-----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, OavUnJqLGUDRych0w1WW1UUh1rYkBetW6EDMO8WOfzigYhDDAXqk6Te18WLLWOPJ bNLZ0YH3DDbnam0rgVGWXQ== 0000912057-97-006728.txt : 19970226 0000912057-97-006728.hdr.sgml : 19970226 ACCESSION NUMBER: 0000912057-97-006728 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970225 SROS: AMEX SROS: NYSE SROS: PSE 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03280 FILM NUMBER: 97543169 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-K 1 10K FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 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 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED COMMON STOCK, PAR VALUE $5 PER SHARE New York, Chicago and Pacific RIGHTS TO PURCHASE COMMON STOCK New York, Chicago and Pacific CUMULATIVE PREFERRED STOCK, PAR VALUE $100 PER SHARE 4 1/4 Series American 7.15% Series New York CUMULATIVE PREFERRED STOCK ($25), PAR VALUE PER SHARE 8.40% Series New York SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: CUMULATIVE PREFERRED STOCK, PAR VALUE $100 PER SHARE (TITLE OF CLASS) 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 ------- ------- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ] THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK, $5.00 PAR VALUE (THE ONLY CLASS OF VOTING STOCK), HELD BY NON-AFFILIATES WAS $2,536,745,052 BASED ON THE LAST SALE PRICE THEREOF REPORTED ON THE CONSOLIDATED TAPE FOR FEBRUARY 21, 1997. AT FEBRUARY 21, 1997, 65,253,892 SHARES OF THE REGISTRANT'S COMMON STOCK, $5.00 PAR VALUE (THE ONLY CLASS OF COMMON STOCK), WERE OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE REGISTRANT'S 1997 PROXY STATEMENT ARE INCORPORATED BY REFERENCE IN PART II, ITEM 9 AND PART III, ITEMS 10, 11, 12 AND 13 OF THIS FORM 10-K. TABLE OF CONTENTS PART I Item 1. Business......................................................... 1 The Company.......................................................... 1 Cheyenne & WGI................................................... 2 e prime and subsidiaries......................................... 2 Other Subsidiaries............................................... 2 Electric Operations.................................................. 2 Peak Load........................................................ 3 Purchased Power.................................................. 3 Construction Program............................................. 5 Electric Fuel Supply................................................. 5 Coal............................................................. 6 Natural Gas and Fuel Oil......................................... 7 Natural Gas Operations............................................... 8 Natural Gas Supply and Storage................................... 8 Regulation and Rates................................................. 8 Merger Rate Filings.............................................. 9 State Regulation................................................. 9 CPUC......................................................... 9 Gas Rate Case................................................ 9 Electric and Gas Adjustment Clauses.......................... 9 Incentive Regulation and Demand Side Management.............. 10 IRP - Electric............................................... 10 WPSC......................................................... 10 Federal Energy Regulatory Commission............................. 10 Environmental Matters................................................ 11 Competition.......................................................... 12 Industry Outlook................................................. 12 State Regulatory Environment..................................... 12 Electric......................................................... 13 Natural Gas...................................................... 13 Franchises........................................................... 13 Employees & Union Contracts.......................................... 13 Research and Development............................................. 14 Consolidated Electric Operating Statistics........................... 15 Consolidated Gas Operating Statistics................................ 16 Electric Transmission Map............................................ 17 Item 2. Properties....................................................... 18 Electric Generation Property......................................... 18 Nuclear Generation Property.......................................... 18 Electric Transmission and Distribution Property...................... 18 Gas Property......................................................... 19 Other Property....................................................... 19 Property of Subsidiaries............................................. 20 Character of Ownership............................................... 20 Item 3. Legal Proceedings................................................ 20 Item 4. Submission of Matters to a Vote of Security Holders.............. 20 i PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................................ 21 Item 6. Selected Financial Data.......................................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 23 Industry Outlook..................................................... 23 Corporate Overview................................................... 23 Recent Developments.................................................. 24 Earnings............................................................. 25 Electric Operations.................................................. 25 Gas Operations....................................................... 27 Non-Fuel Operating Expenses.......................................... 28 Financial Position................................................... 29 Commitments and Contingencies........................................ 29 Common Stock Dividend................................................ 29 Liquidity and Capital Resources...................................... 29 Cash Flows...................................................... 29 Prospective Capital Requirements................................ 30 Capital Sources................................................. 31 Registration Statements......................................... 31 Company's Indentures............................................ 31 Company's Restated Articles of Incorporation.................... 32 Short-Term Borrowing Arrangements............................... 32 Item 8. Financial Statements and Supplementary Data...................... 33 Report of Audit Committee of the Board of Directors.................. 33 Report of Management................................................. 34 Report of Independent Public Accountants............................. 35 Consolidated Balance Sheets.......................................... 36 Consolidated Statements of Income.................................... 38 Consolidated Statements of Shareholders' Equity...................... 39 Consolidated Statements of Cash Flows................................ 40 Notes to Consolidated Financial Statements........................... 41 Schedule II............................................................... 69 Exhibit 12(a)............................................................. 70 Exhibit 12(b)............................................................. 71 Exhibit 99................................................................ 72 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................... 78 PART III Item 10. Directors and Executive Officers of the Registrant.............. 78 Item 11. Executive Compensation.......................................... 81 Item 12. Security Ownership of Certain Beneficial Owners and Management.. 81 ii Item 13. Certain Relationships and Related Transactions.................. 81 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 81 Experts................................................................... 83 Consent of Independent Public Accountants................................. 84 Power of Attorney......................................................... 84 Signatures................................................................ 85 Exhibit Index............................................................. 87 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 due to a variety of factors including, without limitation, restructuring of the utility industry; future economic conditions; earnings retention and dividend payout policies; developments in the legislative, regulatory and competitive environments in which the Company operates; and other circumstances that could affect anticipated revenues and costs, such as compliance with laws and regulations. These and other factors are discussed in the Company's filings with the Securities and Exchange Commission including this report. iii TERMS The abbreviations or acronyms used in the text and notes are defined below: ABBREVIATION OR ACRONYM TERM - ------------------------------------------------------------------------------ AEP....................................................American Electric Power AFDC............................. Allowance for Funds Used During Construction APB Opinion No. 25................. Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" Amax.............. Amax Coal Company, a subsidiary of Cyprus/Amax Coal Company Arapahoe........................... Arapahoe Steam Electric Generating Station BLM................................................. Bureau of Land Management Cameo................................. Cameo Steam Electric Generating Station CCT3................................................ Clean Coal Technology III CERCLA... Comprehensive Environmental Response, Compensation and Liability Act Cherokee........................... Cherokee Steam Electric Generating Station Cheyenne............................... Cheyenne Light, Fuel and Power Company COLI........................................... Corporate-owned life insurance Colorado Supreme Court................. Supreme Court of the State of Colorado Comanche........................... Comanche Steam Electric Generating Station Company or PSCo............................ Public Service Company of Colorado (excluding subsidiaries) CPCN.......................... Certificate of Public Convenience and Necessity CPUC..................... Public Utilities Commission of the State of Colorado Craig................................. Craig Steam Electric Generating Station CWIP............................................ Construction Work in Progress CWQCD................................. Colorado Water Quality Control Division Denver District Court.................. District Court in and for the City and County of Denver DOE................................................. U.S. Department of Energy DSM.................................................... Demand Side Management DSMCA.................................. Demand Side Management Cost Adjustment Dth................................................................. Dekatherm e prime......................................................... e prime, inc. ECA.................................................... Energy Cost Adjustment EIS............................................ Environmental Impact Statement EPAct...................................... National Energy Policy Act of 1992 EPA...................................... U.S. Environmental Protection Agency EWG................................................ Exempt Wholesale Generator FASB..................................... Financial Accounting Standards Board FERC..................................... Federal Energy Regulatory Commission FERC Order 636.................................FERC Order Nos. 636-A and 636-B Fort St. Vrain............. Fort St. Vrain Nuclear Electric Generating Station Fuelco....... Fuel Resources Development Co., a dissolved Colorado corporation GCA....................................................... Gas Cost Adjustment Hayden............................... Hayden Steam Electric Generating Station IBM....................................................... IBM Global Services ICA................................................. Incentive Cost Adjustment Interstate.................................... Colorado Interstate Gas Company IPPF.................................... Independent Power Production Facility IRP.................................................. Integrated Resource Plan IRS.................................................. Internal Revenue Service ISFSI............................. Independent Spent Fuel Storage Installation KN Energy..................................................... KN Energy, Inc. Merger.......... the proposed business combination between the Company and SPS iv Merger Agreement............ Agreement and Plan of Reorganization by and among the Company, SPS, and NCE, as amended Natural Fuels....................................... Natural Fuels Corporation NCE................................................ New Century Energies, Inc. NOPR............................................ Notice of Proposed Rulemaking NOx............................................................ Nitrogen Oxide NRC............................................. Nuclear Regulatory Commission OCC....................................... Colorado Office of Consumer Counsel OPEB................................... Other Postretirement Employee Benefits PCB.................................................. Polychlorinated biphenyl Pawnee............................... Pawnee Steam Electric Generating Station Pawnee 2.......... Pawnee Steam Electric Generating Station, Unit 2 (proposed) Pool........................................................ Inland Power Pool PRPs.......................................... Potentially Responsible Parties PSCCC.......................................... PS Colorado Credit Corporation PSRI.................................................... PSR Investments, Inc. PUHCA.............................. Public Utility Holding Company Act of 1935 QF........................................................ Qualifying Facility QFCCA.......................... Qualifying Facilities Capacity Cost Adjustment QSP................................................... Quality of Service Plan SEC........................................ Securities and Exchange Commission SFAS 71.................. Statement of Financial Accounting Standards No. 71 - "Accounting for the Effects of Certain Types of Regulation" SFAS 106................ Statement of Financial Accounting Standards No. 106 - "Employers' Accounting for Postretirement Benefits Other Than Pensions" SFAS 107................ Statement of Financial Accounting Standards No. 107 - "Disclosures about Fair Value of Financial Instruments" SFAS 109................ Statement of Financial Accounting Standards No. 109 - "Accounting for Income Taxes" SFAS 112................ Statement of Financial Accounting Standards No. 112 - "Employers' Accounting for Postemployment Benefits" SFAS 121................ Statement of Financial Accounting Standards No. 121 - "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" SFAS 123................ Statement of Financial Accounting Standards No. 123 - "Accounting for Stock-Based Compensation" SO2............................................................ Sulfur Dioxide SPS....................................... Southwestern Public Service Company TOG...................................................... Texas-Ohio Gas, Inc. TOP..................................................Texas-Ohio Pipeline, Inc. Tri-State............. Tri-State Generation and Transmission Association, Inc. UK..............................................................United Kingdom Valmont............................. Valmont Steam Electric Generating Station WGG................................................... WestGas Gathering, Inc. WGI.................................................. WestGas InterState, Inc. WGT............................................... WestGas TransColorado, Inc. WPSC..................................... Public Service Commission of Wyoming WSCC..................................... Western Systems Coordinating Council Young Storage................................. Young Gas Storage Company, Ltd. YGSC................................................ Young Gas Storage Company Yorkshire Electricity..........................Yorkshire Electricity Group plc Yorkshire Holdings......................................Yorkshire Holdings plc Yorkshire Power.....................................Yorkshire Power Group Ltd. Zuni................................... Zuni Steam Electric Generating Station v PART I ITEM 1. BUSINESS THE COMPANY The Company, incorporated through merger of predecessors under the laws of the State of Colorado in 1924, is an operating public utility engaged, together with its 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 provides electricity or gas or both in an area having an estimated population of 3.0 million people of which approximately 2.1 million are in the Denver metropolitan area. The Company's operations are wholly within the State of Colorado. On August 22, 1995, the Company, SPS, a New Mexico corporation, and NCE, a newly formed Delaware corporation, entered into a Merger Agreement providing for a business combination as peer firms involving the Company and SPS in a "merger of equals" transaction. As part of the agreement, NCE would become the parent company for the Company and SPS. On January 30, 1996, NCE filed its application with the SEC to be a registered public utility holding company. The shareholders of the Company and SPS approved the Merger Agreement on January 31, 1996. The Merger is subject to customary closing conditions, including the receipt of all necessary governmental approvals and the making of all necessary governmental filings, as discussed in Note 3. Merger and Note 9. Commitment and Contingencies - Regulatory Matters in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The future operations and financial position of the Company will be significantly affected by the Merger. See the information in Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and the unaudited pro forma financial information for NCE included in this report as Exhibit 99. On February 24, 1997, the Company and AEP jointly announced that they have reached agreement with the board of directors of Yorkshire Electricity, a UK regional electricity company, on the terms of a recommended cash tender offer for all of the outstanding and to be issued ordinary shares of Yorkshire Electricity (the "Proposed Acquisition"). The Company and AEP, through a joint venture named Yorkshire Holdings, are offering the equivalent of US $15.02 (9.27 pounds) per ordinary share, for a total purchase price of approximately US $2.4 billion (1.5 billion pounds). The boards of directors of the Company and AEP have approved the transaction. The board of directors of Yorkshire Electricity has agreed to recommend the offer to Yorkshire Electricity's shareholders. Consummation of the Proposed Acquisition is subject to customary conditions in the UK, including regulatory clearance and acceptance of the offer by holders of at least 90% of the outstanding shares of Yorkshire Electricity. Yorkshire Holdings may waive the latter condition when it has received acceptances of its offer and has otherwise acquired shares which in total represent more than 50% of the outstanding shares of Yorkshire Electricity. The Company cannot predict at this time whether or not these conditions will be met or waived. See "Recent Developments" in Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Note 4. Acquisition and Divestiture of Investments - Proposed Acquisition of Yorkshire Electricity in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. As of December 31, 1996, the Company owned all of the outstanding capital stock of Cheyenne, WGI, e prime, 1480 Welton, Inc., PSRI, PSCCC, Green and Clear Lakes Company and Fuelco (a dissolved corporation). In addition, the Company owned 83.63% of the capital stock of Natural Fuels and e prime owned all of the outstanding capital stock of TOG, TOP and YGSC. These subsidiaries are included in the Company's consolidated financial statements. The Company also holds a controlling interest in several other relatively small ditch and water companies whose capital requirements are not significant and which are not consolidated in the Company's financial statements or statistical data. 1 Information regarding industry segments is set forth in Note 14. Segments of Business in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. CHEYENNE AND WGI Cheyenne is an operating utility engaged in the purchase, distribution and sale of electricity and natural gas primarily serving customers in Cheyenne, Wyoming. WGI is a natural gas transmission company engaged in transporting gas to Cheyenne, Wyoming via a thirteen mile connecting pipeline between Chalk Bluffs, Colorado and Cheyenne, Wyoming. Gas transportation volumes were approximately 3.4 million Dth for 1996. E PRIME AND SUBSIDIARIES e prime, with headquarters in Denver and an office in Tulsa, was established in 1995 and provides energy related products and services which include, but are not limited to, electric and gas brokering and marketing, energy consulting and project development services and information processing and other technology based services. e prime is also pursuing international energy investment opportunities. On March 29, 1996, e prime received authorization from the FERC to act as a power marketer. Effective September 1, 1996, the Company and e prime acquired TOG, a gas marketing company, with headquarters in Houston and an office in Boston. TOG serves approximately 1,400 industrial and commercial customers in the eastern U.S. e prime and TOG have merged operations and together they provide value-added energy related products and services to end use customers and utilities nationwide. e prime also acquired TOP on September 1, 1996, a small pipeline company which connects two major interstate pipelines. TOP is subject to FERC regulation. The Company and its subsidiary, e prime are also developing the necessary policies and procedures to enable it to use energy derivative financial instruments in its electric and gas brokering and marketing activites. e prime owns a 50% general partnership interest in the Johnstown Cogeneration Company, LLC, which produces electric energy that is sold to PSCo under a 30 year contract. In addition, e prime acquired a 50% limited partnership interest in ep3 to identify and develop various international energy business opportunities. YGSC, a subsidiary of e prime, owns a 47.5% general partnership interest in Young Storage. Young Storage owns and operates an underground gas storage facility in northeastern Colorado. Young Storage is subject to FERC regulation. OTHER SUBSIDIARIES 1480 Welton, Inc. is a real estate company which owns certain of the Company's real estate interests; PSRI owns and manages permanent life insurance policies on certain past and present employees, the benefits from which are to provide future funding for general corporate purposes; PSCCC is a finance company that finances certain of the Company's current assets; Green and Clear Lakes Company owns water rights and storage facilities for water used at the Company's Georgetown Hydroelectric Station; Natural Fuels sells compressed natural gas as a transportation fuel to retail markets, converts vehicles for natural gas usage, constructs fueling facilities and sells miscellaneous fueling facility equipment. On July 1, 1996, Fuelco, which was primarily involved in the exploration and production of oil and natural gas, sold its remaining properties, the San Juan Basin Coal Bed Methane properties, at approximately book value. Effective October 31, 1996, Fuelco was dissolved. (See Note 4. Acquisition and Divestiture of Investments in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA). ELECTRIC OPERATIONS The Company proposes to use the following resources to meet its net dependable system capacity: 1) the Company's electric generating stations (see Electric Generation Property in Item 2. PROPERTIES); 2) purchases from other utilities and from QFs and IPPFs; 3) demand-side management options and 4) new generation alternatives, including the phased repowering of Fort St. Vrain. Additional planned resources are summarized in the 2 Company's proposed IRP, which was filed with the CPUC in October 1996 (see "Regulation and Rates - State Regulation - IRP - Electric"). PEAK LOAD During 1997, net firm system peak demand for the Company and Cheyenne is estimated to be 4,413 Mw, assuming normal weather conditions. Net dependable system capacity is projected to be, after accounting for 68 Mw of demand-side management options, 5,127 Mw (generating capacity of 3,304 Mw and firm purchases of 1,823 Mw) at the time of the anticipated 1997 system peak (summer season), resulting in a reserve margin of approximately 16%. The net firm system peak demand for the Company and Cheyenne for each of the last five years was as follows: 1992 1993 1994 1995 1996 ----- ----- ----- ----- ----- Net Firm System Peak Demand* (Mw)... 3,757 3,869 3,972 4,248 4,397 - ------------------- * Excludes station housepower, nonfirm electric furnace load and controlled interruptible loads (of which approximately 156 Mw, 164 Mw, 160 Mw, 148 Mw and 122 Mw in the years 1992-1996, respectively, was not interrupted at the time of the system peak). 2 The net firm system peak demand for the Company and Cheyenne for the years 1992-1996 occurred in the summer. The net firm system peak demand for 1996, which occurred on August 13, 1996, was 4,397 Mw. At that time, the net dependable system capacity totaled 5,103 Mw (generating capacity of 3,314 Mw, together with firm purchases of 1,789 Mw), which represented a reserve margin of approximately 16%. Net dependable system capacity is the maximum net capacity available from both Company-owned generating units and purchased power contracts to meet the net firm system peak demand. PURCHASED POWER The Company purchases capacity and energy from various regional utilities as well as QFs and an IPPF in order to meet the energy needs of its customers. Capacity, typically measured in Kws or Mws, is the measure of the rate at which a particular generating source produces electricity. Energy, typically measured in Kwhs or Mwhs, is a measure of the amount of electricity produced from a particular generating source over a period of time. Purchase power contracts typically provide for a charge for the capacity from a particular generating source, together with a charge for the associated energy actually purchased from such generating source. 3 The Company and Cheyenne have contracted with the following sources for the firm purchase of capacity and energy at the time of the anticipated summer 1997 net firm system peak demand through the expiration of the contracts: Mw Contracted For at the Time of the Anticipated Generating Summer 1997 Net Firm Contract Company Source System Peak Demand Expiration - ------- ---------- -------------------- ---------- Basin Electric Power Cooperative, Laramie River Station Agreements 1 and 2 (a) (b) Units 2 and 3 175 2016 PacifiCorp (c) PacifiCorp System 140 2000 PacifiCorp (d) PacifiCorp Resource Pool 176 2011 Platte River Power Authority (a) (e) Craig Units 1 and 2; 180 2004 Rawhide Unit 1 Tri-State 525 (f) Agreements 1, 2, 3 and 4 (a) (f) Laramie River Station Units 2 and 3; Craig Units 1, 2 and 3 Agreement 5 (a) (f) Laramie River Station Units 2 and 3; Craig Units 1, 2 and 3; Nucla Units 1, 2, 3 and 4 Various Owners (a) QFs & IPPF 627 Various dates ----- 1,823 ----- -----
- ------------------- (a) These contracts are contingent upon the availability of the units listed as the generating source. These contracts are take and pay contracts. Based upon the terms of these agreements, if the capacity is available from these units, the Company is obligated to pay for capacity whether or not it takes any energy. However, the Company has historically satisfied the minimum energy requirements associated with these agreements and anticipates doing so in the future. Additionally, if these units are unavailable, the supplying company has no obligation to furnish capacity or energy and the capacity charge to the Company is reduced accordingly. (b) The Company has entered into two agreements with Basin Electric Power Cooperative. The first agreement is for 100 Mw of capacity through March 31, 2016. The second agreement is for 75 Mw of summer season capacity through March 31, 2016 and 25 Mw of winter season capacity through March 31, 2010. (c) This contract calls for PacifiCorp to sell to Cheyenne the total electric capacity and energy requirements associated with the operation of Cheyenne's service area. (d) The current agreement with PacifiCorp expires October 31, 2022. However, the agreement provides the Company the opportunity to exercise an irrevocable option to terminate the agreement on December 31, 2011, provided the Company gives notice to PacifiCorp no later than March 1, 2002. (e) The amount of capacity to be made available for each summer and winter season is agreed upon prior to such season to the extent that Platte River Power Authority has excess capacity for such season. (f) The Company has entered into five agreements with Tri-State. Agreements 1, 2 and 5 are contracts for 100 Mw each of capacity and expire in 2001, 2017 and 2011, respectively. Agreement 3 is a contract for 25 Mw of summer season capacity and 75 Mw of winter season capacity and expires in 2016. Agreement 4 expires in 2018 and the related capacity is for the following amounts: 1997 through 2000 - 200 Mw and 2001 through 2018 - 250 Mw; however, either party may elect to reduce the Agreement 4 capacity by up to 50 Mw each year, except for 2001, effective in the year 1999. If the full 50 Mw reduction is taken each year, the capacity associated with Agreement 4 from 1999 on would be as follows: 1999 - 150 Mw, 2000 through 2001 - 100 Mw, 2002 - 50 Mw with no commitments thereafter. The Company has notified Tri-State of its intent to reduce the capacity associated with Agreement 4 to 150 Mw for 1999. 