-----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, WnTQvFwnfO1owcAiEfZ0V8OPwaM7jmcDDBOcqa4IIYZzOz7kZVQ56CvsbeyD/wdE 9N96MhT7/kQOrz6Z9Z5Oyw== 0000081018-96-000012.txt : 19960515 0000081018-96-000012.hdr.sgml : 19960515 ACCESSION NUMBER: 0000081018-96-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC SERVICE CO OF COLORADO CENTRAL INDEX KEY: 0000081018 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 840296600 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03280 FILM NUMBER: 96563829 BUSINESS ADDRESS: STREET 1: 1225 17TH ST STE 300 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3035717511 MAIL ADDRESS: STREET 1: P O BOX 840 STE 300 CITY: DENVER STATE: CO ZIP: 80201 10-Q 1 1ST QTR 10Q FOR PSCO OF COLORADO ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 1-3280 Public Service Company of Colorado (Exact name of registrant as specified in its charter) Colorado 84-0296600 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1225 17th Street, Denver, Colorado 80202 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, including area code: (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 At May 8, 1996, 64,029,218 shares of the registrant's Common Stock, $5.00 par value (the only class of common stock), were outstanding. ================================================================================ 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 ............................................ 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings................................................. 22 Item 4. Submission of Matters to a Vote of Security Holders............... 22 Item 6. Exhibits and Reports on Form 8-K.................................. 22 SIGNATURE.................................................................. 23 EXHIBIT INDEX.............................................................. 24 EXHIBIT 12(a).............................................................. 25 EXHIBIT 12(b).............................................................. 26 EXHIBIT 15 ................................................................ 27 In addition to the historical information contained herein, this report contains a number of "forward-looking statements", within the meaning of the Securities Exchange Act of 1934. Such statements address future events and conditions concerning capital expenditures, resolution and impact of litigation, regulatory matters, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those projected in such statements by reason of factors including, without limitation, electric utility restructuring, future economic conditions; earnings retention and dividend payout policies; developments in the legislative, regulatory and competitive markets in which the Company operates; and other circumstances that could affect anticipated revenues and costs, such as compliance with laws and regulations. These and other factors are discussed in the Company's filings with the Securities and Exchange Commission including this report. i PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Thousands of Dollars) ASSETS March 31, December 31, 1996 1995 ---- ---- (Unaudited) Property, plant and equipment, at cost: Electric .......................................... $3,760,496 $3,751,321 Gas................................................ 995,639 989,215 Steam and other.................................... 89,101 88,446 Common to all departments.......................... 398,874 380,809 Construction in progress........................... 174,993 192,580 ------- ------- 5,419,103 5,402,371 Less: accumulated depreciation .................... 1,951,921 1,921,659 --------- --------- Total property, plant and equipment.............. 3,467,182 3,480,712 --------- --------- Investments, at cost, and receivables................. 35,553 24,282 ------ ------ Current assets: Cash and temporary cash investments................ 12,540 14,693 Accounts receivable, less reserve for uncollectible accounts ($3,395 at March 31, 1996; $3,630 at December 31, 1995) ........................... 154,750 124,731 Accrued unbilled revenues ......................... 84,196 96,989 Materials and supplies, at average cost............ 52,678 56,525 Fuel inventory, at average cost.................... 34,322 35,654 Gas in underground storage, at cost (LIFO)......... 21,234 44,900 Current portion of accumulated deferred income taxes 28,568 19,229 Regulatory assets recoverable within one year (Note 1) 42,103 40,247 Prepaid expenses and other......................... 31,376 35,619 ------ ------ Total current assets.............................. 461,767 468,587 ------- ------- Deferred charges: Regulatory assets (Note 1)......................... 314,425 321,797 Unamortized debt expense .......................... 10,055 10,460 Other.............................................. 51,290 48,457 ------ ------ Total deferred charges............................ 375,770 380,714 ------- ------- $4,340,272 $4,354,295 ========== ========== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 1 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) CAPITAL AND LIABILITIES March 31, December 31, 1996 1995 ---- ---- (Unaudited) Common stock.......................................... $1,013,364 $ 997,106 Retained earnings..................................... 374,477 346,539 ------- ------- Total common equity............................... 1,387,841 1,343,645 Preferred stock: Not subject to mandatory redemption................ 140,008 140,008 Subject to mandatory redemption at par............. 41,289 41,289 Long-term debt........................................ 1,193,862 1,195,553 --------- --------- 2,763,000 2,720,495 --------- --------- Noncurrent liabilities: Employees' postretirement benefits other than pensions 49,895 51,704 Employees' postemployment benefits................. 23,500 23,500 Defueling and decommissioning liability (Note 2)... - 23,115 ------- ------ Total noncurrent liabilities...................... 73,395 98,319 ------ ------ Current liabilities: Notes payable and commercial paper ................ 267,920 288,050 Long-term debt due within one year................. 67,895 82,836 Preferred stock subject to mandatory redemption within one year ................................. 2,576 2,576 Accounts payable................................... 140,577 156,109 Dividends payable.................................. 36,491 35,284 Recovered purchased gas and electric energy costs - net (Note 1) .................................. 37,791 9,508 Customers' deposits................................ 17,662 17,462 Accrued taxes...................................... 103,102 55,393 Accrued interest................................... 22,383 32,071 Current portion of defueling and decommissioning liability (Note 2) .............................. 25,895 24,055 Other.............................................. 57,692 78,451 ------ ------ Total current liabilities......................... 779,984 781,795 ------- ------- Deferred credits: Customers' advances for construction............... 57,577 99,519 Unamortized investment tax credits ................ 111,943 113,184 Accumulated deferred income taxes ................ 523,341 508,143 Other.............................................. 31,032 32,840 ------ ------ Total deferred credits............................ 723,893 753,686 Commitments and contingencies (Note 4)................ $4,340,272 $4,354,295 ========== ========== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 2 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars Except per Share Data) Three Months Ended March 31, 1996 1995 ---- ---- Operating revenues: Electric.......................................... $370,117 $366,583 Gas............................................... 242,228 244,557 Other............................................. 10,572 9,456 ------ ----- 622,917 620,596 Operating expenses: Fuel used in generation........................... 46,337 47,185 Purchased power................................... 122,435 121,478 Gas purchased for resale.......................... 160,724 168,135 Other operating expenses.......................... 76,646 89,814 Maintenance....................................... 14,372 14,704 Depreciation and amortization..................... 36,862 35,166 Taxes (other than income taxes)................... 22,305 23,091 Income taxes...................................... 41,146 29,334 ------ ------ 520,827 528,907 ------- ------- Operating income..................................... 102,090 91,689 Other income and deductions: Allowance for equity funds used during construction 511 751 Miscellaneous income and deductions - net......... (2,528) (3,883) ------ ------ (2,017) (3,132) Interest charges: Interest on long-term debt........................ 22,068 21,506 Amortization of debt discount and expense less premium .................................... 977 791 Other interest.................................... 13,671 13,308 Allowance for borrowed funds used during construction .................................... (1,072) (692) ------ ---- 35,644 34,913 ------ ------ Net income........................................... 64,429 53,644 Dividend requirements on preferred stock............. 2,972 3,001 ----- ----- Earnings available for common stock.................. $ 61,457 $ 50,643 ======== ======== Weighted average common shares outstanding (thousands) 63,679 62,513 ====== ====== Earnings per weighted average share of common stock outstanding................. $ 0.97 $ 0.81 ======== ========== Dividends per share declared on common stock......... $ 0.525 $ 0.51 ======== ========== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 3 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands of Dollars) Three Months Ended March 31, 1996 1995 ---- ---- Operating activities: Net income........................................ $64,429 $53,644 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................... 38,103 36,148 Amortization of investment tax credits........... (1,241) (1,244) Deferred income taxes............................ 9,117 (8,725) Allowance for equity funds used during construction (511) (751) Change in accounts receivable.................... (30,019) 5,597 Change in inventories............................ 28,845 24,851 Change in other current assets................... 14,149 49,221 Change in accounts payable....................... (15,532) (38,509) Change in other current liabilities.............. 35,537 59,067 Change in deferred amounts....................... (1,158) (1,012) Change in noncurrent liabilities................. (19,819) (362) Other............................................ 1,396 25 ----- -- Net cash provided by operating activities..... 123,296 177,950 ------- ------- Investing activities: Construction expenditures......................... (62,616) (62,005) Allowance for equity funds used during construction 511 751 Proceeds from (cost of) disposition of property, plant and equipment ............................ 734 (1,059) Purchase of other investments..................... (1,316) (454) Sale of other investments......................... 2,034 1,618 ------- ------- Net cash used in investing activities......... (60,653) (61,149) ------- ------- Financing activities: Proceeds from sale of common stock................ 7,317 6,823 Redemption of long-term debt...................... (16,698) (21,921) Short-term borrowings - net....................... (20,130) (60,040) Dividends on common stock......................... (32,313) (31,077) Dividends on preferred stock...................... (2,972) (3,001) ------ ------ Net cash used in financing activities......... (64,796) (109,216) ------- -------- Net (decrease) increase in cash and temporary cash investments ........................... (2,153) 7,585 Cash and temporary cash investments at beginning of period ........................ 14,693 5,883 ------ ----- Cash and temporary cash investments at end of period .................................. $ 12,540 $ 13,468 ========= ========= The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 4 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Accounting Policies Business, utility operations and regulation The Company is an operating public utility engaged, together with its utility subsidiaries, principally in the generation, purchase, transmission, distribution and sale of electricity and in the purchase, transmission, distribution, sale and transportation of natural gas. The Company is subject to the jurisdiction of The Public Utilities Commission of the State of Colorado ("CPUC") with respect to its retail electric and gas operations and the Federal Energy Regulatory Commission ("FERC") with respect to its wholesale electric operations and accounting policies and practices. Approximately 90% of the Company's electric and gas revenues are subject to CPUC jurisdiction. Cheyenne Light, Fuel and Power Company ("Cheyenne") and WestGas Interstate, Inc. ("WGI") are subject to the jurisdiction of the Public Service Commission of Wyoming ("WPSC") and the FERC, respectively. Regulatory assets and liabilities The Company and its regulated subsidiaries prepare their financial statements in accordance with the provisions of Statement of Financial Accounting Standards No. 71 - "Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"). In general, SFAS 71 recognizes that accounting for rate regulated enterprises should reflect the relationship of costs and revenues introduced by rate regulation. As a result, 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. In response to the increasingly competitive environment for utilities, the regulatory climate also is changing. The Company continues to participate in regulatory and legislative proceedings which could change or impact current regulation. However, the Company believes it will continue to be subject to rate regulation that will allow for the recovery of all of its deferred costs. Although the Company does not currently anticipate such an event, to the extent the Company concludes in the future that collection of such revenues (or payment of liabilities) is no longer probable, through changes in regulation and/or the Company's competitive position, the Company may be required to recognize as expense, at a minimum, all deferred costs currently recognized as regulatory assets on the consolidated condensed balance sheet. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 imposes stricter criteria for the continued recognition of regulatory assets on the balance sheet by requiring that such assets be probable of future recovery at each balance sheet date. The Company adopted this standard on January 1, 1996, the effective date of the new statement, and such adoption did not have a material impact on the Company's results of operations, financial position or cash flows. 5 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) The following regulatory assets are reflected in the Company's consolidated condensed balance sheets: March 31, December 31, Recovery 1996 1995 Through ---- ---- ------- (Thousands of Dollars) Nuclear decommissioning costs (Note 2).... $ 95,766 $ 97,801 2005 Income taxes ............................. 107,359 110,617 2006 Employees' postretirement benefits other than pensions..................... 49,312 47,600 2013 Early retirement costs.................... 22,151 24,366 1998 Employees' postemployment benefits........ 23,404 23,500 Undetermined Demand-side management costs.............. 31,527 30,188 2002 Unamortized debt reacquisition costs...... 21,433 21,940 2024 Other..................................... 5,576 6,032 1999 ------- ------ Total................................... 356,528 362,044 Classified as current..................... 42,103 40,247 ------- ------- Classified as noncurrent.................. $314,425 $321,797 ======== ======== Certain costs associated with the Company's Demand Side Management ("DSM") programs are deferred and recovered in rates over five to seven year periods through the Demand Side Management Cost Adjustment ("DSMCA"), which was implemented July 1, 1993. Non-labor incremental expenses, carrying costs associated with deferred DSM costs and incentives associated with approved DSM programs are recovered on an annual basis. Costs incurred to reacquire debt prior to scheduled maturity dates are deferred and amortized over the life of the debt issued to finance the reacquisition or as approved by the regulator. Recovered/Recoverable purchased gas and electric energy costs - net The Company and Cheyenne tariffs contain clauses which allow recovery of certain purchased gas and electric energy costs in excess of the level of such costs included in base rates. These cost adjustment tariffs are revised periodically, as prescribed by the appropriate regulatory agencies, for any difference between the total amount collected under the clauses and the recoverable costs incurred. The cumulative effects are recognized as a current asset or liability until adjusted by refunds or collections through future billings to customers. Other Property, plant and equipment includes approximately $18.4 million and $25.4 million, respectively, for costs associated with the engineering design of the future Pawnee 2 generating station and certain water rights located in southeastern Colorado, also obtained for a future generating station. The Company is earning a return on these investments based on the Company's weighted average cost of debt and preferred stock in accordance with a CPUC rate order. Statements of Cash Flows - Non-cash Transactions Shares of common stock (274,934 in 1996 and 310,546 in 1995), valued at the market price on date of issuance (approximately $9 million in 1996 and $10 million in 1995), were issued to the Employees' Savings and Stock Ownership Plan of Public Service Company of Colorado and Participating Subsidiary Companies. The estimated issuance values were recognized in other operating expenses during the respective preceding years. Shares of common stock (6,470 in 1996 and 3,891 in 1995), valued at the market price on the date of issuance ($0.2 million in 6 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) 1996 and $0.1 million in 1995), were issued to certain executives pursuant to the applicable provisions of the executive compensation plans. These stock issuances were non-cash transactions and are not reflected in the consolidated condensed statements of cash flows. General See Note 1. of the Notes to Consolidated Financial Statements in the Company's 1995 Annual Report on Form 10-K for a summary of the Company's significant accounting policies. 