 Accrued interest................................... 12,631 12,715 Current portion of accumulated deferred income taxes 4,371 10,740 Other.............................................. 2,177 7,415 ------- ------- Total current liabilities......................... 313,468 373,980 ------- ------- Deferred credits: Unamortized investment tax credits ................ 5,344 5,469 Accumulated deferred income taxes ................. 379,037 372,447 Other.............................................. 29,146 4,363 ------- ------- Total deferred credits............................ 413,527 382,279 ------- ------- Commitments and contingencies (Notes 4 and 5)......... ---------- ---------- $2,157,471 $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 June 30, 1998 1997 ---- ---- Operating revenues: Electric........................................... $264,006 $234,430 Other.............................................. - 8,791 ------- ------- 264,006 243,221 Operating expenses: Fuel used in generation............................ 121,725 117,696 Purchased power.................................... 7,079 2,924 Other operating & maintenance expenses............. 35,065 47,604 Depreciation and amortization...................... 17,761 18,215 Taxes (other than income taxes) ................... 11,328 11,324 Income taxes ...................................... 21,729 3,714 ------- ------- 214,687 201,477 ------- ------- Operating income...................................... 49,319 41,744 Other income and deductions: Merger expenses.................................... (5) (5,261) Write-off of investment in Carolina Energy Project (Note 3) ........................................ - (16,052) Miscellaneous income and deductions - net ......... 2,268 147 ------- ------- 2,263 (21,166) Interest charges: Interest on long-term debt......................... 11,037 11,032 Amortization of debt discount and expense less premium 560 561 Other interest..................................... 2,533 1,721 Allowance for borrowed funds used during construction (1,427) (1,078) Dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS ............ 1,962 1,962 ----- ----- 14,665 14,198 ------ ------ Net income............................................ $36,917 $ 6,380 ======= ======= The accompanying 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) Six Months Ended June 30, 1998 1997 ---- ---- Operating revenues: Electric........................................... $463,738 $448,925 Other.............................................. - 15,591 ------- ------- 463,738 464,516 Operating expenses: Fuel used in generation............................ 212,015 222,314 Purchased power.................................... 9,720 8,131 Other operating & maintenance expenses............. 69,461 84,568 Depreciation and amortization...................... 35,537 36,445 Taxes (other than income taxes) ................... 23,393 22,850 Income taxes ...................................... 32,954 14,006 ------- ------- 383,080 388,314 ------- ------- Operating income...................................... 80,658 76,202 Other income and deductions: Merger expenses.................................... (1,208) (8,039) Write-off of investment in Carolina Energy Project (Note 3) ................................ - (16,052) Miscellaneous income and deductions - net ......... 4,546 421 ------- ------- 3,338 (23,670) Interest charges: Interest on long-term debt......................... 21,980 22,057 Amortization of debt discount and expense less premium 1,121 1,123 Other interest..................................... 5,112 2,747 Allowance for borrowed funds used during construction (3,198) (1,918) Dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS ........... 3,925 3,925 ----- ----- 28,940 27,934 ------ ------ Net income............................................ $55,056 $24,598 ======= ======= The accompanying 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) Six Months Ended June 30, 1998 1997 ---- ---- Operating activities: Net income......................................... $55,056 $24,598 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................... 37,703 38,365 Amortization of investment tax credits........... (125) (125) Deferred income taxes............................ 1,384 (7,705) Allowance for funds used during construction..... - (5) Write-off of investment in Carolina Energy Project - 16,052 Change in accounts receivable.................... (8,030) (3,243) Change in inventories............................ (695) (282) Change in other current assets................... (734) (16,685) Change in accounts payable....................... (34,457) (7,576) Change in other current liabilities.............. (11,189) 1,760 Change in deferred amounts....................... 70,005 (27,780) Change in noncurrent liabilities................. (855) 4,810 Other............................................ - (327) ------- ------- Net cash provided by operating activities...... 108,063 21,857 Investing activities: Construction expenditures.......................... (43,184) (65,888) Allowance for equity funds used during construction - 5 Proceeds from (cost of) disposition of property, plant and equipment.............................. (1,830) 369 Purchase of other investments...................... (126) (3,866) ------- -------- Net cash used in investing activities.......... (45,140) (69,380) Financing activities: Redemption of long-term debt....................... (57) (15,010) Short-term borrowings - net........................ (9,872) 90,494 Dividends on common stock.......................... (47,548) (45,010) ------- ------- Net cash (used in) provided by financing activities ................................. (57,477) 30,474 ------- ------ Net increase (decrease) in cash and temporary cash investments ........................... 5,446 (17,049) Cash and temporary cash investments at beginning of period ................................. 986 40,610 ---- ------ Cash and temporary cash investments at end of period .................................. $ 6,432 $ 23,561 ======= ======== 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. 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). The NCE consolidated condensed financial statements reflect the accounting for the Merger as a pooling of interests. The Company's 1997 consolidated condensed statements of income and cash flows include the consolidated financial statements for both PSCo and SPS for the three months ended March 31, 1997 and the six months ended June 30, 1997. Business, Utility Operations and Regulation NCE is a registered holding company under the PUHCA and its utility subsidiaries (PSCo, SPS and Cheyenne) are engaged principally in the generation, purchase, transmission, distribution and sale of electricity and in the purchase, transmission, distribution, sale and transportation of natural gas. Both the Company and its subsidiaries are subject to the regulatory provisions of the PUHCA. The utility subsidiaries are subject to regulation by the FERC and state utility commissions in Colorado, Texas, New Mexico, Wyoming, Kansas and Oklahoma. Over 90% of the Company's revenues are derived from its regulated utility operations. Regulatory Assets and Liabilities The Company's regulated subsidiaries prepare their financial statements in accordance with the provisions of SFAS 71, as amended. SFAS 71 recognizes that accounting for rate regulated enterprises should reflect the relationship of costs and revenues introduced by rate regulation. A regulated utility may defer recognition of a cost (a regulatory asset) or recognize an obligation (a regulatory liability) if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in revenues. 16 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) The following regulatory assets are reflected in the accompanying consolidated condensed balance sheets (in thousands): June 30, 1998 NCE PSCo SPS ------ ------ ----- Income taxes ....................... $154,734 $77,268 $77,997 Nuclear decommissioning costs....... 73,718 73,718 - Employees' postretirement benefits other than pensions .............. 60,192 57,233 2,959 Early retirement costs.............. 3,397 2,215 1,182 Employees' postemployment benefits (Note 4) ......................... 24,213 23,739 - Demand-side management costs........ 40,448 35,764 4,684 Unamortized debt reacquisition costs 34,928 16,780 17,575 Thunder Basin judgment (Note 4)..... 3,716 - 3,716 Other............................... 8,735 1,743 6,992 ------ ------ ------ Total............................. $404,081 $288,460 $115,105 ======== ======== ======== 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 June 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 the Company's operations is no longer subject to the provisions of SFAS 71, as a result of a change in regulation or the effects of competition, the Company's subsidiaries could be required to write-off their regulatory assets, determine any impairment to other assets resulting from deregulation and write-down any impaired assets to their estimated fair value, which could have a material adverse effect on NCE's, PSCo's and SPS's financial position, results of operations 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 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 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 jurisdictional regulatory asset, all unrecoverable 17 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) amounts will be written-off (see Note 4. Regulatory Matters Electric Department Earnings Test and Quality of Service Plan). As of June 30, 1998, SPS has approximately $3.7 million in regulatory assets associated with the Thunder Basin judgment. The judgment amount previously paid by SPS is recoverable from customers, subject to review by various regulatory agencies (see Note 4. Regulatory Matters - Electric and Gas Cost Adjustment Mechanisms). Non-utility Subsidiaries and International Investments The Company's non-utility subsidiaries are principally involved in engineering, design and construction management, non-regulated energy services, including gas and power marketing, the management of real estate and certain life insurance policies, the financing of certain current assets of PSCo and investments in cogeneration facilities, electric wholesale generators and a foreign utility company. The Company's international investments are subject to regulation in the countries in which such investments are made (see Note 2. 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 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 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. 