4 See Note 9. Commitments and Contingencies - Purchase Requirements in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA for information regarding the Company's financial commitments under these contracts. See Electric Transmission and Distribution Property in Item 2. PROPERTIES for a discussion of the Company's interconnections with these sources. Based on present estimates, the Company and Cheyenne will purchase approximately 37% of the total electric system energy input for 1997. In addition, based on the capacity associated with the purchase power contracts described above, approximately 36% of the total net dependable system capacity for the estimated summer 1997 net firm system peak demand for the Company and Cheyenne will be provided by purchased power, compared to approximately 35% in 1996. In accordance with the Public Utility Regulatory Policies Act of 1978 ("PURPA"), the Company is obligated to purchase at "avoided cost" capacity and energy from QFs. The Company has had tariffs in effect since 1984 for these purchases. In December 1987, the CPUC issued an order imposing a moratorium during which the Company was no longer required to continue to execute additional QF contracts due to the fact that excess generating capacity would be created if additional contracts were executed. Although a comprehensive QF bidding procedure was adopted by the CPUC in 1988, which allowed the Company to purchase the most competitively priced QF power, all of the QF capacity purchased by the Company, including approximately 5 Mw of additional capacity scheduled to come on line in the future, is being purchased under contracts entered into prior to the adoption of such procedure. Based on the 1988 comprehensive QF bidding criteria, QFs could provide up to 20% of the Company's net firm system peak load. The CPUC has circulated proposed new rules that would supplant the 1988 comprehensive QF bidding criteria whereby long-term future resource needs would be selected through a competitive bidding process. In 1996, approximately 15% of the Company's summer net firm system peak demand was provided by QFs. In addition to long-term and QF and IPPF purchases, the Company also made short-term and non-firm purchases throughout the year to replace generation from Company owned units which were unavailable due to maintenance and unplanned outages, to provide the Company's reserve obligation to the Pool, to obtain energy at a lower cost than that which could be produced by other resource options, including Company-owned generation and/or long-term purchase power contracts, and for various other operating requirements. Short-term and non- firm purchases accounted for approximately 3% of the Company's total energy requirement in 1996. Based on current projections, the Company expects that purchased capacity will continue to meet a significant portion of system requirements at least for the remainder of the 1990s. Such purchases neither require the Company to make an investment nor afford the Company an opportunity to earn a return. Further discussion related to recovery of purchased capacity costs can be found in "Regulations and Rates - State Regulation - Electric and Gas Adjustment Clauses". The Company is a member of the Pool which is composed of members each of which owns and/or operates electric generation and/or transmission systems which are interconnected to one or more other member systems. The objective of the Pool is to provide capacity which is categorized as: 1) immediately accessible; 2) accessible within ten minutes; and 3) accessible within twelve hours, as required. As a result of membership in the Pool, the Company can supply and protect its electric system with less aggregate operating reserve capacity than otherwise would be necessary; emergency conditions can be met with less likelihood of curtailment or impairment of electric service; and generation and transmission facilities and interconnections can be used more efficiently and economically. CONSTRUCTION PROGRAM At December 31, 1996, the Company and its subsidiaries estimated the cost of their total construction program, including AFDC, to be approximately $327 million in 1997, approximately $376 million in 1998, and 5 approximately $300 million in 1999 (see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS). ELECTRIC FUEL SUPPLY The following table presents the delivered cost per million Btu of each category of fuel consumed by the system for electric generation of the Company and its utility subsidiary during the years indicated, the percentage of total fuel requirements represented by each category of fuel and the weighted average cost of all fuels during such years: Weighted Average Coal* Gas All Fuels** ---------------------------------------- Cost $ % Cost $ % Cost $ 1996........................... 1.029 98 2.424 2 1.054 1995........................... 0.992 99 1.521 1 0.998 1994........................... 1.038 99 2.069 1 1.053 1993........................... 1.078 98 2.319 2 1.097 1992........................... 1.091 99 2.065 1 1.105 * The average cost per ton of coal, including freight, for years 1992 through 1996 shown above was $21.14, $21.03, $20.57, $19.06 and $20.17, respectively. ** Insignificant purchases of oil are included. COAL The Company's primary fuel for its steam electric generating stations is low-sulfur western coal. The Company's coal requirements are purchased primarily under seven long-term contracts with suppliers operating in Colorado and Wyoming, the largest of which is with Cyprus/Amax Coal Company, which operates the Belle Ayr and Eagle Butte Mines near Gillette, Wyoming and the Foidel Creek and Empire Energy mines in northwestern Colorado. Long-term contracts presently in existence provide for a substantial portion of future annual coal requirements. Any shortfall will be provided by purchases on the spot market. During the year ended December 31, 1996, the Company's coal requirements for existing plants were approximately 9,118,360 tons, a substantial portion of which was supplied pursuant to long-term supply contracts. Coal supply inventories at December 31, 1996 were approximately 43 days usage, based on the average peak burn rate for all the Company's coal-fired plants. 6 The following table provides a summary of the basic supply provisions of the existing long-term contracts, which provide a minimum delivery of approximately 78 million tons of low-sulfur coal over their remaining life (see Note 9. Commitments and Contingencies - Purchase Requirements in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ). MINIMUM MAXIMUM CONTRACT DELIVERY DELIVERY MAXIMUM PER CONTRACT YEAR PER CONTRACT YEAR SULFUR COAL SUPPLIER AND DELIVERY YEAR IN TONS IN TONS CONTENT - ------------------------------- ----------------- ----------------- -------- Amax (1) 1988 through Pawnee 2 completion..... 3,960,000 (2) 0.50% Pawnee 2 completion through 2013..... 3,600,000 (3) 0.50% Colowyo Coal Company 1992 through 2017.................... 79,429 (4) 79,429 0.70% Cyprus Coal Company 1988 through 1997.................... 1,700,000 1,900,000 0.60% Mountain Coal Company 1993 through 2000.................... 600,000 (5) 800,000 0.67% Powderhorn Coal Company 1995 through 1999.................... 150,000 350,000 0.69% Seneca Coals, Ltd (6) 1992 through 2004.................... 439,800 (7) 1.00% Trapper Mining, Inc. 1992 through 2014.................... 189,108 (8) 189,108 (9)
(1) The contract term is completed upon delivery of 144,843,970 tons regardless of the year in which delivery is completed. From January 1, 1976 through December 31, 1996, 79,573,842 tons have been delivered. (2) Coal requirements of Comanche and Pawnee. (3) Coal requirements of Pawnee and Pawnee 2. (4) The contract minimum quantity varies by year during the agreement from 79,429 tons in 1996 to 124,810 tons in 2017. (5) The contract term is completed on December 31, 2000 or upon delivery of 3,200,000 tons. As of December 31, 1996, 2,181,740 tons have been delivered. (6) The contract term is completed upon total delivery of 31,250,000 tons to Hayden from and after January 1, 1983. As of December 31, 1996, 20,604,164 tons have been delivered. Delivery is expected to be completed in the year 2004. (7) Coal requirements of Hayden. (8) The contract minimum quantity varies by year during the agreement from 189,108 tons in 1996 to 140,621 tons in 2014. (9) Not specified in the contract. Each coal contract contains adjustment clauses which permit periodic price increases or decreases. See Note 9. Commitments and Contingencies - Purchase Requirements in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA for information regarding the Company's financial commitments under these contracts as well as coal transportation contracts. NATURAL GAS AND FUEL OIL The Company uses both firm and interruptible natural gas and standby oil in combustion turbines and certain boilers. Natural gas supplies for the Company's power plants are procured under short-term contracts on a competitive basis to provide an adequate supply of fuel. 7 NATURAL GAS OPERATIONS During the period 1992-1996, PSCo and Cheyenne have experienced growth in the number of residential and commercial customers ranging from 1.4% to 3.4% annually. Since 1992, residential and commercial gas volumes sold have averaged 131.9 million dekatherms ("MMDth") annually. The growth of residential and commercial sales has steadily improved due primarily to stronger economic conditions in Colorado and Wyoming. Growth of commercial customers has been impacted by large commercial customers selecting to purchase gas directly from suppliers. PSCo and Cheyenne transport gas through their transmission and distribution facilities for large commercial and industrial customers which purchase gas directly from suppliers. Fees for transportation services, which are paid by these customers, substantially offset the effect on net income of the revenue loss from decreased sales of gas to these customers. During 1996, transportation services generated revenues of $28.5 million compared to $23.8 million in 1995 and $23.5 million in 1994. 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 proposed as part of the merger with SPS (see Note 3. Merger in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA). The Company is seeking approval from the SEC to maintain these businesses and currently does not anticipate that divestiture will be required. If divestiture is ultimately required, the SEC has historically allowed companies sufficient time to accomplish divestitures in a manner that protects shareholder value. For a discussion of non-regulated gas marketing operations, see information in "e prime and subsidiaries". NATURAL GAS SUPPLY AND STORAGE PSCo and Cheyenne have attempted to maintain low cost, reliable natural gas supplies by optimizing a balance of long- and short-term gas purchase, firm transportation and gas storage contracts. During 1996, PSCo and Cheyenne purchased 142.2 MMDth from approximately 71 suppliers, including the following major suppliers: Interstate (39.9 MMDth); Western Gas Resources (12.2 MMDth); Barrett Resources (11.4 MMDth); Amoco Energy Trading Co. (11.3 MMDth); and PanEnergy Gas Services, Inc. (6.0 MMDth). In 1996, the average delivered cost per one thousand dekatherms ("MDth") for PSCo and Cheyenne was $2.58 compared to $2.22 per MDth in 1995 and $2.85 per MDth in 1994. Purchased gas costs are recovered from customers through the GCA (see "Regulation and Rates - State Regulation - Electric and Gas Adjustment Clauses"). Interstate was the largest gas supplier to PSCo and Cheyenne in 1996. During 1993, PSCo and Cheyenne entered into two non-regulated supply agreements, as allowed under FERC Order 636. Under the agreement with Interstate, which covered the period from October 1, 1993 through September 30, 1996, the annual quantities purchased declined from 46 MMDth in the first year to 34 MMDth in the second year and declined to 23 MMDth in the third year. Under the agreement with KN Gas Supply Services, Inc., which covered the period from September 1, 1993 through August 31, 1996, the annual quantities to be purchased were fixed at 4 MMDth. During 1996, PSCo and Cheyenne entered into new contracts with Interstate and others for firm transportation and gas storage services with terms of 5-7 years. Adequate supplies of natural gas are currently available for delivery within the Rocky Mountain region. PSCo and Cheyenne continually evaluate the natural gas market and procure supplies, as needed, to meet current and anticipated customer demand. REGULATION AND RATES The Company is subject to the jurisdiction of the CPUC with respect to its facilities, rates, accounts, services and issuance of securities. Cheyenne is subject to the jurisdiction of the WPSC. The Company is subject to the jurisdiction of the DOE through the FERC with respect to its wholesale electric operations and accounting practices and policies. The Company is also subject to the jurisdiction of the NRC with respect to the decommissioning of Fort St. Vrain. Although the Company is a "holding company" under the PUHCA, it has filed an annual exemption statement pursuant to Rule 2 of the SEC under that Act and is, therefore, currently exempt from all of the provisions of such Act and the Rules thereunder, except Section 9(a)(2) thereof. Such 8 exemption is subject to termination under Rule 6 of PUHCA. On January 30, 1996, as part of the Merger of the Company with SPS, NCE filed its application with the SEC to be a registered public utility holding company, which would subject the Company and its subsidiaries to regulation under PUHCA (see "Recent Developments" in Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS). The Company holds a FERC certificate which allows it to transport natural gas in interstate commerce pursuant to the provisions of the Natural Gas Act, the Natural Gas Policy Act of 1978 and FERC Order Nos. 436 and 500 without the Company becoming subject to full FERC jurisdiction. WGI and TOP each hold a FERC certificate which allows them to transport natural gas in interstate commerce pursuant to the provisions of the Natural Gas Act. WGI and TOP are subject to FERC jurisdiction. e prime and TOG have authorization from FERC to act as power marketers. MERGER RATE FILINGS See Note 3. Merger and Note 9. Commitments and Contingencies - Regulatory Matters - Merger Rate Filings in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. STATE REGULATION CPUC The CPUC consists of three full-time members appointed by the Governor and approved by the Colorado Senate. Only two members may be from the same political party. In 1996, the CPUC opened an inquiry docket related to electric utility restructuring. The Company submitted a response to a CPUC sponsored restructuring questionnaire which was followed by the CPUC issuing a summary of all responses. The CPUC is currently working with the Colorado General Assembly in its investigation and implementation of public policy. GAS RATE CASE See Note 9. Commitments and Contingencies - Rate Case in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ELECTRIC AND GAS ADJUSTMENT CLAUSES At December 31, 1996, the Company has four adjustment clauses: the ICA (which replaced the ECA), GCA, DSMCA and QFCCA. These adjustment clauses allow certain costs to be passed through to retail customers. The Company and Cheyenne are required to file applications with their respective state regulatory commissions for approval of adjustment mechanisms in advance of the proposed effective date. The applications must be acted upon before becoming effective. 