2. Fort St. Vrain Overview In 1989, the Company announced its decision to end nuclear operations at the Fort St. Vrain Nuclear Generating Station ("Fort St. Vrain") and to proceed with the defueling and decommissioning of the reactor. While the defueling of the reactor to the Independent Spent Fuel Storage Facility ("ISFSI") was completed in June 1992, several issues related to the ultimate storage/disposal of Fort St. Vrain's spent nuclear fuel remained unresolved. However, as described below, on February 9, 1996, the Company and the Department of Energy ("DOE") entered into a contract resolving all issues related to this matter. Additionally, on March 22, 1996, the Company and the decommissioning contractors engaged to complete such activities, announced the completion of the physical decommissioning work at the facility with only Nuclear Regulatory Commission ("NRC") site release remaining to be addressed. It is expected that NRC site release activities will be completed in 1996 resulting in the Company's Part 50 license being terminated. Fort St. Vrain is being repowered as a gas fired combined cycle steam plant consisting of two combustion turbines and two heat recovery steam generators totaling 471 Mw. The certificate of public convenience and necessity, which was received in July 1994, provides for the repowering of Fort St. Vrain in a phased approach as follows: Phase 1A - 130 Mw in 1996, Phase 1B - 102 Mw in 1999 and Phase 2 - 239 Mw in 2000. The repowering of Phase 1A has been completed with the commencement of commercial operation on May 1, 1996. The phased repowering allows the Company flexibility in timing the addition of this generation supply to meet future load growth. Defueling On February 9, 1996, the Company and the DOE entered into an agreement relating to the disposal of Fort St. Vrain's spent nuclear fuel. Previously, the Company had entered into two separate agreements with the DOE for the disposal/storage of Fort St. Vrain's six segments of spent nuclear fuel which are currently stored in the ISFSI located at the plant site. In summary, the primary provisions of the agreement include the following. - On February 9, 1996, the DOE assumed title to fuel segments 4 - 9, which, as noted above, currently are stored in the facility. - The DOE agreed to pay the Company $16 million for settlement of claims associated with the ISFSI. Title to the ISFSI will pass to the DOE at such time as all applicable legal requirements for title transfer (including NRC approval) are met. The DOE deposited $14 million of the $16 million into an interest bearing escrow account. The initial $2 million was paid to the Company on February 13, 1996. - Until the time title to the ISFSI transfers to the DOE, the Company will be entitled to payments of $2 million per year initially to come from the escrow account (escalated annually based on the Consumer Price Index) plus ISFSI operating and maintenance costs including licensing fees and other regulatory costs, facility support and reasonable insurance costs. On the date title transfers, the Company will be entitled to the remaining funds (principal and interest) in the escrow account and the agreement will be terminated. 7 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) - The term of the agreement will be for a period of up to 15 years, with one 5 year option to extend. If such option to extend is exercised, the annual payments increase to $4 million (unescalated). The DOE has the option to terminate the agreement after the first 8 years. - Upon termination or expiration of the agreement, the DOE will be responsible for the defueling and decommissioning of the ISFSI with the Company being responsible for costs only up to the amount contained in its existing NRC required decommissioning escrow account. Such amount at March 31, 1996 was approximately $1.7 million. - The Company provided to the DOE a full and complete release of claims against the DOE arising out of prior contracts discussed above related to spent fuel disputes. As a result of the DOE settlement, coupled with a complete review of expected remaining decommissioning costs and establishment of the anticipated refund to customers discussed below, pre-tax earnings for the three months ended March 31, 1996 were positively impacted by approximately $16 million. In accordance with the 1991 CPUC approval to recover certain decommissioning costs described below, 50% of any cash amounts received from the DOE as part of a settlement, net of costs incurred by the Company, including legal fees, is to be refunded or credited to customers. While final determination of the amount to be refunded to customers has not yet been completed, the Company established an $8 million liability for such refunds at March 31, 1996 on the consolidated condensed balance sheet. Decommissioning Following the 1991 CPUC approval, effective July 1, 1993 the Company began collecting from customers decommissioning costs which are expected to total approximately $124.4 million (plus a 9% carrying cost). Such amount, which is expected to be collected over a twelve year period, represented the inflation-adjusted estimated remaining cost of decommissioning activities not previously recognized as expense at the time of CPUC approval. At March 31, 1996, approximately $95.8 million of such amount remains to be collected from customers and, therefore, is reflected as a regulatory asset on the consolidated condensed balance sheet. The amount recovered from customers each year is approximately $13.9 million. As previously noted, on March 22, 1996, the Company and the decommissioning contractors announced that the physical decommissioning activities at the facility have been completed with only NRC site release to be addressed. At March 31,1996, approximately $324.2 million had been spent for defueling and decommissioning activities with a remaining $25.9 million defueling and decommissioning liability reflected on the consolidated condensed balance sheet. The Company believes this remaining decommissioning liability is adequate to complete all final decommissioning activities. Funding Under NRC regulations, the Company is required to make filings with, and obtain the approval of, the NRC regarding certain aspects of the Company's decommissioning proposals, including funding. On January 27, 1992, the NRC accepted the Company's funding aspects of the decommissioning plan. The Company has also obtained an unsecured irrevocable letter of credit totaling $125 million that meets the NRC's stipulated funding guidelines including those proposed on August 21, 1991 that address decommissioning funding requirements for nuclear power reactors that have been prematurely shut down. In accordance with the NRC funding guidelines, the Company is allowed to reduce the balance of the letter of credit based upon milestone payments made under the fixed-price decommissioning contract. As a result of such payments, at March 31, 1996, the letter of credit had been reduced to $34 million. 8 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) Nuclear Insurance During commercial operation and defueling, the Company participated in a federally mandated program to provide funding in the event public liability claims arose from a nuclear incident which exceeded available commercial insurance capacity. Under the requirements of the Price-Anderson Act, the Company remains subject to potential assessments of up to $79 million per incident, in amounts not to exceed $10 million per incident per year. The Company was granted an NRC waiver from participation in this program on February 17, 1994 and, therefore, remains subject to assessments levied in response to incidents prior to such date. The Company continues to maintain primary commercial nuclear liability insurance of $100 million for the Fort St. Vrain site and the adjoining ISFSI. On June 7, 1995, the NRC granted the Company an exemption from the requirement to purchase nuclear property damage and decontamination coverage following an environmental assessment and finding of no significant impact. The Company maintains coverage of $10 million to provide property damage and decontamination protection in the event of an accident involving the ISFSI. 3. Merger On August 22, 1995, the Company, Southwestern Public Service Company ("SPS"), a New Mexico corporation, and New Century Energies, Inc. ("NCE"), a newly formed Delaware corporation, entered into an Agreement and Plan of Reorganization ("Merger Agreement") providing for a business combination as peer firms involving the Company and SPS in a "merger of equals" transaction (the "Merger"). Based on outstanding common stock of the Company and SPS at March 31, 1996, the Merger would result in the common shareholders of the Company owning 62% of the common equity of NCE and the common shareholders of SPS owning 38% of the common equity of NCE. In January 1996, NCE filed its application with the Securities and Exchange Commission ("SEC") to be a registered public utility holding company and the parent company for the Company and SPS. The shareholders of the Company and SPS approved the Merger Agreement on January 31, 1996. Additionally, the Merger is subject to customary closing conditions, including the receipt of all necessary governmental approvals and the making of all necessary governmental filings, including approvals and findings of state utility regulators in Colorado, Texas, New Mexico, Wyoming and Kansas as well as the approval of the FERC, the NRC, the SEC, the Federal Trade Commission and the U.S. Department of Justice. Applications to the state regulatory commissions and the FERC have been completed. The required authorizations from the Kansas Corporation Commission and the NRC have been obtained. It is currently expected that the Merger will be completed in the latter half of 1996; however, the timing of the effective date of the Merger is primarily dependent upon the regulatory process (see Note 4). A transition management team, consisting of executives from each company, is working toward the common goal of creating one company with integrated operations to achieve a more efficient and economic utilization of facilities and resources. It is management's intention that the consolidated company begin realizing certain savings upon the consummation of the Merger and, accordingly, costs associated with the Merger and the transition planning and implementation are expected to negatively impact earnings during 1996 and 1997. During the first quarter of 1996, the Company recognized approximately $2.8 million of costs associated with the Merger. The Merger is expected to qualify as a tax-free reorganization and as a pooling of interests for accounting purposes. The Company recognizes that the divestiture of its existing gas business or certain non-utility ventures is a possibility under the new registered holding company structure, but is seeking approval from the SEC to maintain these businesses. If divestiture is ultimately required, the SEC has historically allowed companies sufficient time to accomplish divestitures in a manner that protects shareholder value. Additionally, in the event that divestiture of the gas business is required, the Company will pursue an alternative corporate organizational structure that will permit retention of the gas business. 