2. Investment in Yorkshire Power (NCE and PSCo) 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 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. The total consideration paid by Yorkshire Power was approximately $2.4 billion (1.5 billion pounds sterling). The acquisition was financed by Yorkshire Power through a combination of approximately 25% equity and 75% debt, including the assumption of the existing debt of Yorkshire Electricity. The funds for the 18 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) acquisition were obtained from PSCo's and AEP's investment in Yorkshire Power of approximately $360 million (220 million pounds sterling) each, with the remainder obtained by Yorkshire Power through the issuance of non-recourse debt. PSCo funded its entire equity investment in Yorkshire Power through $250 million of publicly issued secured medium-term notes with varying maturities and drawings of approximately $110 million on its short-term lines of credit pursuant to its short-term credit agreement with Bank of America, as agent. As approved by the SEC on May 14, 1998, under the PUHCA, 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 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 finance 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. Summarized income statement information for the six months ended June 30, 1998, and from the date of acquisition, April 1, 1997 to June 30, 1997, are presented below (in millions): 1998 1997 ---- ---- Yorkshire Power: Operating revenues....................... $1,167.1 $438.5 -------- ------ Operating income......................... 182.2 52.1 -------- ------ Net income (loss) (1).................... $ (7.9) $ 8.2 ========= ===== NCI's equity in earnings (losses) of Yorkshire Power ....................... $ (4.0) $ 4.1 ======== ===== (1)Includes a penalty, which was applicable to all United Kingdom regional electricity utilities, designed to recognize the effects of the delay in implementation of full competition for the period April 1998 to September 1998 (Yorkshire Power's portion was $8.3 million). 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 six months ended June 30, 1998 and June 30, 1997, of $1.653/pound and $1.634/pound, respectively. 19 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) Based on the above assumptions, shown below is unaudited pro forma financial information for the six months ended June 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............................. $142.7 $112.2 $1.28 $1.08 ===== ===== 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....................... $142.7 $ 98.6 $1.28 $0.95 ====== ====== ===== ===== (1) Based on the weighted average number of common shares outstanding for the period. (2) The six months ended June 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. 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 six months ended June 30, 1998 and 1997 (in millions): PSCo Earnings 1998 1997 ---- ---- Net income............................................... $99.8 $93.5 Pro forma adjustments: NCI's net income....................................... (2.8) (4.8) Interest income from promissory note, net of tax....... 3.3 3.3 ----- ----- Pro forma result......................................... $100.3 $92.0 ====== ===== 20 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 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. 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 21 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 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, $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. Rate Cases PSCo Retail - Gas On June 5, 1996, PSCo filed a retail rate case with the CPUC requesting an annual increase in its jurisdictional gas department revenues of approximately $34 million. In early 1997, the CPUC approved an overall increase of approximately $18 million with an 11.25% return on equity, effective February 1, 1997 and as modified on May 15, 1997. The CPUC disallowed the recovery of certain postemployment benefit costs under SFAS 112 and imputed anticipated merger related savings net of costs related to the gas business (see Note 1. Summary of Significant Accounting Policies). PSCo filed a petition with the Denver District Court appealing the CPUC's decision. A decision from the Denver District Court is expected in the latter half of 1998. 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 incorporates the $1.2 million guaranteed minimum annual credits, discussed above. This case has been set for hearing in October 1998. 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 22 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 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). Cheyenne On May 12, 1997, Cheyenne filed an application with the WPSC for an overall annual increase in retail gas revenues of approximately $1.25 million. On September 23, 1997, the WPSC approved an increase in retail gas revenues of approximately $1.19 million with an 11.71% return on equity, effective October 1, 1997. Electric and Gas Cost Adjustment Mechanisms PSCo During 1994 and 1995, the CPUC conducted several proceedings to review issues related to the ECA. The CPUC opened a docket to review whether the ECA should be maintained in its then present form, altered or eliminated, and on January 8, 1996, combined this docket with the merger docket discussed above. The CPUC decision on the Merger modified and replaced the ECA with an ICA. The ICA, which became effective October 1, 1996, allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders. Management does not believe the cost adjustment mechanism will have a significant impact on the Company's results of operations, financial position or cash flows. The CPUC had a docket to review and prescribe a standardized GCA process to determine the prudence of gas commodity and pipeline delivery service costs incurred by gas utilities. Other issues addressed in this docket included whether the GCA should be maintained in its present form, altered or eliminated. The CPUC issued an order on May 7, 1997, which provides for the current GCA to be maintained and the adoption of certain standardized filing and gas purchase reporting requirements. In early 1998, the CPUC issued another Notice of Proposed Rulemaking seeking comments on various customer notice and reporting requirements related to changes in gas costs. On March 25, 1998, the CPUC decision was issued with no material changes to the GCA. 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 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 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 23 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 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. This appeal is pending. 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. Electric Department Earnings Test and Quality of Service Plan PSCo The CPUC's decision on the Merger implemented an electric department earnings test with the sharing of earnings in excess of an 11% return on equity for the calendar years 1997-2001 as follows: Electric Department Sharing of Excess Earnings Return on Equity Customers Shareholders ---------------- --------- ------------ 11-12% 65% 35% 12-14% 50% 50% 14-15% 35% 65% over 15% 100% 0% The CPUC's decision on the Merger also implemented a QSP which provides for bill credits totaling up to $5 million in year one and increasing to $11 million in year five, if PSCo does not achieve certain performance measures relating to electric reliability, customer complaints and telephone response to inquiries. On October 15, 1997, the CPUC issued an order addressing the implementation of a reward mechanism in the QSP which provides up to $3 million of annual rewards if PSCo achieves certain performance measures relating to electric reliability. 24 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 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 it's accrued obligation will be adequate. During 1998, PSCo has recorded a liability of approximately $5.6 million for the 1998 electric department earnings test. 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. Environmental Site Cleanup As described below, PSCo has been or is currently involved with the clean up of contamination from certain hazardous substances. In all situations, PSCo is pursuing or intends to pursue insurance claims and believes it will recover some portion of these costs through such claims. Additionally, where applicable, PSCo intends to pursue recovery from other Potentially Responsible Parties ("PRPs"). To the extent such costs are not recovered, PSCo currently believes it is probable that such costs will be recovered through the rate regulatory process. To the extent any costs are not recovered through the options listed above, PSCo would be required to recognize an expense for such unrecoverable amounts. Under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the U.S. Environmental Protection Agency ("EPA") identified, and a Phase II environmental assessment revealed, low level, widespread contamination from hazardous substances at the Barter Metals Company ("Barter") properties located in central Denver. For an estimated 30 years, PSCo sold scrap metal and electrical equipment to Barter for reprocessing. PSCo has completed the cleanup of this site at a cost of approximately $9 million and has received responses from the Colorado Department of Public Health and Environment ("CDPHE") indicating that no further action is required related to these properties. On January 3, 1996, in a lawsuit by PSCo against its insurance providers, the Denver District Court entered final judgment in favor of PSCo in the amount of $5.6 million for certain cleanup costs at Barter. Several appeals and cross appeals have been filed by one of the insurance providers and PSCo in the Colorado Court of Appeals. The insurance provider has posted supersedeas bonds in the amount of $9.7 million ($7.7 million attributable to the Barter judgment). On July 10, 1997, the Colorado Court of Appeals overturned the previously awarded $7.7 million judgment on the basis that the jury had not been properly instructed by the Judge regarding a narrow issue associated with 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. In addition, in August 1996, PSCo filed a lawsuit against four PRPs seeking recovery of certain Barter related costs. Settlement has been achieved with two smaller PRP's. On December 16, 1997, the U. S. District Court awarded summary judgment in favor of the remaining PRPs, on the basis PSCo failed to follow CERCLA guidelines in the cleanup. On January 15, 1998, PSCo appealed the summary judgment to the U.S. Court of Appeals. In March 1998, PSCo sold the remaining Barter properties, and the total proceeds were $1.2 million. 