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 present form, altered or eliminated, and on January 8, 1996, combined this docket with the Merger docket discussed in Note 9. Commitments and Contingencies - Regulatory Matters - Merger Rate Filings in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The CPUC decision on the Merger modified and replaced the ECA with the ICA. The ICA, which became effective October 1, 1996, allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders. The Company, through its GCA, is allowed to recover the difference between its actual costs of purchased gas and the amount of these costs recovered under its base rates. The GCA rate is revised annually on October 1 and otherwise as needed, to coincide with changes in purchased gas costs. Purchased gas costs and 9 revenues received to recover such gas costs are compared on a monthly basis and differences, including interest, are deferred. The CPUC has had an on-going docket to review the status of the GCA and will determine whether it should be maintained in its present form, altered or eliminated. The CPUC conducted hearings regarding this matter on February 14, 1997. Additional hearings have been scheduled for March 7, 1997. The QFCCA was implemented on December 1, 1993. Under the QFCCA, all purchased capacity costs from new QF projects, not otherwise reflected in base electric rates, are recoverable. The DSMCA is discussed below in "Incentive Regulation and Demand Side Management". INCENTIVE REGULATION AND DEMAND SIDE MANAGEMENT The Company, in a collaborative process with public interest groups, consumers and industry, has developed DSM programs (programs designed to reduce peak electricity demand, shift on-peak demand to off-peak hours and provide for more efficient operation of the electric generation system), including incentive and cost recovery mechanisms. The CPUC approved the programs in 1993 along with a schedule to be implemented over a three-year period. Effective July 1, 1993, the Company implemented a DSMCA clause which permits it to recover deferred DSM costs over seven years while non-labor incremental expenses, carrying costs associated with deferred DSM costs and certain incentives associated with the approved DSM programs are recovered on an annual basis. The CPUC subsequently opened a separate docket to investigate issues involving alternative annual revenue reconciliation mechanisms and incentive mechanisms related to the Company's DSM programs. The investigation was completed in 1995 and a final order was issued. The major provisions of the final order, effective December 27, 1995, included: 1) not to proceed with any of the proposed mechanisms; 2) to reduce the recovery period for certain costs of the Company's DSM programs from seven to five years for expenditures made on or after January 1, 1995; 3) not to establish DSM targets for 1997 and 1998; 4) not to adopt a penalty for failure to achieve DSM targets; and 5) to approve the Company's proposal to forego incentive payments for DSM programs. Under a separate CPUC order issued in December 1992, the Company has implemented a Low-Income Energy Assistance Program. The costs of this energy conservation and weatherization program for low-income customers are recoverable through the DSMCA. IRP - ELECTRIC The Company filed a new IRP with the CPUC in October 1996. A final order is expected in 1997. WPSC In June 1993, Cheyenne filed gas and electric IRPs with the WPSC pursuant to a settlement agreement. The WPSC has not formally acted on these filings. The WPSC has approved adjustment mechanisms which permit Cheyenne to recover purchased energy costs. FEDERAL ENERGY REGULATORY COMMISSION See Note 9. Commitments and Contingencies - Regulatory Matters - Rate Cases in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA for information related to the Company's FERC rate case. Information regarding FERC Order No. 888, Order No. 889 and the NOPR on Capacity Reservation Open Access Transmission Tariffs is discussed in Note 9. Commitments and Contingencies - Regulatory Matters - Federal Energy Regulatory Commission in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 10 ENVIRONMENTAL MATTERS Environmental regulations at the Federal, state and local levels, including the Clean Air Act Amendments (CAAA) of 1990 and other environmental matters, are expected to have a continuing impact on the Company's operations. See Note 9. Commitments and Contingencies - Environmental Issues in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA for a discussion of the impact on the Company of the CAAA of 1990, environmental site clean-up, and other environmental matters not discussed below. The Company continues to strive to achieve compliance with all environmental regulations currently applicable to its operations. However, it is not possible at this time to determine when or to what extent additional facilities or modifications of existing or planned facilities will be required as a result of changes to environmental regulations, interpretations or enforcement policies or, generally, what effect future laws or regulations may have upon the Company's operations. At December 31, 1996, the estimated 1997, 1998 and 1999 expenditures for environmental air and water emission control facilities were $29.6 million, $43.7 million and $23.2 million, respectively. As discussed below the Company's share of estimated cost to install emission control equipment at the Hayden station for the years 1997 through 1999 is approximately $70 million. The Company continues to research and implement various SO2 and NOx emissions reduction projects, including two CCT3 projects. The CCT3 projects are part of a larger DOE Clean Coal Program, which co-funds developing technologies aimed at more efficient and environmentally acceptable methods of burning coal. Research and implementation continues on the two CCT3 projects, which involve Arapahoe Unit 4 and Cherokee Unit 3. Modification and testing at Cherokee Unit 3 and Arapahoe Unit 4 was conducted through 1996 and is expected to continue into 1997. The Company is currently participating in the Northern Front Range Air Quality Study (NFRAQS), a follow-up study to the previous Metro Denver Brown Cloud Studies, which is designed to investigate the formation of secondary particulates in the Denver metropolitan area. The previous study, completed in 1993, was inconclusive and did not offer any policy recommendations. The NFRAQS began field sampling in early December 1996 and is expected to be completed by December 1997. Also, the EPA issued a draft particulate regulation in 1996, requesting public comments on the proposed regulation with issuance of the final regulation expected in June 1997. The Company is currently evaluating the impact of this new regulation on its operations. The Mount Zirkel Wilderness Area ("MZWA") Reasonable Attribution Study, designed to ascertain the contribution of various emission sources to visibility impairment in the MZWA was completed in 1996. The Company is a participant in the Hayden and Craig generating stations, in the nearby Yampa Valley. The study results revealed that the Hayden and Craig Stations were minor contributors to visibility impairment in the MZWA. In May 1996, the joint owners of the Hayden station reached a settlement with a conservation organization, the Colorado Department of Public Health and Environment, and the EPA to resolve alleged air quality concerns in the Yampa Valley. The settlement, among certain other items, will result in the installation of additional emission control equipment at the Hayden station (see Note 9. Commitments and Contingencies - Environmental Issues in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA). Pursuant to the requirements of the Federal Clean Water Act, as amended, and the Colorado Water Quality Control Act and regulations issued thereunder, the Company receives National Pollution Discharge Elimination System permits to discharge effluents into various streams and waters of the State of Colorado for each of its generating stations. These permits, which have a five-year life, are issued by the CWQCD, but are subject to review by the EPA. The Company believes it is presently in compliance with such discharge permits. Renewed wastewater discharge permits have been issued for: 1) Fort St. Vrain, effective April 1, 1993; 2) Cherokee, effective July 1, 1993; 3) Zuni, effective August 1, 1993; 4) Hayden, effective August 1, 1994; 5) Valmont, effective October 1, 1994; 6) Arapahoe, effective December 1, 1994; 7) Cameo, effective December 1, 1994 and 8) Comanche effective July 1, 1996. A renewal wastewater discharge permit for the Leyden Gas Storage facility is expected in the first quarter of 1997. All discharge permits that are not renewed by the 11 CWQCD prior to their expiration date automatically receive an administrative extension pending the issuance of a final permit. The Company has completed the preparation of applications for Operating Permits as required by Title V of the 1990 CAAA. Permits were submitted to the state health department to meet 1996 submittal deadlines. The Company received its first Operating Permit in December 1996 for the Denver Steam Plant. The Company has applied for an early election of annual NOx emission limits for six units including Cherokee Units 3 and 4, Valmont Unit 5, Pawnee Unit 1, and Comanche Units 1 and 2. If the Company meets emission limits for these six units, as required by the early election, the Company would have until the year 2008, rather than the year 2000, to meet the lower emission limits established by Phase II of the CAAA. COMPETITION INDUSTRY OUTLOOK Unprecedented change is occurring in the electric utility industry nationwide, furthering the development of a competitive environment. In general, the economics of the electric generation business have fundamentally changed with open transmission access and the increased availability of electric supply alternatives. Such alternatives will ultimately serve to lower customer prices, particularly in areas where only higher cost energy is currently provided. Customer demands for lower prices and supplier choices, the availability of alternative supplies (IPPFs, QFs, EWGs and power marketers), and open access to the utility transmission grid have resulted in a commodity market for bulk electric supply. The EPAct directly addressed this issue by giving the FERC the authority to require utilities to provide non-discriminatory open access to the transmission grid for purposes of providing wholesale customers with direct access. In response to such authority, in early 1996, the FERC issued new rules on open access transmission services. Furthermore, an increasing number of states with above average energy prices are pursuing full competition in the electric industry. The presence of competition and the associated pressure on prices may ultimately lead to the unbundling of products and services similar to what has evolved in the natural gas industry. Today's market view of the future envisions an unbundled electric utility industry consisting of at least four major business segments: energy supply, transmission, distribution and energy services - each having a different driving force. The SEC has also responded to increasing competition in the utility industry and changes in state and federal utility regulation. In June 1995, the SEC issued its report which focused on both legislative and administrative options for the reform of public utility holding company regulation. The report presented three possible recommendations for legislative reform of PUHCA: 1) conditional repeal of PUHCA, 2) unconditional repeal of PUHCA, and 3) PUHCA remains unmodified, but grants the SEC broader exemptive authority under PUHCA. Any changes in regulation will be determined by Congress. Further discussion can be found in Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. STATE REGULATORY ENVIRONMENT Colorado law permits the CPUC to authorize rates negotiated with individual electric and gas customers which have threatened to discontinue using the services of the Company, so long as the CPUC finds that such authorization: 1) in the case of electric rates, will not adversely affect the Company's remaining customers and 2) in the case of gas rates, will not affect the Company's remaining customers as adversely as would the alternative. In response to the increasingly competitive operating environment for utilities, the regulatory climate is also changing. The CPUC recently issued a report on a comprehensive survey on electric industry restructuring. The Company continues to participate in regulatory proceedings which could change or impact current regulation. The Company believes it will continue to be subject to rate regulation that will allow for the recovery of all of its deferred costs (see Note 1. Summary of Significant Accounting Policies - Business and Regulation - Regulatory 12 Assets and Liabilities and Note 9. Commitments and Contingencies - Regulatory Matters in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA). ELECTRIC The wholesale electric business faces increasing competition in the supply of bulk power due to provisions of the EPAct and Federal and state initiatives with respect to providing open access to utility transmission systems. Under the new FERC rules issued in early 1996, utilities are required to provide wholesale open-access transmission services consistent with what is provided for in their own operations. The Company and Cheyenne are operating with the tariffs approved by the FERC under these new rules. To date, these provisions have not had a material impact on the Company's operations. For 1996, the Company's wholesale revenues totaled approximately 8% of total electric revenues. A substantial portion of these revenues related to firm sales contracts, which are expected to continue at current levels for a minimum of 10 years. Today, the retail electric business faces increasing competition from industrial and large commercial customers who have the ability to own or operate facilities to generate their own electric energy requirements. In addition, customers may have the option of substituting fuels, such as natural gas for heating, cooling and manufacturing purposes rather than electric energy, or of relocating their facilities to a lower cost environment. While the Company faces these challenges, it believes its rates are competitive with currently available alternatives. The Company is taking actions to lower operating costs and is working with its customers to analyze the feasibility of various options, including energy efficiency, load management and co-generation in order to better position the Company to more effectively operate in a competitive environment. NATURAL GAS Historically, gas utilities have competed with suppliers of electricity and fuel oil, as well as, to a lesser extent, propane, for sales of gas to customers for heating and/or cooling purposes. In the 1980s, industrial and large commercial customers began to "by-pass" the local gas utility through the construction of interconnections directly with, and the purchase of gas directly from, interstate pipelines, thereby avoiding the additional charges added by the local gas utility. In addition, industrial and commercial customers sought to purchase less expensive supplies of natural gas directly from producers, marketers and brokers. The Company has been actively involved for several years in providing transportation services for those industrial and large commercial customers which chose to purchase gas directly from suppliers. In addition, the Company has provided flexible transportation rates for several years. The per- unit fee charged for transportation services, while significantly less than the per-unit fee charged for the sale of gas to a similar customer, provides an operating margin approximately equivalent to the margin earned on gas sold. Therefore, increases in such activities will not have as great an impact on gas revenues as increases in deliveries from the sale of gas, but will have a positive impact on operating margin. In 1995, the Company organized e prime to engage in the non-regulated marketing of natural gas in order to expand its marketshare. FRANCHISES The Company and its subsidiaries held nonexclusive franchises to provide electric or gas service or both services in 120 incorporated cities and towns at December 31, 1996. These franchises consist of 69 combined gas and electric service franchises, 29 electric service franchises and 22 gas service franchises. In 1997, the Company expects to renegotiate four of the franchise agreements which will be expiring. The Company's franchise with the City of Denver will expire in 2006. The Company and its subsidiaries supply electric or gas service or both services in about 114 unincorporated communities in which franchises are not required. EMPLOYEES AND UNION CONTRACTS The number of employees of the Company and its subsidiaries decreased from 4,776 at December 31, 1995 to 4,675 at December 31, 1996. Approximately, 2,090 employees, or 45% of the Company's total 13 workforce, are represented by the International Brotherhood of Electrical Workers, Local 111. The number of employees covered by collective bargaining agreements at December 31, 1996 approximated 2,284. RESEARCH AND DEVELOPMENT The Company and its utility subsidiaries spent approximately $3.8 million in 1996, $3.6 million in 1995 and $3.8 million in 1994 on research and development. The major portion of those expenditures went to utility associations which engage in research projects to benefit the electric and gas industries as a whole. The balance of the expenditures went for smaller internal and external projects dealing with such areas as pollution control and alternative fuels research. 