9 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) 4. Commitments and Contingencies Regulatory Matters 1995 Merger Rate Filings In connection with the Merger with SPS, in November 1995 the Company filed comprehensive proposals with the CPUC, the FERC and the WPSC to obtain approval of such Merger and the associated comprehensive proposals from such regulatory agencies. The CPUC proposal included, among other things, implementing an electric rate moratorium for five years, allowing for the sharing of earnings in excess of 12.5% return on equity (determined by utilizing the combined operations of the electric, gas and steam departments) on a 50/50 basis between shareholders and customers, retaining the Company's Energy Cost Adjustment ("ECA"), Gas Cost Adjustment ("GCA") and Qualifying Facilities Capacity Cost Adjustment ("QFCCA") mechanisms, implementing quality of service measures and recovering costs incurred in connection with the Merger (see Note 3). The quality of service measures included in the CPUC proposal relate to the following four areas: 1) customer complaints, 2) phone response time to customer inquiries, 3) response time to customer-initiated gas odor complaints, and 4) electric service availability. In the event that the Company does not meet the proposed quality of service measures, earnings may be reduced by up to $4 million on an annual basis. Additionally, the proposed sharing of earnings in excess of 12.5% return on equity would supersede the QFCCA earnings test discussed below. The CPUC has scheduled hearings on this matter for July 1996 and the WPSC has scheduled hearings for May 30-31, 1996. The FERC has not yet scheduled any proceedings related to the proposed Merger. However, during January 1996, the FERC issued a Notice of Inquiry concerning its merger policy under the Federal Power Act to determine whether the criteria and policies for evaluating mergers needs to be revised. Electric and Gas Cost Adjustment Mechanisms The Company's QFCCA allows for the recovery of purchased capacity costs from new Qualifying Facility ("QF") projects not reflected in base rates. In January 1996, the CPUC issued a final decision which required the following: 1) an earnings test be implemented with a 50/50 sharing between the ratepayers and shareholders of earnings in excess of 11%, the Company's authorized rate of return on regulated common equity; 2) the calculation will be based on the Company's electric department earnings only; and 3) implementation will be on a prospective basis effective October 1, 1996, utilizing a test period for the prior twelve months ended June 30, 1996, unless superseded by a CPUC decision prior to the effective date. The Company intends to address this issue in connection with the merger rate filing discussed above. During 1994 and 1995, the CPUC conducted several proceedings to review issues related to the ECA. Most recently, the CPUC opened a docket to review whether the ECA should be maintained in its present form, altered or eliminated, and on January 8, 1996, combined this docket with the merger docket discussed above. The CPUC approved the recovery of certain energy efficiency credits from retail jurisdiction customers through the DSMCA in June 1994. In December 1994, the Colorado Office of Consumer Counsel ("OCC") filed an appeal of the CPUC's decision in the District Court in and for the City and County of Denver ("Denver District Court"). The Denver District Court approved the collection of these credits in June 1995, subject to refund. Accordingly, effective July 1, 1995, the Company began collection of the December 31, 1994 balance of unbilled revenue related to these credits. To date, the Company has recognized approximately $10.4 million of revenue related to these credits ($5.4 million unbilled). On April 9, 1996, the Denver District Court issued an order affirming the CPUC's decision. Rate Cases In November 1993, the CPUC issued a final written decision regarding the Company's 1993 rate case, lowering the Company's annual base rate revenue requirement by approximately $5.2 million. The Phase II proceedings related to this rate case addressed cost allocation issues and specific rate changes for 10 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) the various customer classes based on the results of the Phase I decision. The CPUC approved a settlement agreement related to gas rates and the new gas rates were implemented effective October 1, 1995. A final decision on rehearing, reargument and reconsideration for the Phase II proceedings related to electric rates was issued in February 1996 and new rates became effective in early May 1996. The Company filed a rate case with the FERC on December 29, 1995, requesting a slight overall rate increase (less than 1%) from its wholesale electric customers. This filing, among other things, requested approval for recovery of Other Postretirement Employee Benefits ("OPEB") costs under Statement of Financial Accounting Standards No. 106 - "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), postemployment benefit costs under Statement of Financial Accounting Standards No. 112 - "Employers' Accounting for Postemployment Benefits" ("SFAS 112") and new depreciation rates based on the Company's most recent depreciation study. On March 29, 1996, the FERC issued an order accepting for filing and suspending certain proposed rate changes and establishing hearing procedures. Federal Energy Regulatory Commission On March 29, 1995, the FERC issued a Notice of Proposed Rulemaking ("NOPR") on Open Access Non-Discriminatory Transmission Services by Public Utilities and Transmitting Utilities and a supplemental NOPR on Recovery of Stranded Costs (collectively, the "Mega-NOPR"). In the Mega-NOPR, the Commission intended to facilitate competition in wholesale bulk power markets by requiring that jurisdictional electric utilities, including the Company, provide transmission services on an open-access and comparable basis. A key feature of comparable service, as proposed in the Mega-NOPR, was that each utility establish separate rates for its transmission and generation services for new wholesale services, and provide transmission services for its own operations, including certain ancillary services, consistent with the terms of its comparable tariffs. In the Mega-NOPR, the FERC proposed pro forma network and point-to-point transmission tariffs. The FERC also proposed rules for the recovery by utilities of legitimate and verifiable stranded costs incurred when existing wholesale requirements customer and retail customers leave utilities' generation systems through FERC jurisdictional open-access tariffs and obtain their electric power from other energy suppliers. On June 26, 1995, the Company filed transmission tariffs with the FERC that were intended to meet the comparability of service requirements as set out in the Mega-NOPR ("PSCo Tariffs"). Concurrently with the comparability filing, e prime, a non-regulated energy services subsidiary of the Company, filed a power marketer application with the FERC. On August 18, 1995, Cheyenne filed transmission tariffs with the FERC that were intended to meet the Mega-NOPR comparability of service requirements ("Cheyenne Tariffs"). In an order issued on October 13, 1995, the FERC accepted the PSCo Tariffs and the Cheyenne Tariffs, subject to modification based on the outcome of the Mega-NOPR proceeding, effective August 25, 1995. The FERC also set the rates in the PSCo Tariffs and Cheyenne Tariffs for hearing. On January 26, 1996, the Company and Cheyenne filed revised tariffs containing terms and conditions which were intended to more closely conform to the FERC's pro forma tariffs as set out in the Mega-NOPR. On March 29, 1996, the FERC accepted the revised PSCo and Cheyenne Tariffs for filing, made the terms and conditions subject to the outcome of the Mega-NOPR, and made the rates subject to the outcome of the earlier proceeding. In the same order, the FERC accepted e prime's request for authorization to act as a power marketer, subject to certain conditions. On April 8, 1996, the Company and Cheyenne filed an Offer of Settlement in the rate proceeding, which is currently pending. On April 15, 1996, e prime filed a compliance filing and a request for rehearing on one of the conditions approved by the FERC in its order authorizing e prime to act as a marketer. Both filings are pending. On April 24, 1996, the FERC issued its Final Order on the Mega-NOPR ("Order No. 888"). In Order No. 888, the FERC adopted its proposal in the Mega-NOPR