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 25 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 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. Two carriers were excluded from this proceeding; subsequently, one carrier received approval to be dismissed on the same basis as the other carriers. In March 1998, PSCo reached a settlement with the remaining carrier. The Company is pursuing the recovery of $3.3 million net costs in the electric department earnings test over a three year period. In addition to these sites, PSCo has identified several other sites where clean up of hazardous substances may be required. While potential liability and settlement costs are still under investigation and negotiation, PSCo believes that the resolution of these matters will not have a material adverse effect on PSCo's financial position, results of operations or cash flows. PSCo fully intends to pursue the recovery of all significant costs incurred for such projects through insurance claims and/or the rate regulatory process. Other Environmental Matters Under the Clean Air Act Amendments of 1990 ("CAAA"), coal fueled power plants are required to reduce SO2 and NOx emissions to specified levels through a phased approach. PSCo's and SPS's facilities must comply with the Phase II requirements, which will be effective in the year 2000. Currently, these regulations permit compliance with SO2 emission limitations by using SO2 allowances allocated to plants by the EPA, using allowances generated by reducing emissions at existing plants and by using allowances purchased from other companies. The Company expects to meet the Phase II emission standards placed on SO2 through the combination of: a) use of low sulfur coal, b) the operation of air quality control equipment on certain generation facilities, and c) allowances issued by the EPA and purchased from other companies. PSCo and SPS will be required to modify certain boilers by the year 2000 to reduce the NOx emissions in order to comply with Phase II requirements. The estimated Phase II costs for future plant modifications to meet NOx requirements is approximately $14.4 million for PSCo's Cherokee Unit 1 and 2 and Arapahoe Unit 3. SPS installed two new gas turbines at its Cunningham Station in 1997. The two gas turbine units have undergone performance testing to meet the requirements of the air quality permit. The test results have indicated that the units are in compliance. Data is now being compiled into a formalized test report to the State of New Mexico. SPS is working with the vendor and the New Mexico Environmental Department to ensure compliance with all permit limits. PSCo has announced its intention to spend approximately $211 million on its Denver and Boulder Metro area coal-fueled power plants to further reduce such emissions below the required regulatory levels discussed above, but will only do so if the following three conditions are met: 1) the Colorado General Assembly and the CPUC approve recovery of these costs, 2) PSCo obtains flexibility in operating the plants and 3) PSCo is assured the emission reduction plan is sufficient to meet future state requirements for 15 years. Legislation was passed and signed into law during the second quarter of 1998. 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. The Company is completing the installation of the emission control equipment. 26 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 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. Resolution of this matter may require installation of emission control equipment. Management does not believe that this potential liability, the future impact of this litigation on plant operations, or any related cost will have a material adverse impact on PSCo's financial position, results of operations or cash flows. Pepsi Center Hazardous substances resulting from manufactured gas plant operations have been identified at the site of the Pepsi Center, a sports arena under construction in lower downtown Denver. A settlement, in principle, with the site owners has been achieved which is not expected to 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 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. Employee Matters Several employee lawsuits have been filed against PSCo involving alleged discrimination or workers' compensation issues which have arisen during the normal course of business. Also, lawsuits have been filed against 27 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) PSCo alleging breach of certain fiduciary duties to employees. The plaintiffs lawsuits are in various stages of litigation and/or appeal (s), including settlement discussions, with the appropriate state and federal judicial courts. PSCo intends to contest, or is actively contesting, all such lawsuits, and believes the ultimate outcome will not have a material adverse impact on PSCo's financial position, results of operations or cash flows. During 1996, ninety former Information Technology and Systems ("IT&S") employees filed a lawsuit against the Company. The complaint alleged that PSCo unfairly amended its severance plan in connection with a restructuring in late 1994 to exclude the IT&S function/positions that were outsourced to a subsidiary of IBM, effective February 1, 1995. On June 16, 1997, the Denver District Court issued a decision in favor of the former IT&S employees and awarded approximately $1.6 million in severance costs and, in a judgment on October 10, 1997, the former IT&S employees were awarded interest and attorney fees as well, making the total judgment against PSCo $2.1 million. An additional case with 153 former IT&S employees was filed asserting identical claims. Settlement on both cases was achieved in early 1998. During 1997, PSCo accrued related costs, including estimated interest and attorney fees. In early 1998, two additional lawsuits, asserting identical claims, were filed on behalf of a total of 26 former IT&S employees, which were settled in May 1998. Year 2000 Costs The Company has further refined its initial estimates and now expects to incur costs of approximately $30 million through 1999 to modify its computer software, hardware and other automated systems used in operations enabling proper data processing relating to the year 2000 and beyond. The majority of these costs will be incurred by or allocated to the Company's operating utilities, primarily PSCo and SPS. The Company continues to evaluate appropriate courses of corrective action, including the replacement of certain systems. A significant portion of these costs will represent the redeployment of existing information technology resources. If such modifications and conversions are not completed on a timely basis, the year 2000 problem may have a material impact on the operations of the Company. Management does not anticipate these activities will have a material adverse impact on the financial position, results of operations or cash flows of the Company or its subsidiaries. 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 obligation under the Subordinate 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 guarantee by the Company of the trust obligations under the preferred securities. 28 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 June 30, 1998 and December 31, 1997 and the results of operations for the three and six months ended June 30, 1998 and 1997 and cash flows for the six months ended June 30, 1998 and 1997. The 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 six months ended June 30, 1998 should not be taken as an indication of earnings for all or any part of the balance of the year. 29 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 June 30, 1998, and the related condensed statements of income for the three and six-month periods ended June 30, 1998 and 1997 and the condensed statements of cash flows for the six-month periods ended June 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 (not presented herein), and, in our report dated February 13, 1998, we expressed an unqualified opinion on that statement. 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. ARTHUR ANDERSEN LLP Denver, Colorado, August 10, 1998 30 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 June 30, 1998, and the related consolidated condensed statements of income for the three and six-month periods ended June 30, 1998 and 1997 and the consolidated condensed statements of cash flows for the six-month periods ended June 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 Public Service Company of Colorado and subsidiaries as of December 31, 1997 (not presented herein), and, in our report dated February 13, 1998, we expressed an unqualified opinion on that statement. 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. ARTHUR ANDERSEN LLP Denver, Colorado, August 10, 1998 31 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 June 30, 1998, and the related condensed statements of income for the three and six-month periods ended June 30, 1998 and 1997 and the condensed statements of cash flows for the six-month periods ended June 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 of Southwestern Public Service Company as of December 31, 1997 (not presented herein), and, in our report dated February 13, 1998, we expressed an unqualified opinion on that statement. 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. ARTHUR ANDERSEN LLP Denver, Colorado, August 10, 1998 32 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 June 30, 1998 Compared to the Three Months Ended June 30, 1997 Earnings Earnings per share were $0.50 for the second quarter of 1998 as compared to $0.33 for the second quarter of 1997. The higher earnings were primarily attributable to strong retail and wholesale electric sales. Customer growth and hotter than normal weather contributed to the increased sales during the period, with a significant increase in the irrigation load in Texas and New Mexico. Non-recurring items impacted the Company's quarterly earnings in both 1998 and 1997. In the second quarter of 1998, Yorkshire Power recognized an impairment of its investment in a U.K. telecommunications company. This investment impairment, in conjunction with the recognition of a non-recurring positive tax adjustment at Yorkshire Power, reduced earnings approximately 15 cents per share (see Note 2. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). Earnings for the second quarter of 1997 were reduced approximately 17 cents per share due to the recognition of merger costs and the write-off of a subsidiary investment in a waste-to-energy cogeneration project. Electric Operations The following table details the change in electric operating revenues and energy costs for the second quarter of 1998 as compared to the same period in 1997. Increase (Decrease) ------------------- (Thousands of Dollars) Electric operating revenues: Retail............................................... $ 19,920 Wholesale............................................ 