14 CONSOLIDATED ELECTRIC OPERATING STATISTICS YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ------------ ------------ ----------- ----------- Energy Generated, Received, & Sold (Thousands of Kwh): Net Generated: Steam, Fossil................................ 17,099,890 16,053,928 15,949,980 15,470,247 14,972,688 Combustion Turbine........................... 121,079 5,251 41,705 39,228 47,194 Pumped Storage............................... 178,205 68,400 126,721 118,593 79,609 Hydro........................................ 197,660 208,104 176,264 198,272 175,010 ----------- ------------ ------------ ----------- ----------- Total Net Generation....................... 17,596,834 16,335,683 16,294,670 15,826,340 15,274,501 Energy Used for Pumping...................... 276,983 109,632 201,744 185,850 126,266 ----------- ------------ ------------ ----------- ----------- Total Net System Input..................... 17,319,851 16,226,051 16,092,926 15,640,490 15,148,235 Purchased Power and Net Interchange.......... 10,349,298 9,794,968 9,653,067 9,631,982 8,663,339 ----------- ------------ ------------ ----------- ----------- Total System Input......................... 27,669,149 26,021,019 25,745,993 25,272,472 23,811,574 Used by Company.............................. 57,603 64,885 66,348 60,396 64,125 Other (1).................................... 1,352,843 1,526,358 1,670,591 2,001,832 1,932,333 ----------- ------------ ------------ ----------- ----------- Total Energy Sold.......................... 26,258,703 24,429,776 24,009,054 23,210,244 21,815,116 ----------- ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- Electric Sales (Thousands of Kwh) (2): Residential................................. 6,606,601 6,281,911 6,119,914 5,969,529 5,747,048 Commercial.................................. 9,880,502 9,284,577 8,931,962 10,797,272 10,350,155 Industrial.................................. 5,791,608 5,747,534 5,726,837 3,289,501 3,375,638 Public Authorities.......................... 200,070 188,363 187,939 186,397 187,500 Wholesale - Regulated....................... 3,361,217 2,927,391 3,042,402 2,967,545 2,154,775 Wholesale Energy Services - Non-Regulated... 418,705 - - - - ----------- ------------ ------------ ----------- ----------- Total Energy Sold......................... 26,258,703 24,429,776 24,009,054 23,210,244 21,815,116 ----------- ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- Number of Customers at End of Period(2): Residential................................. 959,249 936,759 913,582 898,752 894,217 Commercial.................................. 126,426 123,277 120,886 120,317 120,198 Industrial.................................. 380 378 384 157 194 Public Authorities.......................... 79,725 79,154 77,842 76,476 647 Wholesale - Regulated....................... 26 17 18 20 34 Wholesale Energy Services - Non-Regulated... 6 - - - - ----------- ------------ ------------ ----------- ----------- Total Customers........................... 1,165,812 1,139,585 1,112,712 1,095,722 1,015,290 ----------- ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- Electric Revenues (Thousands of Dollars)(2): Residential................................. $ 507,233 $ 477,740 $ 453,614 $ 433,521 $ 413,655 Commercial.................................. 571,536 552,905 519,340 602,187 572,780 Industrial.................................. 249,774 257,189 252,552 142,146 148,951 Public Authorities.......................... 25,798 23,029 21,950 20,828 20,221 Wholesale - Regulated....................... 120,478 114,514 120,238 116,937 80,290 Wholesale Energy Services - Non-Regulated... 7,806 - - - - Other Electric Revenues..................... 6,365 23,719 32,142 21,434 24,872 ----------- ------------ ------------ ----------- ----------- Total Electric Revenues................... $ 1,488,990 $ 1,449,096 $ 1,399,836 $ 1,337,053 $ 1,260,769 ----------- ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- Average Annual Kwh Sales per Residential Customer..................................... 6,965 6,794 6,770 6,717 6,533 Average Annual Revenue per Residential Customer..................................... $534.79 $516.70 $501.82 $487.81 $470.26 Average Residential Revenue per Kwh........... 7.68 CENTS 7.61 CENTS 7.41 CENTS 7.26 CENTS 7.20 CENTS Average Commercial Revenue per Kwh........... 5.78 CENTS 5.96 CENTS 5.81 CENTS 5.58 CENTS 5.53 CENTS Average Industrial Revenue per Kwh............ 4.31 CENTS 4.47 CENTS 4.41 CENTS 4.32 CENTS 4.41 CENTS Average Wholesale - Regulated Revenue per Kwh. 3.58 CENTS 3.91 CENTS 3.95 CENTS 3.94 CENTS 3.73 CENTS
- ------------------- (1) Primarily includes net distribution and transmission line losses. (2) Comparison of energy sales, customers and electric revenues between periods is impacted by: 1) a change in criteria for counting customers resulting from the implementation of a new customer information system during 1993, and 2) effective January 1, 1994, a reclassification to include large commercial customers (>1,000 Kw demand) within the industrial category, to be consistent with recommended utility industry guidelines. 15 CONSOLIDATED GAS OPERATING STATISTICS YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ------------ ------------ ----------- ----------- Natural Gas Purchased and Sold (Thousands of Dth): Purchased from Interstate.................... 39,924 38,687 45,177 55,078 59,328 Purchased from Others........................ 107,374 101,259 88,174 88,482 79,011 Purchased for Non-regulated Gas Marketing (1)............................... 22,807 237 - - - ----------- ------------ ------------ ----------- ----------- Total Purchased............................ 170,105 140,183 133,351 143,560 138,339 Company Use.................................. 520 1,330 2,386 2,349 2,603 Other (2).................................... 10,000 5,657 3,824 (1,803) 6,052 ----------- ------------ ------------ ----------- ----------- Total Gas Sold............................. 159,585 133,196 127,141 143,014 129,684 ----------- ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- Gas Deliveries (Thousands of Dth): Residential.................................. 86,102 82,188 77,955 83,991 74,951 Commercial................................... 50,100 50,463 48,689 54,125 50,705 Wholesale.................................... 1,555 308 497 4,898 4,028 Non-regulated Gas Marketing (1).............. 21,828 237 - - - ----------- ------------ ------------ ----------- ----------- Total Gas Sold............................. 159,585 133,196 127,141 143,014 129,684 Transportation............................... 90,304 75,704 66,230 61,421 51,706 Gathering and Processing (3)................. 1,141 1,391 25,316 35,877 28,292 ----------- ------------ ------------ ----------- ----------- Total Deliveries........................... 251,030 210,291 218,687 240,312 209,682 ----------- ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- Number of Customers at End of Period: Residential.................................. 902,078 872,777 845,464 820,521 808,722 Commercial................................... 90,761 89,034 87,103 86,227 86,192 Wholesale ................................... - - 8 8 8 Non-regulated Gas Marketing (1).............. 1,255 2 - - - ----------- ------------ ------------ ----------- ----------- Total...................................... 994,094 961,813 932,575 906,756 894,922 Transportation and Other..................... 1,794 952 786 619 416 ----------- ------------ ------------ ----------- ----------- Total Customers............................ 995,888 962,765 933,361 907,375 895,338 ----------- ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- Gas Revenues (Thousands of Dollars): Residential.................................. $ 362,481 $ 383,719 $ 375,406 $ 366,445 $ 329,406 Commercial................................... 173,308 200,314 203,311 204,820 191,366 Wholesale ................................... 3,020 4,961 7,319 13,966 10,099 Non-regulated Gas Marketing (1).............. 64,389 399 - - - Transportation............................... 28,549 23,769 23,495 23,176 20,638 Gathering and Processing..................... 364 443 8,335 10,575 8,023 Other Gas Revenues........................... 8,386 10,980 7,056 9,342 9,354 ----------- ------------ ------------ ----------- ----------- Total Gas Revenues......................... $ 640,497 $ 624,585 $ 624,922 $ 628,324 $ 568,886 ----------- ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- Average Annual Dth Sales per Residential Customer...................................... 97.14 95.65 93.67 103.21 93.73 Average Annual Revenue per Residential Customer...................................... $408.93 $446.58 $451.09 $450.29 $411.94 Average Revenue per Dekatherm: Residential.................................. $4.210 $4.669 $4.816 $4.363 $4.395 Commercial................................... $3.459 $3.970 $4.176 $3.784 $3.774 Transportation............................... $0.316 $0.314 $0.355 $0.377 $0.399
- ------------------- (1) Includes purchases and sales by e prime and TOG. (2) Primarily includes distribution and transmission line losses and net changes to gas in storage. (3) In August 1994, the Company sold WGG, which resulted in the decline in gathering and processing deliveries. 16 PUBLIC SERVICE COMPANY OF COLORADO ELECTRIC TRANSMISSION INTERCONNECTED SYSTEM [MAP] 17 ITEM 2. PROPERTIES ELECTRIC GENERATION PROPERTY The electric generating stations of the Company and its subsidiaries expected to be available at the time of the anticipated 1997 net firm system peak demand during the summer season are as follows: Net Dependable Installed Capacity (Mw) Gross at Time of Anticipated Major Name of Station Capacity 1997 Net Firm System Fuel and Location (Mw) Peak Demand* Source --------------- --------- ---------------------- ------ Steam: Arapahoe-Denver....................................... 262.00 246.00 Coal Cameo-near Grand Junction............................. 77.00 72.70 Coal Cherokee-Denver....................................... 784.00 723.00 Coal Comanche-near Pueblo.................................. 725.00 660.00 Coal Craig-near Craig...................................... 86.90 (a) 83.20 Coal Hayden-near Hayden.................................... 259.00 (b) 237.00 Coal Pawnee-near Brush..................................... 530.00 495.00 Coal Valmont-near Boulder (Unit 5)......................... 188.00 178.00 Coal Zuni-Denver........................................... 115.00 107.00 Gas/Oil -------- -------- Total............................................... 3,026.90 2,801.90 Fort St. Vrain Combustion Turbine - near Platteville... 141.45 126.75 Gas Combustion turbines (6 units-various locations)......... 209.00 171.00 Gas Hydro (14 units-various locations) (c).................. 53.35 36.55 (d) Hydro Cabin Creek Pumped Storage-near Georgetown.............. 324.00 (e) 162.00 Hydro Cherokee Diesel generators (2 units).................... 5.50 5.50 Oil -------- -------- Total............................................... 3,760.20 3,303.70 -------- -------- -------- --------
- ------------------- * A measure of the unit capability planned to be available at the time of the system peak load net of seasonal reductions in unit capability due to weather, stream flow, fuel availability and station housepower, including requirements for air and water quality control equipment. (a) The gross maximum capability of Craig Units No. 1 and No. 2 is 894 Mw, of which the Company has a 9.72% undivided ownership interest. (b) The gross maximum capability of Hayden Units No. 1 and No. 2 is 202.01 Mw and 285.96 Mw, respectively, of which the Company has a 75.5% and 37.4% undivided ownership interest, respectively. (c) Includes one station (two units) not owned by the Company but operated under contract. (d) Seasonal Hydro Plant net dependable capabilities are based upon average water conditions and limitations for each particular season. The individual plant seasonal capabilities are sometimes limited by less than design water flow. (e) Capability at maximum load. NUCLEAR GENERATION PROPERTY Fort St. Vrain, near Platteville, the Company's only previous nuclear generating station, ceased operations on August 29, 1989 and on March 22, 1996 the physical decommissioning of the station was completed. The initial phase of the repowered gas fired combined cycle steam electric generating station began commercial operations on May 1, 1996 (see Note 2. Fort St. Vrain in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA). ELECTRIC TRANSMISSION AND DISTRIBUTION PROPERTY On December 31, 1996, the Company's transmission system consisted of approximately 112 circuit miles of 345 Kv overhead lines; 1,916 circuit miles of 230 Kv overhead lines; 15 circuit miles of 230 Kv underground 18 lines; 65 circuit miles of 138 Kv overhead lines; 999 circuit miles of 115 Kv overhead lines; 20 circuit miles of 115 Kv underground lines; 344 circuit miles of 69 Kv overhead lines; 143 circuit miles of 44 Kv overhead lines; and 1 circuit mile of 44 Kv underground lines. The Company jointly owns with another utility approximately 342 circuit miles of 345 Kv overhead lines and 360 miles of 230 Kv overhead lines, of which the Company's share is 112 miles and 147 miles, respectively, which shares are included in the amounts listed above. The Company's transmission facilities are located wholly within Colorado. The map on page 16 illustrates the Company's transmission interconnected system. The system is interconnected with the systems of the following utilities with which the Company has major firm purchase power contracts; capacity and energy are provided primarily by generating sources in the locations indicated: Utility Location ------- -------- Basin Electric Power Cooperative.................... Southeast Wyoming PacifiCorp.......................................... West & Northwest U.S. Northwest Colorado Platte River Power Authority........................ Northcentral Colorado Tri-State........................................... Southeast Wyoming and Northwest Colorado The Company has wheeling agreements with the above, and with other utilities and public power agencies, which are utilized to provide capacity and energy to the Company's system from time to time. The Company is a member of the WSCC, an interstate network of transmission facilities which are owned by public entities and investor-owned utilities. WSCC is the regional reliability coordinating organization for member electric power systems in the western United States. At December 31, 1996, the distribution systems consisted primarily of approximately 12,939 miles of overhead line, 1,068 miles of which are located on poles owned by other utilities under joint use agreements. The Company also owned approximately 7,891 cable miles of underground distribution system (excluding street lighting) located principally in the Denver metropolitan area. The Company owned 219 substations (four of which are jointly owned) having an aggregate transformer capacity of 18,705,000 Kva, of which 4,145,827 Kva is step-up transformer capacity at generating stations. GAS PROPERTY The gas property of the Company at December 31, 1996 consisted chiefly of approximately 15,304 miles of distribution mains ranging in size from 0.50 to 30 inches and related equipment. The Denver distribution system consisted of 8,691 miles of mains. Pressures in the low pressure system are varied to meet load requirements and individual house regulators are installed on each customer's premises to provide uniform flow of gas to appliances. The Company also owns and operates four gas storage facilities. OTHER PROPERTY The Company's steam heating property at December 31, 1996 consisted of 10.5 miles of transmission, distribution and service lines in the central business district of Denver, including a steam transmission line connecting the steam heating system with Zuni. Steam is supplied from boilers installed at the Company's Denver Steam Plant which has a capability of 295,000 pounds of steam per hour under sustained load and an additional 300,000 pounds of steam per hour is available from Zuni on a peak demand basis. The Company also owns service and office facilities in Denver and other communities strategically located throughout its service territory. 19 PROPERTY OF SUBSIDIARIES The book value of the properties of the consolidated subsidiaries of the Company aggregates approximately 3% of the total book value of the properties of the Company and such subsidiaries combined. Such properties consist largely of electric and gas properties similar in character to the properties of the Company. Unregulated subsidiary property is approximately 1% of the total book value of the properties of the Company and consolidated subsidiaries combined. 1480 Welton, Inc. owns two buildings that are used by the Company. CHARACTER OF OWNERSHIP The steam electric generating stations, the majority of major electric substations and the major gas regulator stations owned by the Company and its subsidiaries are on land owned in fee. Approximately half of the compressor stations and a limited number of town border and meter stations are also on land owned in fee. The remaining major electric substations and compressor stations and the majority of gas regulator stations and town border and meter stations are wholly or partially on land leased from others or on or along public highways or on streets or public places within incorporated towns and cities. The Company's Cabin Creek Pumped Storage Hydroelectric Generating Station, its Shoshone Hydroelectric Generating Station and a portion of the related intake tunnel are located on public lands of the United States. As to substantially all property on or across public lands of the United States, the Company or its subsidiaries hold licenses or permits issued by appropriate Federal agencies or departments. The Leyden gas storage facility is located largely on leased property under leases expiring December 31, 2040. The Company and its utility subsidiaries have the power of eminent domain pursuant to Colorado law to acquire property for their electric and gas facilities. The electric and gas transmission and distribution facilities are for the most part located over or under streets, public highways or other public places and on public lands under franchises or other rights, and on land owned by the Company or others pursuant to easements obtained from the record holders of title. The water rights of the Company and its subsidiaries are owned subject to divestment to the extent of any abandonment thereof. Substantially all of the utility plant and other physical property owned by the Company and its utility subsidiaries is subject to the liens of the respective indentures securing the mortgage bonds of the Company and its utility subsidiaries. ITEM 3. LEGAL PROCEEDINGS See Note 9. Commitments and Contingencies in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Does not apply. 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed on the New York, Chicago and Pacific Stock Exchanges. The following table sets forth for the periods indicated the dividends declared per share of common stock and the high and low sale prices of the common stock on the consolidated tape as reported by THE WALL STREET JOURNAL. Dividends Price Range Year and Quarter Declared High Low ---------------- --------- ------- ------- 1996 First Quarter.................... $.525 $36 1/2 $33 3/4 Second Quarter................... .525 36 3/4 32 3/8 Third Quarter.................... .525 36 7/8 34 3/4 Fourth Quarter................... .525 39 1/2 35 1/4 ----- $2.10 1995 First Quarter.................... $ .51 $31 1/2 $29 Second Quarter................... .51 32 7/8 29 1/4 Third Quarter.................... .51 34 1/2 30 5/8 Fourth Quarter................... .51 35 7/8 33 3/8 ----- $2.04 At December 31, 1996, the book value of the common stock was $22.19 per share. At February 21, 1997, there were 57,532 holders of record of the Company's common stock. The dividend level is dependent upon the Company's results of operations, financial position and other factors and is evaluated quarterly by the Board of Directors. See Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. On February 26, 1991, the Company's Board of Directors declared a dividend of one common share purchase right ("right") on each outstanding share of the Company's common stock. All future common shares issued will contain this right. Each right stipulates an initial purchase price of $55 per share and also prescribes a means whereby the resulting effect is such that, under the circumstances described below, shareholders would be entitled to purchase additional shares of common stock at 50% of the prevailing market price at the time of exercise. The rights are not currently exercisable, but would become exercisable if certain events occurred related to a person or group acquiring or attempting to acquire 20% or more of the outstanding shares of common stock of the Company. On August 22, 1995, in connection with the proposed merger (see Note 3. Merger in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA), the Company's Rights Agreement was amended to provide that NCE will not be deemed an "Acquiring Person" as a result of the execution, delivery, and performance of the Merger Agreement. In the event a takeover results in the Company being merged into an acquiror, the unexercised rights could be used to purchase shares in the acquiror at 50% of market price. Subject to certain conditions, if a person or group acquires at least 20% but no more than 50% of the Company's common stock, the Company's Board of Directors may exchange each right held by shareholders other than the acquiring person or group for one share of common stock (or its equivalent). If a person or group successfully acquires 80% of the Company's common stock for cash, after tendering for all of the common stock, and satisfies certain other conditions, the rights would not operate. The rights expire on March 22, 2001; however, each right may be redeemed by the Board of Directors for one cent at any time prior to the acquisition of 20% of the common stock by a potential acquiror. For a description of the rights and their terms see the Company's Rights Agreement, as amended, which is an exhibit to this Form 10-K. 21 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data of the Company and its subsidiaries for each of the five years in the period ended December 31, 1996 should be read in conjunction with the consolidated financial statements and the management's discussion and analysis of financial condition and results of operations appearing elsewhere herein.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS-EXCEPT PER SHARE DATA & RATIOS) Operating revenues: Electric............................................... $1,488,990 $1,449,096 $1,399,836 $1,337,053 $1,260,769 Gas.................................................... 640,497 624,585 624,922 628,324 568,886 Other.................................................. 41,899 36,920 32,626 33,308 32,618 ---------- ---------- ---------- ---------- ---------- Total............................................. 2,171,386 2,110,601 2,057,384 1,998,685 1,862,273 Total operating expenses................................. 1,812,902 1,784,784 1,786,592 1,717,752 1,612,646 Operating income......................................... 358,484 325,817 270,792 280,933 249,627 Total interest charges................................... 149,880 143,906 132,134 130,337 121,116 Net income............................................... 190,346 178,856 170,269 157,360 136,623 Dividend requirements on preferred stock................. 11,848 11,963 12,014 12,031 12,077 Earnings available for common stock...................... 178,498 166,893 158,255 145,329 124,546 Per share data applicable to common stock (a): Earnings............................................... $ 2.78 $ 2.65 $ 2.57 $ 2.43 $ 2.16 Dividends declared..................................... $ 2.10 $ 2.04 $ 2.00 $ 2.00 $ 2.00 Shares of common stock outstanding: Weighted average....................................... 64,187 62,932 61,547 59,695 57,558 Year-end............................................... 64,819 63,358 62,155 60,457 58,477 Rate of return earned on average common equity (net to common)........................................ 12.8% 12.8% 12.9% 12.7% 11.7% Ratio of earnings to fixed charges (b)................... 2.75 2.78 2.53 2.54 2.43 Total assets............................................. $4,572,648 $4,351,789 $4,207,832 $4,057,600 $3,759,583 Total net plant.......................................... 3,598,895 3,480,712 3,291,402 3,193,136 3,077,509 Total construction expenditures.......................... 321,162 285,516 317,138 293,515 261,666 AFDC..................................................... 4,101 7,095 7,158 12,667 11,302 Cash generated internally as a percent of construction expenditures (c).......................... 56.9% 87.4% 35.4% 52.2% 57.5% Total common equity...................................... $1,438,288 $1,343,645 $1,267,482 $1,184,183 $1,101,047 Preferred stock: Not subject to mandatory redemption.................... 140,008 140,008 140,008 140,008 140,008 Subject to mandatory redemption at par (including amounts due within one year).............. 42,489 43,865 45,241 45,454 45,654 Long-term debt (including amounts due within one year)... 1,414,558 1,278,389 1,180,580 1,193,668 1,199,779 Notes payable & commercial paper......................... 244,725 288,050 324,800 276,875 250,626
- ------------------------- (a) Earnings per share are based on the weighted average number of shares of common stock outstanding. (b) See Exhibit 12(a) herein. (c) Calculated as cash provided by operations net of cash used for dividends, divided by construction expenditures net of AFDC equity-component. 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INDUSTRY OUTLOOK Fundamental changes continue to occur throughout the electric utility industry as it moves toward deregulation with customer choice and increased competition. Regulatory actions at both the federal and state level have opened up the wholesale, and to a lessor extent retail, markets to more competition. The FERC issued new rules in early 1996 requiring utilities to provide wholesale open-access transmission services and allowing for recovery of stranded investment costs. A few states with above-average electric energy prices are aggressively pursuing full competition in the electric industry. Some states currently have pilot plans in place to allow retail customers to select their energy supplier. Federal legislation related to deregulation of the electric utility industry was introduced in 1996 and broad support for restructuring legislation is developing. In addition, the reform or repeal of PUHCA, the law which regulates the ownership and operation of public utility holding companies, is expected to be given serious consideration in 1997 by Congress. Utilities are responding to increased competition. Mergers, acquisitions and corporate restructurings have continued to occur nationally and globally as companies strive to position themselves for the future, achieving economies of scale and increases in productivity and efficiency. Electric prices in Colorado are relatively low in comparison to other parts of the country, lessening the need for immediate change in the state's electric industry. In 1996, the CPUC performed a comprehensive survey on electric industry restructuring. The report issued by the CPUC is not conclusive on what the next steps should be. Clearly, the issues are complex and controversial with significant consequences to the Company's securities holders. The Company supports the need for change and believes that Colorado must take the time to study and learn from the restructuring models developed in other states to determine which aspects of those programs may be appropriate, and to identify other specific regional issues that need to be addressed. The Company's response to the survey included a proposal that the CPUC undertake a comprehensive study of these complex issues, which would provide the necessary foundation of information for consideration by the state legislature. CORPORATE OVERVIEW Significant progress on the Merger of the Company with SPS was achieved in 1996 and early 1997. Shareholder approvals were received in January 1996 and required authorizations were obtained from all state utility regulators. Final approvals and filings are in progress with completion of the merger anticipated in the spring of 1997. The Merger will permit the Company to derive benefits from the more efficient and economic utilization of combined facilities and personnel. With a larger and more geographically diverse combined service territory, the business risks related to changes in economic, competitive or climatic conditions will be reduced. In addition, purchasing savings, increased economical use of generation capacity and reduced administrative costs are anticipated. Merger transition plans have been developed to begin realizing synergy savings upon consummation of the Merger, although the savings expected for 1997 will be reduced somewhat by various Merger related costs, including those related to planned workforce reductions. Operating priorities in 1996 continued to focus on reducing costs and developing new business opportunities. Positive earnings reflected the continued cost containment efforts initiated in 1994. The performance based regulatory plan approved by the CPUC resulted in a sharing arrangement between customers and shareholders of electric department earnings in excess of 11% for the years 1997-2001, a 50%/50% sharing of certain fuel and energy cost increases or decreases and a QSP which provides for penalties if certain performance measures relating to electric reliability, customer complaints and telephone response to inquiries are not met. The Company anticipates that a reward structure for performance above certain standards will be implemented in the near term. In line with the Company's strategic focus on expanding market share and value, e prime received authorization from the FERC to act as a power marketer and is now marketing wholesale electricity. In September 1996, e prime acquired TOG, a gas marketing company which serves 1,400 industrial and commercial customers in the eastern U.S. In line with customer retention, the Company and one of its largest wholesale customers entered into a new purchase power agreement in which the Company provides power through the year 23 2001. This wholesale customer had previously notified the Company of its intent to