with certain modifications. As required by Order No. 888, jurisdictional utilities owning, controlling, or operating transmission facilities must file non-discriminatory open-access tariffs that satisfy the 11 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) comparability standard-- i.e., that offer transmission services consistent with what is provided for in their own operations. The FERC is requiring that all such utilities file the single pro forma tariff (combined network and point-to-point tariff) within sixty days of publication of the final rule in the Federal Register. As proposed in the Mega-NOPR, the FERC, in Order No. 888, is requiring that utilities must use the pro forma tariff for new requirements services and, after year-end, for new economy transactions under existing coordination agreements. Order No. 888 also requires that power pools, including the Inland Power Pool of which the Company is a member, file an open-access tariff for pool transactions. Order No. 888 also provides for the recovery of legitimate, prudent, and verifiable stranded investment costs in accordance with the proposal outlined in the Mega-NOPR. The FERC will permit utilities to seek extra contractual recovery of stranded costs associated with wholesale requirements contracts executed prior to July 11, 1994. The FERC is to be the primary forum for utilities seeking to recover stranded costs arising where retail customers become wholesale transmission customers of a utility. In addition, the FERC will allow utilities to seek to recover stranded costs resulting from retail wheeling, but only in circumstances where a state regulator does not have authority to address retail stranded costs at the time that retail wheeling is required. In Order No. 888, the FERC determined not to allow for the general abrogation of existing requirements contracts, but stated that it would permit customers and utilities to seek modification or termination of certain contracts on a case-by-case basis, and subject to appropriate stranded cost recovery. On April 24, 1996, the FERC issued a Final Rule on its rulemaking Open Access Same-time Information Systems ("OASIS") ("Order No. 889"). The intent of the rule is to ensure that owners of transmission facilities, including the Company and its affiliates, do not have an unfair competitive advantage in using transmission facilities to market their power. Order No. 889 requires the marketing area of a utility to obtain information about their transmission system for their own wholesale power transactions from the utility's OASIS in the same way as their competition does, and that utilities completely separate their wholesale power marketing and transmission operations functions. Simultaneously with its issuance of Order Nos. 888 and 889, the FERC also issued a NOPR on Capacity Reservation Open Access Transmission Tariffs. This proposed rule specifies filing requirements to be followed by public utilities in making transmission tariff filings based on capacity reservations for all transmission users. If adopted, the capacity reservation open access tariff would replace the pro forma tariff implemented in Order No. 888. Comments on this rulemaking must be filed by August 1, 1996. Merger Notice of Inquiry On February 7, 1996, the FERC issued a Notice of Inquiry in which it requested comments on whether it should revise its criteria and policies for evaluating proposed public utility mergers in light of the fundamental changes in the electric industry and the regulations of the industry. The Company submitted comments to such proceeding, which were due on May 7, 1996. Environmental Issues Overview As described below, the Company has been or is currently involved with the clean-up of contamination from certain hazardous substances. In all situations, the Company is pursuing or intends to pursue insurance claims and believes it will recover some portion of these costs through such claims. Additionally, where applicable, the Company intends to pursue recovery from other potentially responsible parties. To the extent such costs are not recovered, the Company currently believes it is probable that such costs will be recovered through the rate regulatory process. However, as part of its merger filings (see discussion 12 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) in "Regulatory Matters - 1995 Merger Rate Filings"), the Company has proposed implementing an electric rate moratorium for five years, and if its regulatory authorities accept this proposal, the likelihood of the recovery of such clean-up costs through the regulatory process may be diminished. To the extent any costs are not recovered through the options listed above, the Company would be required to recognize an expense for such unrecoverable amounts. Environmental Site Cleanup Under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the U.S. Environmental Protection Agency ("EPA") has identified, and a Phase II environmental assessment has revealed, low level, widespread contamination from hazardous substances at the Barter Metals Company properties located in central Denver. For an estimated 30 years, the Company sold scrap metal and electrical equipment to Barter for reprocessing. The Company has completed the cleanup of this site at a cost of approximately $9 million. On January 3, 1996, in a lawsuit by the Company against its insurance providers, the Denver District Court entered final judgment in favor of the Company in the amount of $5.6 million for certain clean up costs at Barter. Several appeals and cross appeals have been filed by the one of the insurance providers and the Company 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). Previously, the Company has 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, the Company expects to recoup additional expenditures by sale of the Barter property and from other potentially responsible parties. Polychlorinated biphenyl ("PCB") presence was identified in the basement of an historic office building located in downtown Denver. The Company was negotiating the future cleanup with the current owners; however, on October 5, 1993, the owners filed a civil action against the Company in the Denver District Court. The action alleged that the Company was responsible for the PCB releases and additionally claimed other damages in unspecified amounts. On August 8, 1994, the Denver District Court entered a judgment approving a $5.3 million offer of settlement between the Company and the building owners resolving all claims between the Company and the building owners. In December 1995, complaints were filed by the Company against all applicable insurance carriers in the Denver District Court. The Ramp Industries disposal facility, located in Denver, Colorado has been designated by the EPA as a Superfund hazardous waste site pursuant to CERCLA and, on November 29, 1995, the Company received from the EPA a Notice of Potential Liability and Request for Information related to such site. The EPA is conducting an investigation of the contamination at this site and is in the process of identifying the nature and quantities of hazardous wastes delivered to, processed and currently stored at the site by Potentially Responsible Parties ("PRPs"). The Company has responded to the EPA's request. The estimated cost to investigate and remediate site contamination is not available as the EPA is in the initial stages of its investigation. At this time, the Company cannot estimate the amount, if any, of its potential liability related to this matter. In addition to these sites, the Company has identified several sites where cleanup of hazardous substances may be required. While potential liability and settlement costs are still under investigation and negotiation, the Company believes that the resolution of these matters will not have a material effect on its financial position, results of operations or cash flows. The Company 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, coal burning power plants are required to reduce sulfur dioxide ("SO2") and nitrogen oxide ("NOx") emissions to specified levels through a phased approach. The Company is currently meeting Phase I emission standards placed on SO2 through the use of low sulfur coal and the operation of pollution control equipment on certain generation facilities. The Company will be required to modify certain boilers by the year 2000 to 13 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) reduce NOx emissions in order to comply with Phase II requirements. The estimated costs for future plant modifications total approximately $51.4 million. The Company is studying its options to reduce SO2 emissions and currently does not anticipate that these regulations will significantly impact its operations. In April 1992, the Company acquired interests in the two generating units at the Hayden Steam Electric Generating Station located near Hayden, Colorado. The Company currently is the operator of the Hayden station and owns an undivided interest in each of the two generating units at the station which in total average approximately 53%. On August 18, 1993, a conservation organization filed a complaint in the U.S. District Court for the District of Colorado ("U.S. District Court") pursuant to Section 304 of the Federal Clean Air Act, against the Company and the other joint owners of the Hayden station. The plaintiff alleged that: 1) the station exceeded the 20% opacity limitations in excess of 19,000 six minute intervals during the period extending from the last quarter of 1988 through mid-1993 based on the data and reports obtained from the station's continuous