32,542 Non-regulated power marketing........................ 14,198 Other (including unbilled revenues and provision for rate refunds) ..................................... (1,560) Total revenues...................................... 65,100 Fuel used in generation............................... 6,102 Purchased power....................................... 30,164 ------- Net increase in electric margin..................... $28,834 ======= The following table compares electric Kwh sales by major customer classes for the second quarter of 1998 and 1997. Millions of Kwh Sales --------------------- 1998 1997 % Change * ---- ---- ---------- Residential ............................... 2,215 2,116 4.7% Commercial and Industrial ................ 6,686 6,534 2.3 Public Authority .......................... 197 180 9.3 ----- ----- Total Retail............................. 9,098 8,830 3.0 Wholesale.................................. 3,698 2,671 38.5 Non-regulated power marketing.............. 781 213 ** ----- ----- Total ..................................... 13,577 11,714 15.9 ====== ====== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful 33 Electric margin increased in the second quarter of 1998, when compared to the second quarter of 1997, due primarily to a 3.0% increase in total retail sales and a 15.9% increase in total sales resulting from customer growth and hotter than normal weather. PSCo's higher non-firm wholesale electric sales contributed to increased revenues, but had little impact on electric margin. SPS's higher retail and wholesale sales were particularly impacted by the hotter than normal weather during the second quarter of 1998 and a resulting increase in the irrigation load in Texas and New Mexico. 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). 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 second quarter of 1998 or 1997 (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). Fuel used in generation expense increased approximately $6.1 million during the second quarter of 1998 as compared to the same quarter in 1997 due primarily to increased generation levels. Purchased power expense increased $30.2 million during the second quarter of 1998, as compared to the same quarter in 1997, primarily due to an increase in power marketing activities at the Company's non-regulated subsidiaries ($14.0 million) and purchases to meet wholesale requirements and other customer demands at PSCo ($12.4 million). Purchased power at SPS increased $4.2 million due to a 78% increase in wholesale purchases, higher spot market prices and increased purchased capacity costs. 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 second quarter of 1998 as compared to the same period in 1997. Increase (Decrease) ------------------- (Thousands of Dollars) Revenues from gas sales (including unbilled revenues). $ 6,630 Gas purchased for resale.............................. 9,292 ------- Net decrease in gas sales margin..................... $(2,662) ======== The following table compares gas Dth deliveries by major customer classes for the second quarter of 1998 and 1997. Millions of Dth Deliveries -------------------------- 1998 1997 % Change * ---- ---- ---------- Residential................................ 18.6 18.5 0.4% Commercial................................. 9.4 9.8 (4.4) Non-regulated gas marketing................ 15.5 15.0 3.2 ----- ---- Total Sales.............................. 43.5 43.3 0.3 Transportation............................. 27.3 22.3 22.4 ----- ---- Total.................................... 70.8 65.6 7.8 ===== ==== * Percentages are calculated using unrounded amounts Gas sales margin decreased during the second quarter of 1998, when compared to the second quarter of 1997, primarily due to a $5.2 million decrease in PSCo's unbilled revenues. Unbilled revenues consist of gas that has been delivered to customers who's meters have not been read and therefore not billed. Retail gas sales increased 0.3% 34 overall during the second quarter of 1998 as compared with the prior year primarily as a result of non-regulated sales. PSCo's gas sales decreased 1.6% as a result of warmer weather, despite a 2.7% increase in customers. Gas transportation, gathering and processing revenues increased approximately $0.7 million during the second quarter of 1998, when compared to the second quarter of 1997, primarily due to higher deliveries. The volume of transported gas increased approximately 22% although the average price decreased approximately 12%. The increase in transport deliveries is a result of commercial customers shifting to transport customers. 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 second 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 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 second quarter of 1998, along with an increase in the quantity of gas purchased, contributed to the increase in cost of gas purchased for resale. Non-Fuel Operating Expenses and Other Income and Deductions Other operating and maintenance expenses increased $13.8 million during the second quarter of 1998, as compared to the same period in 1997, primarily due to higher operating costs from non-regulated operations ($13.2 million). Depreciation and amortization expense increased $6.7 million primarily due to an increase in electric property, plant and equipment at PSCo and SPS. Other income and deductions increased approximately $22.5 million during the second quarter of 1998, when compared to the second quarter of 1997, primarily due to 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), a decrease in merger expenses and accruals for estimated legal and other costs associated with various employee lawsuits in 1997 offset by lower earnings at Yorkshire Power as discussed above. Interest charges and preferred dividends of subsidiaries increased $1.8 million during the second quarter of 1998, when compared to the same quarter in 1997, primarily due to interest on borrowings to finance capital expenditures and dividends on the PSCo Trust Originated Preferred Securities. Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997 Earnings Earnings per share were $1.28 for the first six months of 1998 as compared to $1.08 for the first six 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 quarter of 1998, the absence of merger costs in 1998, and a the write-off of the Carolina Energy Project in 1997. Earnings for the six months ended June 30, 1998 also included the investment impairment and a non-recurring tax adjustment by Yorkshire Power, which reduced earnings by approximately 15 cents per share. 35 Electric Operations The following table details the change in electric operating revenues and energy costs for the first six months of 1998 as compared to the same period in 1997. Increase (Decrease) ------------------- (Thousands of Dollars) Electric operating revenues: Retail............................................... $24,140 Wholesale............................................ 33,014 Non-regulated power marketing........................ 23,913 Other (including unbilled revenues and provision for rate refunds) ..................................... (4,336) Total revenues...................................... 76,731 Fuel used in generation............................... (1,859) Purchased power....................................... 51,195 ------- Net increase in electric margin..................... $27,395 ======= The following table compares electric Kwh sales by major customer classes for the first six months of 1998 and 1997. Millions of Kwh Sales --------------------- 1998 1997 % Change * ---- ---- ---------- Residential ............................... 4,896 4,736 3.4% Commercial and Industrial ................ 13,277 13,036 1.8 Public Authority .......................... 378 359 5.1 ----- ----- Total Retail............................. 18,551 18,131 2.3 Wholesale.................................. 6,434 4,962 29.7 Non-regulated power marketing.............. 1,603 579 ** ----- ----- Total ..................................... 26,588 23,672 12.3 ====== ====== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful Electric margin increased in the first six months of 1998, when compared to the prior year primarily due to higher retail sales resulting from hotter than normal weather during the second quarter 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). This increase was offset, in part, by recognition of an estimated customer refund obligation (approximately $5.6 million in the first six months 1998, while no obligation was recorded in the first six months 1997) in connection with the earnings sharing in excess of 11% return on equity which resulted for the settlement of the Merger proceedings in Colorado (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). Higher wholesale electric 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 six months of 1998 or 1997 (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). Fuel used in generation expense decreased approximately $1.9 million during the first six months of 1998 as compared to the same period in 1997. Lower per unit cost of coal and natural gas were offset by increased generation levels. Purchased power expense increased during the first six months of 1998, as compared to the same period in 1997, primarily due to an increase in power marketing activities at the Company's non-regulated subsidiaries. 36 Gas Operations The following table details the change in revenues from gas sales and gas purchased for resale for the first six months of 1998 as compared to the same period in 1997. Increase (Decrease) ------------------- (Thousands of Dollars) Revenues from gas sales (including unbilled revenues). $33,436 Gas purchased for resale.............................. 27,215 ------- Net increase in gas sales margin..................... $ 6,221 ======= The following table compares gas Dth deliveries by major customer classes for the first six months of 1998 and 1997. Millions of Dth Deliveries -------------------------- 1998 1997 % Change * ---- ---- ---------- Residential................................ 58.5 58.1 0.8% Commercial................................. 28.7 31.2 (7.9) Non-regulated gas marketing................ 31.9 30.6 4.0 ----- ----- Total Sales.............................. 119.1 119.9 (0.7) Transportation............................. 54.9 47.5 15.6 ----- ----- Total.................................... 