reduce firm and peaking power purchases beginning in 1998. The Company continues to look for opportunities to expand its customer base as both a natural gas and electric energy provider and to advance its strategy to focus on customer needs, while building a national presence in the marketplace. The regulatory environment within Colorado is a primary focus for the Company and the successful merger with SPS will likely have long-term effects on the Company's future financial performance. The Company strongly believes that all potentially stranded costs resulting from changes in laws or regulation should be recoverable. Additionally, the Company believes that it will continue to be subject to rate regulation that will allow for the recovery of all of its deferred costs. To the extent the Company concludes in the future that such recovery is no longer probable, the Company may be required to recognize as expense, at a minimum, all deferred costs currently recognized as regulatory assets on the consolidated balance sheet. (See Note 1. Summary of Significant Accounting Policies in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA). RECENT DEVELOPMENTS On February 24, 1997, the Company and AEP jointly announced that they have reached agreement with the board of directors of Yorkshire Electricity, a UK regional electricity company, on the terms of a recommended cash tender offer for all of the outstanding and to be issued ordinary shares of Yorkshire Electricity. The Company and AEP, through a joint venture named Yorkshire Holdings, are offering the equivalent of US $15.02 (9.27 pounds) per ordinary share, for a total purchase price of approximately US $2.4 billion (1.5 billion pounds). The boards of directors of the Company and AEP have approved the transaction. The board of directors of Yorkshire Electricity has agreed to recommend the offer to Yorkshire Electricity's shareholders. The offer will be made through Yorkshire Holdings, a wholly-owned subsidiary of Yorkshire Power, a newly formed UK corporation owned equally by the Company and AEP. The Company will make its investment through New Century International, Inc., a wholly-owned subsidiary of the Company. If the Proposed Acquisition is completed, the Company would have an indirect 50% ownership interest in Yorkshire Electricity, which would be accounted for using the equity method of accounting. Consummation of the Proposed Acquisition is subject to customary conditions in the UK, including regulatory clearance and acceptance of the offer by holders of at least 90% of the outstanding shares of Yorkshire Electricity. Yorkshire Holdings may waive the latter condition when it has received acceptances of its offer and has otherwise acquired shares which in total represent more than 50% of the outstanding shares of Yorkshire Electricity. The Company cannot predict at this time whether or not these conditions will be met or waived. The Proposed Acquisition will be 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 Proposed Acquisition will be obtained from the Company's and AEP's investment in Yorkshire Power of approximately US $360 million (220 million pounds) each, with the remainder to be obtained by Yorkshire Power through the issuance of non-recourse debt. Yorkshire Power will, in turn, fund Yorkshire Holdings for the purpose of the Proposed Acquisition. The Company intends initially to use debt to fund its entire equity investment in Yorkshire Power, including the issuance of US $250 million of its secured medium-term notes with varying maturities and drawings of US $110 million on its short-term lines of credit. It is currently anticipated that the Company's entire equity investment in Yorkshire Power will be refinanced through the issuance of common equity at the NCE level within six to eighteen months from the date of consummation of the Proposed Acquisition. According to Yorkshire Electricity's 1996 Annual Report and Accounts, Yorkshire Electricity's principal activities are the distribution of electricity to 2.1 million industrial, commercial, agricultural and domestic customers in its authorized area, which covers 4,180 square miles of northeast England. Yorkshire Electricity is also active in electricity supply and generation and the supply of natural gas, including the ownership of gas assets. Other activities include the development of telecommunications services and the construction and operation of windfarms. For the fiscal year ended March 31, 1996, Yorkshire Electricity reported a consolidated profit on ordinary activities before taxation and exceptional items of US $310.8 million (199.2 million pounds) on revenues of US $2.2 billion (1.4 billion pounds), had reported total assets at that date of US $2.2 billion (1.4 billion pounds), and reported net assets at that date of US $818.9 million (521.1 million pounds). 24 The SEC, in an order issued on February 19, 1997 under section 3(b) of PUHCA, exempted Yorkshire Electricity from all provisions of PUHCA that would be applicable to it as a subsidiary of the Company. In connection with its application for such order, the Company also requested and obtained a no-action letter from the Division of Investment Management of the Office of Public Utility Regulation of the SEC stating that, as long as the Merger is completed by September 30, 1997, it will not recommend any enforcement action with respect to the possible effect of the Proposed Acquisition on the Company's existing section 3(a)(2) exemption under PUHCA. In seeking the section 3(b) exemption for Yorkshire Electricity, the Company informed the SEC that its investment in Yorkshire Electricity would be less than 50% of the Company's and SPS's combined retained earnings as of September 30, 1996, consistent with the requirements of Rule 53 under PUHCA. The Company also informed the SEC in its application for a section 3(b) exemption that upon completion of the Merger, NCE would hold the proposed investment in Yorkshire Power through a separate subsidiary and not through the Company. At that time, Yorkshire Electricity would be qualified as a foreign utility company under section 33 of PUHCA. See Note 4. Acquisition and Divestiture of Investments - Proposed Acquisition of Yorkshire Electricity in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. EARNINGS Earnings per share were $2.78, $2.65 and $2.57 during 1996, 1995 and 1994, respectively. The improved earnings in both 1996 and 1995 are primarily attributable to increased electric and gas margins resulting from higher sales and lower operating and maintenance expenses resulting from the Company's cost containment efforts. In addition, earnings in 1996 were favorably impacted by 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA). ELECTRIC OPERATIONS The following table details the annual change in electric operating revenues and energy costs as compared to the preceding year: INCREASE (DECREASE) FROM PRIOR YEARS 1996 1995 -------- -------- (THOUSANDS OF DOLLARS) Electric operating revenues: Retail............................................... $ 43,478 $ 63,407 Wholesale............................................ 13,770 (5,724) Other (including unbilled revenues).................. (17,354) (8,423) -------- -------- Total revenues..................................... 39,894 49,260 Fuel used in generation................................ 13,447 (16,123) Purchased power........................................ 8,470 44,871 -------- -------- Net increase in electric margin........................ $ 17,977 $ 20,512 -------- -------- -------- -------- 25 The following table summarizes electric sales by major customer classes: MILLIONS OF % CHANGE * KWH SALES FROM PRIOR YEARS ---------------- ---------------- 1996 1995 1996 1995 ------ ------ ------ ------ Residential............................. 6,607 6,282 5.2% 2.6% Commercial and Industrial............... 15,672 15,032 4.3 2.5 Public Authority........................ 200 189 6.2 0.2 ------ ------ Total Retail........................ 22,479 21,503 4.5 2.6 Wholesale............................... 3,780 2,927 29.1 (3.8) ------ ------ Total............................... 26,259 24,430 7.5 1.8 ------ ------ ------ ------ * Percentages are calculated using unrounded amounts. Electric operating revenues increased in 1996, when compared to 1995, primarily due to an overall 4.5% increase in retail sales resulting primarily from customer growth of 2.3%. The increase in wholesale revenues was due to higher economy sales by the Company and power marketing activities of non-regulated subsidiaries. However, these additional sales contributed little to the increase in electric margin. Electric operating revenues increased in 1995, when compared to 1994, primarily due to higher retail sales resulting from customer growth and additional revenues related to collection of QF purchased power capacity costs. Wholesale revenues decreased in 1995, as compared to 1994, as a result of lower wholesale Kwh sales. The demand for wholesale energy during 1995 was negatively impacted by an available supply of low-cost non-firm energy in the region. 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 in 1996 and 1995, when compared to the respective preceding year, had little impact on net income. However, as discussed in Note 9. Commitments and Contingencies -Regulatory Matters - Merger Rate Filings in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, in its decision on the Merger, the CPUC modified and replaced the Company's ECA with an ICA, effective October 1, 1996, which allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders. The change did not significantly impact the cost recoveries for 1996. Fuel used in generation expense increased $13.4 million in 1996, when compared to 1995, primarily due to higher generation levels. Fuel used in generation expense decreased $16.1 million during 1995, as compared to the prior year, primarily due to lower coal and coal transportation costs from the renegotiation of certain contracts as generation levels were about the same for both years. Purchased power expense increased slightly in 1996 primarily due to purchases in connection with the non-regulated power marketing sales. Purchased power expense increased 10.3% in 1995, as compared to 1994, primarily due to increased purchases from QFs as mandated by the CPUC. Electric energy purchased from QFs is over 50% higher per Kwh than that purchased from other suppliers. 26 GAS OPERATIONS The following table details the annual change in revenues from gas sales and gas purchased for resale as compared to the preceding year: INCREASE (DECREASE) FROM PRIOR YEARS 1996 1995 -------- -------- (THOUSANDS OF DOLLARS) Revenues from gas sales................................ 11,211 7,281 Gas purchased for resale............................... 483 (5,197) ------- ------- Net increase in gas sales margin..................... $10,728 $12,478 ------- ------- ------- ------- The following table summarizes gas deliveries by major customer classes: MILLIONS OF % CHANGE * DTH DELIVERIES FROM PRIOR YEARS ---------------- ---------------- 1996 1995 1996 1995 ------ ------ ------ ------ Residential............................. 86.1 82.2 4.8% 5.4% Commercial.............................. 50.1 50.5 (0.7) 3.6 Wholesale............................... 1.6 0.3 ** (38.0) Non-regulated gas marketing............. 21.8 0.2 ** ** ------ ------ Total Sales......................... 159.6 133.2 19.8 4.8 Transportation, gathering and processing............................ 91.4 77.1 18.6 (15.8) ------ ------ Total............................... 251.0 210.3 19.4 (3.8) ------ ------ ------ ------ * Percentages are calculated using unrounded amounts. **Percentage change is significant, but presentation of the amount is not meaningful. Gas sales margin increased in 1996, when compared to 1995, primarily due to higher retail gas sales resulting from customer growth of 3.4% and slightly colder weather. Increased gas marketing activities by non-regulated subsidiaries favorably impacted gas sales margin in 1996. Gas sales margin increased in 1995, as compared to 1994, primarily due to higher retail gas sales resulting from colder weather and moderate customer growth; there were approximately 17% more heating degree days in 1995 than in 1994. Gas transportation, gathering and processing revenues increased $4.7 million in 1996, as compared to 1995, primarily due to an increase in transport deliveries resulting from the shifting of various Company commercial customers to firm transport customers which accelerated in October 1995 with the implementation of new gas rates. Transportation, gathering and processing revenues decreased $7.6 million in 1995 primarily due to the sale of WGG in August 1994 (See Note 4. Acquisition and Divestiture of Investments in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA). 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 in 1996 and 1995, when compared to the respective preceding year, had little impact on net income. However, the fluctuations in gas sales impact the amount of gas the Company must purchase and, therefore, along with increases and decreases in the per-unit cost of gas, affect total gas purchased for resale. In 1996, the increase in the quantity of gas purchased was offset substantially by the lower per unit average cost of gas for the year. The $5.2 million decrease in gas purchased for resale for 1995 is primarily due to lower per unit cost of gas offset, in part, by a slight increase in gas purchases. NON-FUEL OPERATING EXPENSES Other operating and maintenance expenses decreased $10.1 million during 1996 as compared to 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 (See Note 2. Fort St. Vrain. in Item 8. FINANCIAL 27 STATEMENTS AND SUPPLEMENTARY DATA), lower labor and employee benefit costs resulting from the hiring freeze instituted in August 1995 and other general cost reductions resulting from the Company's cost containment efforts. These reductions were offset, in part, by higher operating costs from non-regulated operations that were, for the most part, initiated during 1996. Other operating and maintenance expenses decreased $26.1 million in 1995, as compared to 1994, primarily due to lower labor and employee benefit costs resulting from the Company's cost containment efforts which included the restructuring and downsizing accomplished in 1994 (approximately a $26 million reduction) and the recognition of approximately $8.7 million of involuntary severance costs in 1994. This restructuring and downsizing was completed in two phases: 1) effective April 1, 1994, the Company reduced its workforce by approximately 550 employees through an early retirement/severance program, and 2) during the last six months of 1994, the Company eliminated approximately 550 management and staff level positions in connection with an internal restructuring and involuntary severance program. These decreases in 1995 were offset, in part, by the $2.5 million write-off of software costs due to the cancellation of a materials management project, three months of additional amortization of the early retirement/severance program costs totaling $2.2 million and $2.2 million of additional repair costs associated with an early winter snow storm. During 1994, the Company recognized additional expenses aggregating approximately $43.4 million for increased costs associated with the defueling and decommissioning of Fort St. Vrain and the impairment of certain Fort St. Vrain related property and inventory. The additional expense was primarily associated with radiation levels in the reactor core being higher than originally anticipated and increased uncertainty related to spent fuel disposal issues (See Note 2. Fort St. Vrain