opacity monitors ("COMs"), which measure average emission stream opacity in six minute intervals on a continuous basis, 2) the station was operated for over two weeks in late 1992 without a functioning electrostatic precipitator which constituted a modification of the station without the requisite permit from the Colorado Department of Public Health and Environment ("CDPHE"), and 3) 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 joint owners of the station contest all of these claims and contend that there were no violations of the opacity limitation, because pursuant to the Colorado state implementation plan, visual emissions are to be measured by qualified personnel using the EPA's visual test known as Method 9 and not by any measurements from the station's COMs as alleged by the plaintiff. Discovery was completed and oral arguments on summary judgment motions were heard in mid-May 1995. On July 21, 1995, the U.S. District Court entered partial summary judgment on liability issues in favor of the plaintiff in regards to the claims described in items 1) and 3) above and denied the plaintiff's motion in regards to the claims described in item 2) above. On July 31, 1995, the joint owners filed a petition for an interlocutory appeal with the 10th Circuit Court of Appeals. On August 21, 1995, the joint owners' petition for permission to appeal was denied. Subsequent to the denial of the joint owners' petition, the U.S. District Court dismissed the plaintiff's claims described in item 2) above. As described below, the joint owners are currently involved in settlement discussions with the conservation organization, the CDPHE and the EPA. The Company has made substantial progress in the settlement discussions. Any settlement would be contained in a consent decree that would be subject to public comment and U. S. District Court approval. However, if settlement is not reached, court hearings for injunctive relief and the determination of penalties in connection with the litigation will be held. Further appeals could be pursued by the joint owners if settlement is not achieved. In December 1995, the conservation organization filed a motion for summary judgment which would require the joint owners to come into compliance with the opacity requirements identified in the August 1993 complaint within 60 days or submit a plan for the installation of additional pollution control equipment. Additionally, the Company had received and responded to a request from the EPA for information related to the plant and, on January 18, 1996, the EPA issued a notice of violation stating that the plant had exceeded the 20% opacity limitations in excess of 10,000 additional six-minute intervals during the period extending from mid-1993 to mid-1995. It is expected that the issues related to this notice of violation will be resolved as part of the settlement discussions previously mentioned. In early May 1996, the joint owners and the conservation organization agreed to a stay of further court proceedings as a result of progress achieved in settlement discussions. As part of the settlement discussions, payments to the U.S. Treasury and certain contributions by the joint owners in an aggregate amount of $4,250,000 are being considered. The Company would be responsible for approximately 53% of such costs and, in anticipation of a settlement, the Company made adequate provision for such amounts in the first quarter of 1996. The Company cannot predict the level of penalties, if any, or the remedies that the court or the EPA may impose if settlement is not reached or if the joint 14 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) owners are unsuccessful in a subsequent appeal. In the complaint, the plaintiff had requested, among other things, that the joint owners "pay to the EPA to finance air compliance and enforcement activities, as provided for by 42 U.S.C. section 7604(g) (1), a penalty of $25,000 per day for each of their violations of the Clean Air Act." The statute provides for penalties of up to $25,000 per day per violation, but the level of penalties imposed in any particular instance is discretionary. In setting penalties in its own enforcement actions, the EPA relies, in part, on such factors as the economic benefit of noncompliance, the actual or possible harm of noncompliance, the size of the violator, the willfulness or negligence of the violator and its degree of cooperation in resolving the matter. Moreover, it is expected that as part of the settlement discussed above, additional pollution control equipment and practices will be required at the station. The joint owners and the conservation organization have signed a stipulation that, at a minimum, baghouses will be installed at the Hayden station. Furthermore, the additional equipment and practices would be designed to address particulate matter, SO2 and NOx emission concerns raised by this litigation and by the Mt. Zirkel Wilderness Area Reasonable Attribution Study, which is expected to be finalized during 1996. The timing of the installation of the baghouses will be determined as part of the settlement, if achieved, or in the litigation process. The Company believes that, consistent with historical regulatory treatment, any costs for pollution control equipment to comply with pollution control regulations would be recovered from its customers. However, no assurance can be given that this practice will continue in the future. Employee Litigation Several employee lawsuits have been filed against the Company involving alleged sexual/age/race/disability discrimination. The Company is actively contesting all such lawsuits and believes the ultimate outcome will not have a material impact on the Company's results of operations, financial position or cash flows. In one of the cases, certain employees terminated as part of the Company's 1991/1992 organizational analysis asserted breach of contract and promissory estoppel with respect to job security and breach of the covenant of good faith and fair dealing. Of the 21 actions filed, the trial court directed verdicts in favor of the Company in 19 cases. Two cases went to a jury, which entered verdicts adverse to the Company. All 21 decisions are currently on appeal, but the Company believes its liability, if any, will not have a material impact on the Company's results of operations, financial position or cash flows. Union Contracts In early December 1995, the Company's contracts with the International Brotherhood of Electrical Workers, Local 111 expired. Previously, an arbitrator had rejected the Company's attempt to cancel the contract. The parties were unable to reach agreement on the contract issues reopened through the negotiation process and, as a result, entered into binding arbitration on March 20, 1996, as required under the provisions of the contracts. Contract provisions to be determined by this binding arbitration process are limited to the length of the contract extension and wages. A decision from the arbitrator is expected in the second quarter of 1996. In addition, the International Brotherhood of Electrical Workers, Local 111 has filed several grievances relating to the employment of certain non-union personnel to perform services for the Company, which matters are currently in arbitration. Approximately 2,150 employees, or 45% of the Company's total workforce, are represented by Local 111. 15 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) 5. Management's Representations In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements include all adjustments necessary for the fair presentation of the financial position of the Company and its subsidiaries at March 31, 1996 and December 31, 1995, and the results of operations and cash flows for the three months ended March 31, 1996 and 1995. The consolidated condensed financial information and notes thereto should be read in conjunction with the consolidated financial statements and notes for the years ended December 31, 1995, 1994 and 1993 included in the Company's 1995 Annual Report filed with the Securities and Exchange Commission on Form 10-K. Because of seasonal and other factors, the results of operations for the three month period ended March 31, 1996 should not be taken as an indication of earnings for all or any part of the balance of the year. 16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF 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 March 31, 1996, and the related consolidated condensed statements of income and cash flows for the three month periods ended March 31, 1996 and 1995. 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, 1995 (not presented herein), and, in our report dated February 15, 1996, 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, 1995, 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, May 10, 1996 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Earnings Earnings per share were $0.97 for the first quarter of 1996 as compared to $0.81 for the first quarter of 1995. The higher earnings were primarily attributable to increased electric and gas margins due to higher retail sales and lower operating and maintenance expenses resulting from the favorable impact of the February 9, 1996 settlement agreement with the DOE resolving all spent nuclear fuel storage and disposal issues at Fort St. Vrain (See Note 2. Fort St. Vrain in Item 1. FINANCIAL STATEMENTS). Electric Operations The following table details the change in electric operating revenues and energy costs for the first three months of 1996 as compared to the same period in 1995. Increase (Decrease) ------------------- (Thousands of Dollars) Electric operating revenues: Retail............................................... $ 11,896 Wholesale............................................ (533) Other (including unbilled revenues).................. (7,829) ------ Total revenues...................................... 3,534 Fuel used in generation............................... (848) Purchased power....................................... 957 --- Net increase in electric margin..................... $ 3,425 ======== The following table compares electric Kwh sales by major customer classes for the first quarter of 1996 and 1995. Millions of Kwh Sales 1996 1995 % Change * ---- ---- ---------- Residential ................................ 1,833 1,728 6.1% Commercial and Industrial ................. 3,776 3,690 2.3 Public Authority ........................... 51 48 6.2 -- -- Total Retail.............................. 5,660 5,466 3.5 Wholesale................................... 792 794 (0.3) --- --- Total.................................... 6,452 6,260 3.1 ===== ===== * Percentages are calculated using unrounded amounts Electric operating revenues increased in the first quarter of 1996, when compared to the first quarter of 1995, primarily due to higher electric Kwh retail sales resulting from residential customer growth offset, in part, by lower unbilled revenues ($7.1 million). The Company and Cheyenne currently have cost adjustment mechanisms which recognize the majority of the effects of changes in fuel used in generation and purchased power costs and allow recovery of such costs on a timely basis. As a result, the changes in revenues associated with these mechanisms during the first quarters of 1996 and 1995 had little impact on net income. A majority of purchased power costs associated with QFs have historically been collected through the QFCCA, a cost adjustment mechanism; however, the future recovery of costs under the QFCCA has been modified by the CPUC and will be subject to an earnings test, beginning October 1, 1996. The Company intends to address this issue in connection with the merger rate filing. This earnings test, if not changed or eliminated, may negatively impact the ability of the Company to earn a rate of return on common equity in excess of its current 11% allowed return in the electric department (see Note 4. Commitments and Contingencies-Regulatory Matters in Item 1. FINANCIAL STATEMENTS). 18 Fuel used in generation expense decreased approximately $848,000 or 1.8% during the first quarter of 1996, as compared to the same quarter in 1995, due to slightly lower coal costs from the renegotiation of certain contracts as generation levels were about the same for both periods. Purchased power expense increased approximately $957,000 or 0.8% in the first three months of 1996 as compared to the same period in 1995, primarily due to an increase in economy purchases from other utilities to meet customer demand. Gas Operations The following table details the change in gas operating revenues and gas purchased for resale for the first three months of 1996 as compared to the same period in 1995. Increase (Decrease) ------------------- (Thousands of Dollars) Gas operating revenues................................ $ (2,329) Less: gathering, processing and transportation revenues 31 -- Revenues from gas sales.............................. (2,360) Gas purchased for resale.............................. (7,411) ------ Net increase in gas sales margin..................... $ 5,051 ======== The following table compares gas Mcf deliveries by major customer classes for the first quarter of 1996 and 1995. Millions of Mcf Deliveries 1996 1995 % Change * ---- ---- ---------- Residential................................ 46.3 40.8 13.5% Commercial and Industrial.................. 27.2 23.5 15.5 ---- ---- Total Sales.............................. 73.5 64.3 14.2 Gathering and Processing................... 0.2 0.4 (46.2) Transportation............................. 25.5 24.2 5.3 ----- ----- Total.................................... 99.2 88.9 11.5 ===== ==== * Percentages are calculated using unrounded amounts Gas sales margin increased in the first quarter of 1996, when compared to the first quarter of 1995, primarily due to higher retail gas sales resulting from colder weather in the current period and moderate customer growth. The weather was approximately 18.5% colder during the first quarter of 1996 as compared to the same period in 1995. While total gas sales increased 14.2%, revenues from gas sales decreased in the first three months of 1996, as compared to the same period in 1995, primarily due to the effects of lower gas costs which are recoverable through GCA mechanisms. The Company and Cheyenne have in place GCA mechanisms for natural gas sales, which recognize the majority of the effects of changes in the cost of gas purchased for resale and adjust revenues to reflect such changes in cost on a timely basis. As a result, the changes in revenues associated with these mechanisms during the first quarters of 1996 and 1995 had little impact on net income. The fluctuations in gas sales impact the amount of gas the Company must purchase and, therefore, affect total gas purchased for resale along with increases and decreases in the per-unit cost of gas. The $7.4 million decrease in gas purchased for resale for the first quarter of 1996 as compared to the first quarter of 1995, is primarily due to lower per unit cost of gas offset, in part, by the increase in gas purchases. 19 Non-Fuel Operating Expenses Other operating and maintenance expenses decreased $13.5 million or 12.9% during the first quarter of 1996, when compared to the same quarter in 1995, primarily due to the favorable impact of the February 9, 1996 settlement agreement with the DOE resolving all spent nuclear fuel storage and disposal issues at Fort St. Vrain (approximately $16 million) offset, in part, by costs incurred during the first quarter of 1996 associated with the Merger ($2.8 million) and the settlement of certain environmental issues related to the operations of the Hayden station. These items are discussed further in Note 2. Fort St. Vrain, Note 3. Merger and Note 4. Commitments and Contingencies - Environmental Issues, respectively, in Item 1. FINANCIAL STATEMENTS. Depreciation and amortization expense increased approximately $1.7 million or 4.8% in the first quarter of 1996, as compared to the same period in 1995, primarily due to higher depreciation expense from property additions. Taxes (other than income taxes) decreased $786,000 or 3.4% during the first quarter of 1996, when compared to the same period in 1995, primarily due to decreased payroll related taxes resulting from a reduced workforce and lower property taxes. The increase in income taxes for the first quarter of 1996, as compared to the same period in 1995, is primarily due to higher pre-tax income, the tax effects of certain merger costs incurred in 1996 which are non-deductible for income tax purposes and the accrual of additional tax liabilities for prior years. The change in miscellaneous income and deductions - net was primarily due to the 1995 recognition of a $2.1 million refund obligation related to the sale of WestGas Gathering, Inc. in accordance with a 1995 settlement agreement with the OCC. Financial Position The increase in accounts receivable at March 31, 1996, as compared to the amount at December 31, 1995, was due to the impact of a gas refund made late in 1995. The majority of this gas refund was applied directly to customers' accounts during the fourth quarter of 1995 which served to lower accounts receivable at December 31, 1995. Recovered purchased gas and electric energy costs - net increased approximately $28.3 million at March 31, 1996 as compared to December 31, 1995, primarily due to lower gas costs charged by the Company's suppliers. Effective April 2, 1996, as approved by the CPUC, natural gas rates were reduced by approximately $44 million on an annual basis which will serve to minimize any future overrecovery of purchased gas costs. This reduction will have no impact on net income. The decrease in accounts payable is also primarily attributable to lower gas costs. The decrease in noncurrent defueling and decommissioning liability of $23.1 million was primarily due to expenditures during the first quarter of 1996 and the February 9, 1996 settlement agreement with the DOE resolving all spent nuclear fuel storage and disposal issues at Fort St. Vrain (See Note 2. Fort St. Vrain in Item 1. FINANCIAL STATEMENTS). Customer advances for construction decreased by approximately $41.9 million due to a 1996 transfer of amounts to property, plant and equipment, which served to reduce such investments, after determining that these amounts would not be refunded to customers in the future. Recently Issued Accounting Standards Adopted In March 1995, the FASB issued SFAS 121, which requires the Company to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This statement also imposes stricter criteria for continued recognition of regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. The Company adopted this standard on 20 January 1, 1996, the effective date of this new statement, and such adoption did not have a material impact on the Company's results of operations, financial position or cash flows. Commitments and Contingencies Issues relating to the Merger with SPS, and regulatory and environmental matters are discussed in Notes 3 and 4, respectively, in Item 1. FINANCIAL STATEMENTS. These matters and the future resolution thereof, may impact the Company's future results of operations, financial position and cash flows. Common