174.0 167.4 3.9 ===== ===== * Percentages are calculated using unrounded amounts Gas sales margin increased during the first six months of 1998, when compared to the first six 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 rate case (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). Gas transportation, gathering and processing revenues increased $2.0 million during the first six months of 1998, when compared to the first six months of 1997, primarily due to higher volume of gas transported offset, in part, by a decrease in the average price. The volume of transported gas increased approximately 16% although the average per unit cost decreased approximately 3%. The increase in transport deliveries is a result of commercial customers shifting to transport customers. 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 six months of 1998, as compared to the first six 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 six months of 1998, along with an increase in the quantity of gas purchased, contributed to the increase in cost of gas purchased for resale. Non-Fuel Operating Expenses and Other Income and Deductions Other operating and maintenance expenses increased $26.4 million during the first six months of 1998, as compared to the same period in 1997, primarily due to higher operating costs from non-regulated operations ($23.4 million). Other income and deductions increased approximately $28.7 million during the first six months of 1998, when compared to the first six months of 1997, primarily due to the write-off of the investment in the Carolina 37 Energy Project in 1997 ($16.1 million), a decrease in merger expenses ($13.7 million) offset, in part, by lower earnings at Yorkshire Power as discussed above. Interest charges and preferred dividends of subsidiaries increased $4.3 million during the first six months of 1998, when compared to the same quarter 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), and dividends on the PSCo Trust Originated Preferred Securities. Commitments and Contingencies Issues relating to regulatory matters, environmental issues, employee lawsuits and Year 2000 costs 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. Based on a preliminary analysis, the Company expects to incur costs of approximately $30 million over the next two years to modify its computer software, hardware and other automated systems used in operations enabling proper data processing relating to the year 2000 and beyond. The majority of these costs will be incurred by or allocated to the Company's operating utilities, primarily PSCo and SPS. The Company continues to evaluate appropriate courses of corrective action, including the replacement of certain systems. A significant portion of these costs will represent the redeployment of existing information technology resources. If such modifications and conversions are not completed on a timely basis, the year 2000 problem may have a material impact on the operations of the Company. Management does not anticipate these activities will have a material adverse impact on the financial position, results of operations or cash flows of the Company or its subsidiaries. Common Stock Dividend The Board of Directors approved a $0.58 per share dividend payable to shareholders of the Company for the second quarter of 1998 and $1.16 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 - Six Months Ended June 30 1998 1997 Increase ---- ---- -------- Net cash provided by operating activities (in millions)................ $362.8 $136.4 $226.4 Cash provided by operating activities increased during the first six months of 1998, when compared to the first six months of 1997, primarily due to the decrease in payments to gas suppliers resulting from lower gas costs during the first six months of 1998 as compared to the first six 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. Also contributing to the increase were higher electric sales at SPS and PSCo resulting from hotter than normal weather. 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. 1998 1997 Decrease ---- ---- -------- Net cash used in investing activities (in millions) .............. $(270.8) $(569.1) $(298.3) 38 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 a company in 1998. 1998 1997 Decrease ---- ---- -------- Net cash provided by (used in) financing activities (in millions) .............. $(57.0) $425.2 $(482.2) 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. The debt issuances in 1997 were offset by proceeds from PSCo's issuance of $250 million of long-term debt in April 1998 which was used to repay short-term and other debt. In May 1998, PSCo 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 (see Note 6. Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Soley Subordinated Debentures in Item 1. FINANCIAL STATEMENTS). Financing Activities 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 will be 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 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. 39 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. 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. 40 PSCo's Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended June 30, 1998 Compared to the Three Months Ended June 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 six months ended June 30, 1997 and statement of cash flows for the six months ended June 30, 1997, reflect the results of operations of 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 increased approximately 3% to $28.5 million for the second quarter of 1998, as compared to $27.7 million for the second quarter of 1997. The increase was primarily attributable to the absence of accruals for estimated legal costs associated with various employee lawsuits recognized in 1997, higher merger and business integration costs in 1997 and an increase in the electric margin resulting from an increase in sales in 1998. Electric Operations The following table details the change in electric operating revenues and energy costs for the three months ended June 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....................................... $10,804 $ (8,936) $ 1,868 Wholesale - regulated........................ 10,197 - 10,197 Non-regulated power marketing................ - (3,085) (3,085) Other (including unbilled revenues and provision for rate refunds) ............... 722 4 726 --- ---- --- Total revenues.............................. 21,723 (12,017) 9,706 Fuel used in generation....................... 2,072 - 2,072 Purchased power............................... 12,399 (9,630) 2,769 ------- --------- ------- Net increase (decrease) in electric margin.. $ 7,252 $ (2,387) $ 4,865 ======= ========= ======= 41 The following table compares electric Kwh sales by major customer classes for the three months ended June 30, 1998 and 1997. Millions of Kwh Sales % Change * --------------------- ---------- 1998 1997 Consolidated PSCo Only ---- ---- --------------------- Residential ..................... 1,501 1,509 (0.6)% 2.7% Commercial and Industrial ...... 3,721 3,844 (3.2) 1.0 Public Authority ................ 39 41 (4.2) (2.2) ------ ------ Total Retail................... 5,261 5,394 (2.4) 1.4 Wholesale - Regulated............ 1,409 1,028 37.1 37.1 Non-regulated Power Marketing.... - 212 ** - ------ ------ Total............................ 6,670 6,634 0.6 7.3 ====== ====== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful Electric margin increased in the second quarter of 1998, when compared to the second quarter of 1997, primarily due to an overall increase in PSCo's retail sales of 1.4% resulting primarily from customer growth of approximately 1.8%. Higher wholesale electric 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 second quarter of 1998 or 1997 (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). Fuel used in generation expense increased approximately $2.1 million during the second 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 $2.8 million during the second quarter of 1998, as compared to the same quarter in 1997, primarily due to purchases to meet increased wholesale requirements and other customer demands. Gas Operations The following table details the change in revenues from gas sales and gas purchased for resale for the second 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)............................ $ 3,480 $(41,655) $(38,175) Gas purchased for resale........................ 7,189 (38,236) (31,047) ------ -------- -------- Net decrease in gas sales margin.............. $(3,709) $(3,419) $ (7,128) ======= ======= ======== 42 The following table compares gas Dth deliveries by major customer classes for the second quarter of 1998 and 1997. Millions of Dth Deliveries % Change * -------------------------- ---------- 1998 1997 Consolidated PSCo Only ---- ---- ------------ ---------- Residential.................. 18.0 18.5 (2.7)% 0.3% Commercial................... 8.9 9.8 (9.9) (5.3) Non-regulated gas marketing.. - 15.1 ** - ---- ---- Total sales................ 26.9 43.4 (38.0) (1.6) Transportation, gathering and processing ................ 22.8 22.3 1.9 23.1 ---- ---- Total...................... 49.7 65.7 (24.5) 8.4 ==== ===== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful Gas sales margin decreased during the second quarter of 1998, when compared to the second quarter of 1997, primarily due to a $5.2 million decrease in PSCo's unbilled revenues, which is gas delivered to customers that has not been billed. Gas sales decreased 1.6% as a result of warmer weather during the second quarter of 1998, despite a 2.7% 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 second 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 lower per-unit average cost of gas during the second quarter of 1998, along with a decrease in the quantity of gas purchased, contributed to the decrease in cost of gas purchased for resale. Gas transportation, gathering and processing revenues increase $0.5 million during the second quarter of 1998, compared to the second 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 $4.6 million during the second quarter of 1998, as compared to the second quarter of 1997, primarily due to the depreciation of property additions and the higher amortization of software costs. Income taxes increased approximately $1.9 million during the second quarter of 1998, as compared to the second quarter of 1997, primarily due to higher pre-tax income. Other income and deductions increased $9.9 million primarily due to the accruals for estimated legal and other costs associated with various employee lawsuits and the recognition of merger and business integration costs in 1997. The decrease in expenditures was offset, in part, by the recognition of equity earnings associated with the Company's investment in Yorkshire Power in the second quarter of 1997. On March 31, 1998, NCI and its subsidiaries 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. Interest charges decreased slightly during the second quarter of 1998, as compared to the second quarter of 1997. The increase in allowance for funds used during construction were offset, in part, by dividends on the 43 PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo which were issued in May 1998. See Note 6. PSCo Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debentures in Item 1. FINANCIAL STATEMENTS. Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997 Earnings Available for Common Stock Earnings increased approximately 8% to $94.5 million for the first six months of 1998, as compared to $87.6 million for the first six months of 1997. The increase was primarily attributable to accruals for estimated legal costs associated with various employee lawsuits recognized in 1997 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 six months ended June 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...................................... $18,760 $(18,548) $ 212 Wholesale - regulated....................... 21,916 - 21,916 Non-regulated power marketing............... - (8,733) (8,733) Other (including unbilled revenues and provision for rate refunds) .............. (2,205) 99 (2,106) ------ --- ------ Total revenues............................. 38,471 (27,182) 11,289 Fuel used in generation...................... 8,440 - 8,440 Purchased power.............................. 26,514 (22,314) 4,200 ------- --------- ------- Net increase (decrease) in electric margin $ 3,517 $ (4,868) $(1,351) ======= ======== ======= The following table compares electric Kwh sales by major customer classes for the six months ended June 30, 1998 and 1997. Millions of Kwh Sales % Change * --------------------- ---------- 1998 1997 Consolidated PSCo Only ---- ---- ------------ --------- Residential ..................... 3,356 3,376 (0.6)% 2.7% Commercial and Industrial ...... 7,476 7,686 (2.7) 1.4 Public Authority ................ 87 89 (2.8) (0.6) ------ ------ Total Retail................... 10,919 11,151 (2.1) 1.8 Wholesale - Regulated............ 2,903 1,878 54.5 54.5 Non-regulated Power Marketing.... - 579 ** - ------ ------ Total............................ 13,822 13,608 1.6 9.7 ====== ====== * 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 six months of 1998, when compared to the first six months of 1997, primarily due to an overall increase in PSCo's retail sales of 1.8% resulting from customer growth of approximately 1.8%. The increase was offset, in part, by the recognition of an estimated customer refund obligation (approximately $5.6 million in the first six months of 1998 while no obligation was recognized in the first six months of 1997) in connection with the earnings sharing in excess of 11% return on equity which resulted from the settlement of the Merger proceedings in Colorado 44 (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). Higher wholesale electric 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 six months of 1998 or 1997 (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). Fuel used in generation expense increased approximately $8.4 million during the first six 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 $4.2 million during the first six months of 1998, as compared to the same period in 1997, primarily due to purchases to meet increased wholesale requirements and other customer demands. Gas Operations The following table details the change in revenues from gas sales and gas purchased for resale for the first six 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)...................... $32,240 $(97,710) $(65,470) Gas purchased for resale........................ 29,114 (90,669) ( 61,555) ------ -------- -------- Net increase (decrease) in gas sales margin... $3,126 $(7,041) $(3,915) ====== ======= ======== The following table compares gas Dth deliveries by major customer classes for the first six months of 1998 and 1997. Millions of Dth Deliveries % Change * -------------------------- ---------- 1998 1997 Consolidated PSCo Only ---- ---- ------------ --------- Residential................... 56.9 58.1 (2.1)% 0.7% Commercial.................... 27.3 31.2 (12.5) (8.8) Non-regulated gas marketing... - 30.6 ** - ------ -------- Total sales................. 84.2 119.9 (29.8) (2.6) Transportation, gathering and processing ................. 46.0 47.5 (3.1) 18.0 ---- ---- ---- ---- Total....................... 130.2 167.4 (22.3) 3.8 ======= ======== * 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 six months of 1998, when compared to the first six 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 rate case. This increase was offset, in part, by a 2.6% decrease in PSCo's sales which resulted from warmer weather during the first six months of 1998 despite a 2.8% increase in customers. Gas transportation, gathering and processing revenues increased approximately $1.7 million during the first six months of 1998, when compared to the first six months of 1997, primarily due to higher transportation 45 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. 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 six months of 1998, as compared to the first six 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 lower per-unit average cost of gas during the first six months of 1998, along with a decrease in the quantity of gas purchased, contributed to the decrease in cost of gas purchased for resale. Non-Fuel Operating Expenses and Other Income and Deductions Other operating and maintenance expenses decreased approximately $3.2 million primarily due to lower labor and employee benefit costs and other general cost reductions in connection with the Merger. Depreciation and amortization expense increased $4.6 million in the first six 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. Taxes other than income taxes decreased approximately $2.8 million during the first six months of 1998, as compared to the first six months of 1997. Excluding the effects of the sale of Cheyenne, WGI, e prime and Natural Fuels taxes other than income taxes decreased approximately $1.8 million primarily due to lower property tax accruals. Income taxes increased approximately $3.5 million during the first six months of 1998, as compared to the first six months of 1997, primarily due to higher pre-tax income. Other income and deductions increased approximately $13.3 million during the first six months of 1998, when compared to the first six months of 1997, primarily due to the recognition of merger and business integration costs in 1997 and accruals for estimated legal and other costs associated with various employee lawsuits in 1997. The recognition of equity earnings in Yorkshire Power ($3.4 million) during the first quarter of 1998 offset, in part, equity earnings of Yorkshire Power during the second quarter of 1997 ($4.1 million). 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. Interest charges increased slightly during the first six months of 1998, as compared to the first six months of 1997. Dividends on PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo which were issued in May 1998 (See Note 6. Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debentures in Item 1. FINANCIAL STATEMENTS) were offset, in part, by allowance for funds used during construction. Commitments and Contingencies See Note 5. Commitments and Contingencies in Item 1. FINANCIAL STATEMENTS. 46 Liquidity and Capital Resources Cash Flows - Six Months Ended June 30 1998 1997 Increase ---- ---- -------- Net cash provided by operating activities (in millions)............... $221.8 $ 120.4 $101.4 Cash provided by operating activities increased during the first six months of 1998, when compared to the first six months of 1997, primarily due to the decrease in payments to gas suppliers resulting from lower gas costs during the first six months of 1998 as compared to the first six 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. 1998 1997 Decrease ---- ---- -------- Net cash used in investing activities (in millions)............... $(207.9) $(499.7) $291.8 Cash used in investing activities decreased during the first six months of 1998, when compared to the first six 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 (used in) financing activities (in millions)................. $(11.1) $388.9 $(400.0) Cash provided by financing activities decreased during the first six months of 1998, when compared to the first six 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. 47 SPS's Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended June 30, 1997 Compared to the Three Months Ended June 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 six months ended June 30, 1997 and the statement of cash flows for the six months ended June 30, 1997 reflect the results of operations of Quixx and UE. Earnings Available for Common Stock Earnings available for common stock increased $30.5 million during the second quarter of 1998 compared to the same quarter in 1997. Operating income increased primarily due to a 16.6% increase in electric sales and lower operating and maintenance expenses. The 1997 write-off of the investment in the Carolina Energy Project and lower merger related costs also favorably impacted net income. 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 June 30, 1998, as compared to the same period in 1997 (thousands of dollars). Increase (Decrease) ------------------- Electric operating revenues: Retail.............................. $ 9,069 Wholesale........................... 22,346 Other (including unbilled revenues). (1,839) ------- Total revenues.................... 29,576 Fuel used in generation.............. 4,029 Purchased power...................... 4,155 ------- Net increase in electric margin... $21,392 ======= The following table compares electric Kwh sales by major customer classes for the three months ended June 30, 1998 and 1997. Millions of Kwh Sales --------------------- 1998 1997 % Change* ---------------------- --------- Residential ............ 667 607 9.9% Commercial ............ 712 682 4.4 Industrial ............ 2,098 2,008 4.5 Public Authority ....... 156 139 12.7 ----- ----- Total Retail.......... 3,633 3,436 5.7 Wholesale............... 2,289 1,643 39.3 ----- ----- Total................... 5,922 5,079 16.6 ===== ===== * Percentages are calculated using unrounded amounts. 48 Electric operating revenues increased $29.6 million or 12.6% during the second quarter in 1998, when compared to the same period in 1997, primarily due to higher retail and wholesale electric sales offset, in part by $1.1 million of merger savings passed on to customers. The hotter than normal weather contributed to the increased sales, with a significant increase in the irrigation load in Texas and New Mexico. Other electric operating revenues decreased $1.8 million primarily due to the recognition in 1997 of higher deferred fuel revenues related to the recovery of the Texas jurisdictional portion of the Thunder Basin judgment offset, in part, by $7.7 million of 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, $100,000 in Oklahoma, $10,000 in Kansas and $1.5 million to wholesale customers. Fuel used in generation expense increased $4.0 million or 3.4% during the second quarter of 1998, when compared to the same period in 1997, primarily due to increased generation levels to serve retail and wholesale customers. This increase was mitigated, in part, by the recognition of the Thunder Basin judgment costs in 1997. Lower coal expense for the quarter was offset by higher gas expense. 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 for 1998 and 1997 were comparable. Cost of natural gas used in generation increased due to a 52% increase in generation from gas fired plants 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 second quarter of 1998, when compared to the second quarter of 1997, had little impact on net income. Purchased power increased $4.2 million during the second quarter of 1998, when compared to the same period in 1997, due to a 78% increase in wholesale purchases, higher spot market prices and increased purchased capacity costs. 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. Other Operating Revenues Other operating revenues decreased $8.8 million during the second 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 $12.5 million or 26.3% during the second quarter of 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 $6.0 million, primarily due to lower pension and benefit costs. Income taxes increased $18.0 million during the second quarter of 1998, 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 second quarter was 37.1% in 1998 and 36.8% in 1997. Other Income and Deductions Other income and deductions increased $23.4 million during the second quarter of 1998, as compared to the same period in 1997, primarily due to the 1997 write-off of the investment in the Carolina Energy Project 49 ($16.1 million), the absence of merger and business integration expenses in 1998 and higher interest income in 1998 related to the note receivable from NC Enterprises for the sale of Quixx and UE. Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997 Earnings Available for Common Stock Earnings available for common stock were $55.1 million and $24.6 million during the first six months of 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 net income. 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 six months ended June 30, 1998 as compared to the same period in 1997 (thousands of dollars). Increase (Decrease) ------------------- Electric operating revenues: Retail.............................. $ 5,185 Wholesale........................... 11,098 Other (including unbilled revenues). (1,470) -------- Total revenues.................... 14,813 Fuel used in generation.............. (10,299) Purchased power...................... 1,589 ------- Net increase in electric margin... $23,523 ======= The following table compares electric Kwh sales by major customer classes for the six months ended June 30, 1998 and 1997. Millions of Kwh Sales --------------------- 1998 1997 % Change* ----- ---- --------- Residential ............ 1,431 1,360 5.2% Commercial ............ 1,375 1,364 0.8 Industrial ............ 4,112 3,986 3.2 Public Authority ....... 289 270 7.0 ----- ----- Total Retail.......... 7,207 6,980 3.2 Wholesale............... 3,532 3,084 14.5 ----- ----- Total................... 10,739 10,064 6.7 ====== ====== * Percentages are calculated using unrounded amounts. Electric operating revenues increased $14.8 million or 3.3% during the first six months of 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 quarter of 1998 with a significant increase in the irrigation load in Texas and New Mexico. The decrease in other electric operating revenues was primarily due to the recognition in 1997 of higher deferred fuel revenues related to the recovery of the Texas jurisdictional portion of the Thunder Basin judgment offset, in part, by $7.7 million of additional revenue recognized in 1998 from the resolution of a 1985 FERC rate case. Under the various state 50 regulatory approvals, SPS is required to provide credits to retail customers over five years for one-half of the measured non-fuel operation and maintenance expense savings associated with the Merger. SPS will provide a guaranteed minimum annual savings to retail customers of $3.0 million in Texas, $1.2 million in New Mexico, $100,000 in Oklahoma, $10,000 in Kansas and $1.5 million to wholesale customers. Fuel used in generation expense decreased $10.3 million or 4.6% during the first six months of 1998, when compared to the same period in 1997, primarily due to lower prices of coal and natural gas. The decrease in coal costs was 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 for 1998 and 1997 were comparable. Cost of natural gas used in generation increased 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 first six months of 1998, when compared to the first six months of 1997, had little impact on net income. Purchased power increased $1.6 million or 19.5% during the first six months of 1998, when compared to the same period in 1997, primarily due to an increase in spot market prices and higher purchased capacity costs. 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. Other Operating Revenues Other operating revenues decreased $15.6 million during the first six months 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 $15.1 million or 17.9% during the first six months of 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 $4.2 million, primarily due to lower pension and benefit costs. Income taxes increased $18.9 million during the first six months of 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 first six months was 37.4% in 1998 and 36.2% in 1997. Other Income and Deductions Other income and deductions increased $27.0 million during the first six months of 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 and higher interest income in 1998 related to the note receivable from NC Enterprises for the sale of Quixx and UE. 51 PART II - OTHER INFORMATION Item 1. Legal Proceedings Part 1. See Note 5. Commitments and Contingencies in Item 1, Part 1. Item 4. Submission of Matters to a Vote of Security Holders (a) The 1998 Annual Meeting of Shareholders of the Company was held on May 12, 1998. (b) Six matters were voted upon at the above meeting: 1) the election of five class I directors; 2) the approval of the New Century Energies, Inc. Omnibus Incentive Plan; 3) the approval of the New Century Energies, Inc. Outside Directors' Compensation Plan; 4) the appointment of Arthur Andersen LLP as the Company's independent public accountants for the 1998 calendar year; 5) a shareholder proposal to provide for cumulative voting in the election of directors, and 6) a shareholder proposal to provide for the elimination of a classified Board of Directors. With respect to the election of directors, the votes were as follows: Wayne H. Brunetti 95,410,211 shares for 2,324,750 shares withheld C. Coney Burgess 95,693,535 shares for 2,041,426 shares withheld Danny H. Conklin 95,752,783 shares for 1,982,178 shares withheld Gayle L. Greer 95,629,565 shares for 2,105,396 shares withheld A. Barry Hirschfeld 95,660,670 shares for 2,074,291 shares withheld With respect to the adoption of the New Century Energies, Inc. Omnibus Incentive Plan, the vote was: 62,621,872 shares for; 31,757,730 shares against; 3,355,359 shares abstain. The proposal and plan was approved. With respect to the adoption of the New Century Energies, Inc. Outside Directors' Compensation Plan, the vote was: 85,659,804 shares for; 9,177,983 shares against; 2,897,174 shares abstain. The proposal and plan was approved. With respect to the appointment of Arthur Andersen LLP as the Company's independent public accountants, the vote was: 94,951,892 shares for; 1,618,683 shares against; 1,164,386 shares abstain. The proposal passed. With respect to the shareholder proposal regarding cumulative voting, the vote was: 28,147,497 shares for; 52,971,870 shares against; 4,044,414 shares abstain. The proposal did not pass. With respect to the shareholder proposal regarding the elimination of a classified Board of Directors, the vote was: 35,515,796 shares for; 45,700,987 shares against; 3,946,999 shares abstain. The proposal did not pass. There were zero broker non-votes with respect to the election of directors, the adoption of the New Century Energies, Inc. Omnibus Incentive Plan, the adoption of the New Century Energies, Inc. Outside Directors' Compensation Plan, and the appointment of Arthur Andersen LLP. Broker non-votes had no effect on the outcome of the two shareholder proposals. Item 5. Other Information Rule 14a-4 of the Securities and Exchange Commission's proxy rules allows the Company to use discretionary voting authority to vote on matters coming before an annual meeting of stockholders, if the Company does not have notice of the matter at least 45 days before the date corresponding to the date on which the Company first mailed its proxy materials for the prior year's annual meeting of stockholders or the date specified by an overriding advance notice 52 provision in the Company's Certificate of Incorporation or Bylaws. The Company's Certificate of Incorporation contains such an advance notice provision. Under the Company's Restated Certificate of Incorporation, no business maybe brought before an Annual Meeting of Stockholders except as specified in the notice of the meeting or as otherwise properly brought before the meeting by or at the direction of the Board or by a stockholder from whom the Secretary of the Company has received written notice (containing certain information specified in the Restated Certificate of Incorporation) not less than 60 days nor more than 90 days prior to the first anniversary of the preceeding year's Annual Meeting; provided that in the event that the date of the Annual Meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary, notice by the stockholder to be timely must be received not earlier than the 90th day prior to such Annual Meeting and not later than the close of business on a later of (a) the 60th day prior to such Annual Meeting or (b) the 10th day following the date on which notice of the Annual Meeting was mailed or public disclosure thereof was made, whichever first occurs. the Restate Articles of Incorporation also provide that nominations for Director at an Annual Meeting may be made only by the Board or the Nominating and Civic Responsibility Committee, or by a stockholder entitled to vote in the election of directors generally from whom the Secretary of the Company has received written notice (containing certain information specified in the Restated Certificate of Incorporation) in accordance with the timetable set forth above. For the Company's 1999 Annual Meeting of Stockholders, which is not expected to be advanced or delayed, the Secretary of the Company must have received notice from any stockholder who intends to bring business before the meeting or who wishes to nominate a person or persons for election as directors no earlier than February 11, 1999 and no later than the close of business on March 13, 1999. This requirement is separate and apart from the Securities and Exchange Commission's requirements that a stockholder must meet in order to have a stockholder proposal included in the company's proxy statement under Rule 14a-8. For the Company's Annual Meeting of Stockholders, any stockholder who wishes to submit a proposal for inclusion in the Company's proxy materials pursuant to Rule14a-8 must submit such proposal to the Secretary of the Company on or before November 29, 1998. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges for PSCo is set forth at page 57 herein. 12(b) Computation of Ratio of Consolidated Earnings to Consolidated Combined Fixed Charges and Preferred Stock Dividends for PSCo is set forth at page 58 herein. 12(c) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges for SPS is set forth at page 59 herein. 15(a) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 60 herein for NCE. 15(b) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 61 herein for PSCo. 15(c) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 62 herein for SPS. 27(a) Financial Data Schedule for NCE as of June 30, 1998. 27(b) Financial Data Schedule for PSCo as of June 30, 1998. 27(c) Financial Data Schedule for SPS as of June 30, 1998. (b) Reports on Form 8-K The following reports on Form 8-K were filed by PSCo since the beginning of the second quarter of 1998. 53 - A report on Form 8-K dated April 28, 1998, was filed by PSCo on April 28, 1998. The item reported was Item 5. Other Events: Filing of Bond Purchase Contract, dated as of April 15, 1998. - A report on Form 8-K dated April 30, 1998, was filed by PSCo on April 30, 1998. The item reported was Item 5. Other Events: Selected consolidated financial information for PSCo was presented for the three months ended March 31, 1998 and 1997 and for the years ended December 31, 1997, 1996 and 1995. - A report on Form 8-K/A dated April 30, 1998, was filed by PSCo on May 1, 1998. The item reported was Item 5. Other Events: Selected consolidated financial information for PSCo was presented for the three months ended March 31, 1998 and 1997 and for the years ended December 31, 1997, 1996 and 1995. - A report on Form 8-K dated May 6, 1998 was filed by PSCo on May 14, 1998. The item reported was Item 5.Other Events: Filing of an Underwriting Agreement and other documents in connection with a financing. 54 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 13th day of August, 1998. NEW CENTURY ENERGIES, INC. By /s/ R. C. Kelly --------------------------------- R. C. KELLY Executive Vice President 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 13th day of August, 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 13th day of August, 1998. SOUTHWESTERN PUBLIC SERVICE COMPANY By /s/Brian P. Jackson --------------------------------- Brian P. Jackson Senior Vice President, Finance and Administrative Services and Chief Financial Officer 55 EXHIBIT INDEX 12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges for PSCo is set forth at page 57 herein. 12(b) Computation of Ratio of Consolidated Earnings to Consolidated Combined Fixed Charges and Preferred Stock Dividends for PSCo is set forth at page 58 herein. 12(c) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges for SPS is set forth at page 59 herein. 15(a) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 60 herein for NCE. 15(b) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 61 herein for PSCo. 15(c) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 62 herein for SPS. 27(a) Financial Data Schedule for NCE as of June 30, 1998. 27(b) Financial Data Schedule for PSCo as of June 30, 1998. 27(c) Financial Data Schedule UT for SPS as of June 30, 1998. 56 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) Six Months Ended June 30, 1998 1997 ---- ---- (Thousands of Dollars, except ratios) Fixed charges: Interest on long-term debt................... $ 57,271 $ 56,953 Interest on borrowings against corporate-owned life insurance contracts.................... 24,605 22,238 Other interest............................... 10,152 8,954 Amortization of debt discount and expense less premium ................................... 1,995 1,945 Interest component of rental expense......... 4,139 4,938 Dividends on PSCo obligated mandatorily redeemable preferred securities............ 2,111 - ------ ------- Total ..................................... $100,273 $ 95,028 ======== ======== Earnings (before fixed charges and taxes on income): Net income................................... $ 99,805 $ 93,488 Fixed charges as above....................... 100,273 95,028 Provisions for Federal and state taxes on income, net of investment tax credit amortization.... 50,368 46,944 -------- ------- Total...................................... $250,446 $235,460 ======== ======== Ratio of earnings to fixed charges.............. 2.50 2.48 ====== ====== 57 EXHIBIT 12(b) PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO CONSOLIDATED COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (not covered by Report of Independent Public Accountants) Six Months Ended June 30, 1998 1997 ---- ---- (Thousands of Dollars, except ratios) Fixed charges and preferred stock dividends: Interest on long-term debt.................. $ 57,271 $ 56,953 Interest on borrowings against corporate -owned life insurance contracts............ 24,605 22,238 Other interest.............................. 10,152 8,954 Amortization of debt discount and expense less premium .............................. 1,995 1,945 Interest component of rental expense........ 4,139 4,938 Dividends on PSCo obligated mandatorily redeemable preferred securities........... 2,111 - Preferred stock dividend requirement........ 5,332 5,885 Additional preferred stock dividend requirement 2,691 2,955 ----- ------ Total .................................... $108,296 $103,868 ======== ======== Earnings (before fixed charges and taxes on income): Net income.................................. $ 99,805 $ 93,488 Interest on long-term debt.................. 57,271 56,953 Interest on borrowings against corporate -owned life insurance contracts............ 24,605 22,238 Other interest.............................. 10,152 8,954 Amortization of debt discount and expense less premium .............................. 1,995 1,945 Interest component of rental expense........ 4,139 4,938 Dividends on PSCo obligated mandatorily redeemable preferred securities........... 2,111 - Provisions for Federal and state taxes on income, net of investment tax credit amortization .............................. 50,368 46,944 ------ ------- Total..................................... $250,446 $235,460 ======== ======== Ratio of earnings to fixed charges and preferred stock dividends................ 2.31 2.27 ====== ======= 58 EXHIBIT 12(c) SOUTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO CONSOLIDATED FIXED CHARGES (not covered by Report of Independent Public Accountants) Six Months Ended June 30, 1998 1997 ---- ---- (Thousands of Dollars, except ratios) Fixed charges: Interest on long-term debt................... $21,980 $22,057 Dividends on SPS obligated mandatorily redeemable preferred securities............ 3,925 3,925 Other interest............................... 5,112 2,747 Amortization of debt discount and expense less premium ................................... 1,121 1,123 Interest component of rental expense......... 404 623 ------ ------ Total ..................................... $32,542 $30,475 ======= ======= Earnings (before fixed charges and taxes on income): Net income................................... $ 55,056 $ 24,598 Fixed charges as above....................... 32,542 30,475 Provisions for Federal and state taxes on income, net of investment tax credit amortization.... 32,954 16,078 -------- -------- Total...................................... $120,552 $ 71,151 ======== ======== Ratio of earnings to fixed charges.............. 3.70 2.33 ====== ====== 59 EXHIBIT 15(a) August 10, 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 Statement (Form S-3, File No. 333-40361) 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 June 30, 1998, which includes our report dated August 10, 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 60 EXHIBIT 15(b) August 10, 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 June 30, 1998, which includes our report dated August 10, 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(c) August 10, 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 June 30, 1998, which includes our report dated August 10, 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 EX-27.1 2 NCE FDS 2ND 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 JUNE 30, 1998 AND CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JUN-30-1998 PER-BOOK 5,672,476 357,705 780,439 559,783 0 7,370,403 111,492 1,615,789 672,718 2,399,999 294,000 0 2,190,893 0 0 454,063 186,007 0 37,235 4,976 1,803,230 7,370,403 1,799,125 76,909 1,470,622 1,470,622 328,503 (5,762) 322,741 103,090 142,742 0 0 64,550 83,191 362,779 1.28 1.28
EX-27.2 3 PSCO FDS 2ND 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 JUNE 30, 1998 AND CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JUN-30-1998 PER-BOOK 3,851,022 317,066 443,134 378,792 0 4,990,014 0 1,302,119 330,018 1,632,137 194,000 0 1,537,605 0 0 234,531 185,428 0 37,100 4,874 1,164,339 4,990,014 1,149,240 50,368 935,760 986,128 163,112 2,529 165,641 65,836 99,805 5,332 94,473 83,743,171 57,271 221,813 0.000 0.000
EX-27.3 4 SPS FDS 2ND QTR 98
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEET AS OF JUNE 30, 1998 AND CONDENSED STATEMENTS OF INCOME AND CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JUN-30-1998 PER-BOOK 1,723,216 124,994 172,998 136,263 0 2,157,471 0 348,402 356,062 704,464 100,000 0 620,621 0 0 169,532 114 0 0 0 562,740 2,157,471 463,738 32,954 350,126 383,080 80,658 3,338 83,996 28,940 55,056 0 55,056 48,982 21,980 108,063 0.000 0.000
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