Stock Dividend In the first quarter of 1996, the Company increased the quarterly dividend on its common stock from $0.51 per share to $0.525 per share. The Company's common stock dividend level is dependent upon the Company's results of operations, financial position, cash flows and other factors. The Board of Directors will continue to evaluate the common stock dividend level on a quarterly basis. Liquidity and Capital Resources Cash Flows - Three Months Ended March 31 1996 1995 ---- ---- Net cash provided by operating activities (in millions) $123.3 $ 178.0 Cash provided by operating activities decreased approximately $54.7 million in the first quarter of 1996 when compared to the first quarter of 1995 primarily due to an increase in accounts receivable ($35.6 million) and a decrease in the recovery of purchased gas and electric energy costs ($19.9 million). The increase in accounts receivable was due to a gas refund made late in 1995 which was applied directly to customers' accounts resulting in lower cash receipts during the first quarter of 1996. The decrease in recovered purchased gas and electric energy costs was due to a reduction in the level of over collection of these costs in the first quarter of 1996, as compared to the first quarter of 1995, thereby also lowering cash receipts during the first quarter of 1996. At March 31, 1996, the Company's decommissioning liability, excluding defueling, was approximately $23.9 million. The expenditures related to this obligation are expected to be incurred during the remainder of 1996. The annual decommissioning amount being recovered from customers is approximately $13.9 million which will continue through June 2005. At March 31, 1996, approximately $95.8 million remains to be collected from customers and is reflected as a regulatory asset on the consolidated condensed balance sheet. Accordingly, operating cash flows will continue to be negatively impacted until the decommissioning of Fort St. Vrain is completed later in 1996. 1996 1995 ---- ---- Net cash used in investing activities (in millions) $(60.7) $(61.1) Cash used in investing activities, which substantially consists of construction expenditures, decreased only slightly for the first quarter of 1996, when compared to the same period in 1995, reflecting a consistent level of capital expenditures between the quarters. 1996 1995 ---- ---- Net cash used in financing activities (in millions) $(64.8) $(109.2) Cash used in financing activities decreased (indicating there were more borrowings) in the first quarter of 1996, when compared to the first quarter of 1995, primarily due to increases in short-term borrowings ($39.9 million) to meet operating cash requirements as discussed above. 21 PART II - OTHER INFORMATION Item 1. Legal Proceedings Part 1. Issues relating to decommissioning and defueling are discussed in Note 2. Fort St. Vrain and issues relating to the recovery of energy efficiency credits, environmental site cleanup and other environmental matters, employee litigation and union contracts are discussed in Note 4. Commitments and Contingencies in Item 1, Part 1. Item 4. Submission of Matters to a Vote of Security Holders On January 31, 1996, the Company held a Special Meeting of Shareholders at which shareholders were asked to approve the Merger Agreement pursuant to which the holders of Company common stock and holders of SPS common stock will become holders of the common stock of NCE upon the completion of the Merger. The Merger was approved by the shareholders. Of the shares voted, 50,934,837, 1,366,283, and 824,460 votes were cast for, against and abstained, respectively (see Note 3. Merger in Item 1, Part 1). Approximately 72% of the Company's outstanding shares of common and preferred stock were voted in favor of the Merger. An affirmative vote of two-thirds of the outstanding shares was required for approval. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges is set forth at page 25 herein. 12(b) Computation of Ratio of Consolidated Earnings to Consolidated Combined Fixed Charges and Preferred Stock Dividends is set forth at page 26 herein. 15 Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 27 herein. 27 Financial Data Schedule UT (b) Reports on Form 8-K A report on Form 8-K, dated January 18, 1996, was filed on January 29, 1996. The item reported was Item 5 - Other Events, which presented updated information related to litigation, a notice of violation issued by the EPA and environmental matters associated with the operations of the Hayden Steam Electric Generating Station. A report on Form 8-K, dated January 31, 1996, was filed on February 1, 1996. The item reported was Item 5 - Other Events, which reported that on January 31, 1996, at separate meetings of shareholders, the holders of Company Common Stock, Company Preferred Stock, and SPS Common Stock approved the Merger Agreement. 22 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. PUBLIC SERVICE COMPANY OF COLORADO By /s/ R. C. Kelly --------------------------------- R. C. KELLY Senior Vice President, Finance, Treasurer and Chief Financial Officer Dated: May 14, 1996 23 EXHIBIT INDEX 12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges is set forth at page 25 herein. 12(b) Computation of Ratio of Consolidated Earnings to Consolidated Combined Fixed Charges and Preferred Stock Dividends is set forth at page 26 herein. 15 Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 27 herein. 27 Financial Data Schedule UT. 24 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) Three Months Ended March 31, 1996 1995 ---- ---- (Thousands of Dollars, except ratios) Fixed charges: Interest on long-term debt................... $ 22,068 $ 21,506 Interest on borrowings against corporate-owned life insurance contracts................... 9,258 7,969 Other interest............................... 4,413 5,339 Amortization of debt discount and expense less premium ................................... 977 791 Interest component of rental expense......... 2,746 1,690 ----- ----- Total ..................................... $ 39,462 $ 37,295 ======== ======== Earnings (before fixed charges and taxes on income): Net income................................... $ 64,429 $ 53,644 Fixed charges as above....................... 39,462 37,295 Provisions for Federal and state taxes on income, net of investment tax credit amortization.... 41,146 29,334 ------ ------ Total...................................... $145,037 $120,273 ======== ======== Ratio of earnings to fixed charges.............. 3.68 3.22 ==== ==== 25 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) Three Months Ended March 31, 1996 1995 ---- ---- (Thousands of Dollars, except ratios) Fixed charges and preferred stock dividends: Interest on long-term debt.................. $ 22,068 $ 21,506 Interest on borrowings against corporate-owned life insurance contracts.................. 9,258 7,969 Other interest.............................. 4,413 5,339 Amortization of debt discount and expense less premium .................................. 977 791 Interest component of rental expense........ 2,746 1,690 Preferred stock dividend requirement........ 2,972 3,001 Additional preferred stock dividend requirement 1,898 1,641 ----- ----- Total .................................... $ 44,332 $ 41,937 ======== ======== Earnings (before fixed charges and taxes on income): Net income.................................. $ 64,429 $ 53,644 Interest on long-term debt.................. 22,068 21,506 Interest on borrowings against corporate-owned life insurance contracts.................. 9,258 7,969 Other interest.............................. 4,413 5,339 Amortization of debt discount and expense less premium .................................. 977 791 Interest component of rental expense........ 2,746 1,690 Provisions for Federal and state taxes on income, net of investment tax credit amortization ............................. 41,146 29,334 ------ ------ Total..................................... $145,037 $120,273 ======== ======== Ratio of earnings to fixed charges and preferred stock dividends................ 3.27 2.87 ==== ==== 26 EXHIBIT 15 May 10, 1996 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; the Company's Registration Statement (Form S-3, File No. 33-37431), as amended on December 4, 1990, pertaining to the shelf registration of the Company's First Mortgage Bonds; the Company's Registration Statement (Form S-8, File No. 33-55432) pertaining to the Omnibus Incentive Plan; the Company's Registration Statement (Form S-3, File No. 33-51167) pertaining to the shelf registration of the Company's First Collateral Trust Bonds and the Company's Registration Statement (Form S-3, File No. 33-54877) pertaining to the shelf registration of the Company's First Collateral Trust Bonds and Cumulative Preferred Stock, its Form 10-Q for the quarter ended March 31, 1996, which includes our report dated May 10, 1996, 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 EX-27 2 FDS --
UT This schedule contains summary financial information extracted from Public Service Company of Colorado and Subsidiaries consolidated balance sheet as of March 31,1996 and consolidated statements of income and cash flows for the three months ended March 31, 1996 1,000 3-MOS DEC-31-1995 MAR-31-1996 PER-BOOK 3,467,182 35,553 461,767 375,770 0 4,340,272 319,235 694,129 374,477 1,387,841 41,289 140,008 1,193,862 68,425 0 199,495 67,895 2,576 48,000 4,577 1,238,881 4,340,272 622,917 41,146 76,646 520,827 102,090 (2,017) 100,073 35,644 64,429 2,972 61,457 33,520 0 123,296 0.525 0.525
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