in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA). Depreciation and amortization expense increased $13.3 million in 1996 and $2.3 million in 1995 primarily due to higher depreciation expense from property additions and amortization of software costs. Taxes (other than income taxes) decreased $5.1 million in 1995 primarily due to lower payroll related taxes resulting from the 1994 downsizing. Income taxes increased $1.0 million in 1996, as compared to 1995, primarily due to higher pre-tax income, offset, in part, by the write-off of additional investment tax credits for retired property and additional tax benefits at PSRI. The $46.9 million increase in income taxes during 1995, as compared to 1994, is primarily due to higher pre-tax income and the effects of two items recorded in 1994 which served to lower tax expense during that period. These items included: 1) an adjustment associated with the adoption of full normalization which was provided for in a CPUC rate order (approximately $21.3 million), and 2) the true-up of the tax accrual related to the filing of the 1993 tax return (approximately $5.1 million). Other income and deductions decreased $15.2 million during 1996, as compared to the preceding year, primarily due to higher costs related to the Merger ($3.1 million), the recognition of $4.1 million of certain severance costs, the recognition of $2.3 million of costs associated with the settlement of environmental issues related to the operations of the Hayden station and a decrease in the allowance for equity funds used during construction. Other income and deductions decreased $34.7 million in 1995 primarily due to the net effects of the pre-tax gain of approximately $34.5 million recognized on the sale of WGG in 1994 (See Note 4. Acquisition and Divestiture of Investments in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA) and $4.0 million of costs related to the Merger (See Note 3. Merger in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA), offset, in part, by the 1994 reversal of the $3.0 million gas search award, as the Colorado Supreme Court reversed the incentive award previously granted by the CPUC. Interest charges increased $6.0 million during 1996, as compared to 1995. Higher interest on long-term debt resulted from the financing of capital expenditures. Interest charges increased $11.8 million during 1995 as compared to 1994. Other interest increased due to higher interest rates and an increased level of short-term borrowings in 1995, the recognition of interest costs related to the over-collection of expenses under the Company's cost adjustment mechanisms and higher interest on COLI contracts, while the net costs associated with long-term debt decreased slightly. 28 FINANCIAL POSITION Accounts receivable increased at December 31, 1996, as compared to 1995, primarily due to overall sales growth, including marketing activities by non-regulated subsidiaries, and the fact that a portion of the gas refund made late in 1995 was applied directly to customers' accounts, which served to lower the accounts receivable balance at December 31, 1995. Accounts payable increased primarily due to the Company's higher gas costs at the end of 1996 and increased activities by non-regulated subsidiaries. The $38.5 million decrease in the defueling and decommissioning liability was due to expenditures during 1996. This decrease and the increase in noncurrent investments and receivables were also affected by the February 9, 1996 settlement agreement with the DOE resolving all spent nuclear fuel storage and disposal issues at Fort St. Vrain. Customers' advances for construction decreased by approximately $49.3 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. COMMITMENTS AND CONTINGENCIES Issues relating to regulatory and environmental matters are discussed in Note 9. Commitments and Contingencies in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. These matters and the future resolution thereof, may impact the Company's future results of operations, financial position 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. This follows the 1995 first quarter increase in the quarterly dividend on its common stock from $0.50 per share to $0.51 per share. The Company's common stock dividend level is dependent upon the Company's results of operations, financial position, cash flow 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 1996 1995 1994 ------- ------- ------- Net cash provided by operating activities (IN MILLIONS).............................. $ 327.6 $ 385.7 $ 245.7 Net cash provided by operating activities decreased $58.1 million in 1996 primarily due to the undercollection of purchased gas and electric energy costs ($40.8 million) and lower cash receipts because of a gas refund that was applied directly to customers' accounts in late 1995. Higher earnings and lower decommissioning and defueling expenditures positively impacted operating cash flows for both 1996 and 1995. The increase in 1995 was also significantly impacted by the overcollection of purchased gas and electric costs. At December 31, 1996, the Company's decommissioning liability, excluding defueling, was approximately $6.6 million. The remaining expenditures related to this obligation are expected to be incurred over the next year. The annual decommissioning amount being recovered from customers is approximately $13.9 million which will continue through June 2005. At December 31, 1996, approximately $89.7 million remains to be collected from customers and is reflected as a regulatory asset on the consolidated balance sheet. 1996 1995 1994 ------- ------- ------- Net cash used in investing activities (IN MILLIONS).............................. $(307.1) $(284.6) $(177.4) Net cash used in investing activities, which substantially consisted of construction expenditures, was higher in both 1996 and 1995, compared to the respective prior years. Proceeds from the sale of WGG in 1994 29 and the sale of certain Fuelco properties in 1994 and 1996 reduced the net cash used in investing activities (See Note 4. Acquisition and Divestiture of Investments in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA). 1996 1995 1994 ------- ------- ------- Net cash used in financing activities (IN MILLIONS).............................. $ (25.8) $ (92.3) $ (80.5) Net cash used in financing activities decreased (indicating that there were more borrowings) significantly in 1996 primarily due to the issuance of additional long-term debt, including the $125 million First Collateral Trust Bonds in May 1996 and $75 million in medium-term notes in November 1996. The proceeds were used to fund the Company's construction program, for other general corporate purposes and to repay short-term indebtedness incurred for such purposes. Cash used in financing activities increased slightly in 1995 over 1994. Proceeds from the sale of common stock under the Company's dividend reinvestment and stock purchase plan decreased in 1995. Long-term debt refinancing activity also decreased in 1995, as compared to 1994, as a result of higher interest rates. The use of short-term borrowing over the last several years has increased slightly, however, short-term borrowing levels were reduced in late 1995 with an issuance of $80 million of medium-term notes by PSCCC. PROSPECTIVE CAPITAL REQUIREMENTS At December 31, 1996, the Company and its subsidiaries estimated cost of their construction programs and other capital requirements for the years 1997, 1998 and 1999 are shown in the table below: 1997 1998 1999 -------- -------- -------- Company: (THOUSANDS OF DOLLARS) Electric Production*............................. $ 95,056 $103,211 $125,505 Transmission............................ 39,600 48,433 22,718 Distribution............................ 68,944 70,426 68,090 Gas....................................... 62,991 88,240 56,172 General**................................. 53,440 59,186 21,137 -------- -------- -------- Total Company......................... 320,031 369,496 293,622 Subsidiaries.............................. 7,015 6,243 6,075 -------- -------- -------- Total construction expenditures....... 327,046 375,739 299,697 Less: AFDC................................ 5,640 5,000 6,113 Add: Sinking funds and debt maturities and refinancings........................ 157,851 72,901 120,957 Add: Fort St. Vrain decommissioning....... 2,500 - - -------- -------- -------- Total capital requirements............ $493,037 $453,640 $426,767 -------- -------- -------- -------- -------- -------- * Capital requirements for Electric Production include approximately $121 million for Fort St. Vrain repowering and approximately $70 million for pollution control equipment at Hayden. **Capital requirements in the "General" category include assets leased under a leasing program. The 1997 and 1998 amounts include approximately $40 million of expenditures for automated electric and gas meter reading equipment. The construction programs of the Company and its subsidiaries are subject to continuing review and modification. In particular, actual construction expenditures may vary from the estimates due to changes in the electric system projected load growth, the desired reserve margin and the availability of purchased power, as well as alternative plans for meeting the Company's long-term energy needs. In addition, the proposed merger with SPS, the Company's ongoing evaluation of merger, acquisition and divestiture opportunities to support corporate strategies, and future requirements to install pollution control equipment may impact actual capital requirements (See Note 3. Merger, Note 4. Acquisition and Divestiture of Investments and Note 9. Commitments and Contingencies - Environmental Issues in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA). 30 CAPITAL SOURCES At December 31, 1996, the Company and its subsidiaries estimated that their 1997-1999 capital requirements will be met principally with a combination of funds from external sources and funds from operations. The Company and its subsidiaries may meet their external capital requirements through the issuance of first collateral trust bonds, preferred and/or common stock, by increasing the level of borrowing under PSCCC's medium-term note program or through the issuance of commercial paper or through short-term borrowing under committed and uncommitted bank borrowing arrangements discussed below. The financing needs are subject to continuing review and can change depending on market and business conditions and changes, if any, in the construction programs and other capital requirements of the Company and its subsidiaries. REGISTRATION STATEMENTS On August 30, 1995, the Company filed a registration statement with the SEC for the issuance of 3 million shares of common stock and 3 million rights to purchase common stock appurtenant thereto to be issued under the Company's Automatic Dividend Reinvestment and Common Stock Purchase Plan ("Dividend Reinvestment Plan") for the purpose of funding its construction program and other general corporate purposes. The Dividend Reinvestment Plan allows its shareholders to purchase additional shares of the Company's common stock through the reinvestment of cash dividends and the purchase of additional shares of common stock with optional cash payments. In 1994, the Company filed a registration statement with the SEC for the issuance of First Collateral Trust Bonds and cumulative preferred stock for the purpose of funding its construction program, refunding certain issues of its cumulative preferred stock and other general corporate purposes. The aggregate principal amount of first collateral trust bonds, plus the aggregate par value of shares of cumulative preferred stock, will not exceed $306 million. On May 31, 1996, the Company issued $125 million aggregate principal amount of its First Collateral Trust Bonds. On October 24, 1996, the Company filed a registration statement with the SEC for the issuance of $400 million aggregate principal amount of First Collateral Trust Bonds through one or more series of medium-term notes. On November 13, 1996, the Company established a $250 million Secured Medium-Term Note Program, Series B. As of January 31, 1997, $150 million of the Series B medium-term notes had been issued. COMPANY'S INDENTURES The Company's Indenture dated as of December 1, 1939 (the "1939 Indenture"), which is a mortgage on the Company's electric and gas properties, permits the issuance of additional first mortgage bonds to the extent of 60% of the value of net additions to the Company's utility property, provided net earnings before depreciation, taxes on income and interest expense for a recent twelve month period are at least 2.5 times the annual interest requirements on all bonds to be outstanding. The 1939 Indenture also permits the issuance of additional bonds on the basis of retired first mortgage bonds, in some cases with no requirement to satisfy such net earnings test. At December 31, 1996, the amount of net additions would permit (and the net earnings test would not prohibit) the issuance of approximately $365 million of new bonds (in addition to the $250 million principal amount of secured medium-term notes discussed above) at an assumed annual interest rate of 7.80%. At December 31, 1996, the amount of retired bonds would permit the issuance of $718.2 million of new bonds. The Company's Indenture dated as of October 1, 1993 (the "1993 Indenture") is a second mortgage on the Company's electric properties. Generally, so long as the Company's 1939 Indenture remains in effect, first collateral trust bonds will be issued under the 1993 Indenture on the basis of the deposit with the trustee of an equal principal amount of first mortgage bonds issued under the 1939 Indenture. If the bonds issued under the 1939 Indenture are to be issued on the basis of property additions, first collateral trust bonds may be issued under the 1993 Indenture only if net earnings before depreciation, taxes on income, interest expenses and non-recurring charges for a recent twelve-month period are at least 2 times annual interest requirements on all first mortgage 31 bonds (other than bonds held by the trustee under the 1993 Indenture) and all first collateral trust bonds to be outstanding. As of December 31, 1996, coverage under the net earnings test was 5.3 times such annual interest requirements. COMPANY'S RESTATED ARTICLES OF INCORPORATION The Company's Restated Articles of Incorporation prohibit the issuance of additional preferred stock without preferred shareholder approval, unless the gross income available for the payment of interest charges for a recent twelve month period is at least 1.5 times the total of: 1) the annual interest requirements on all indebtedness to be outstanding for more than one year; and 2) the annual dividend requirements on all preferred stock to be outstanding. At December 31, 1996, gross income available under this requirement would permit the Company, if allowed under provisions of the Company's Restated Articles of Incorporation, to issue approximately $2.9 billion of additional preferred stock at an assumed annual dividend rate of 6.90%. Coverage of gross income to interest charges was 6.22 at December 31, 1996. The Company's Restated Articles of Incorporation prohibit, without preferred shareholder approval, the issuance or assumption of unsecured indebtedness, other than for refunding purposes, greater than 15% of the aggregate of: 1) the total principal amount of all bonds or other securities representing secured indebtedness of the Company, then outstanding; and 2) the total of the capital and surplus of the Company, as then recorded on its books. At December 31, 1996, the Company had outstanding unsecured indebtedness, including subsidiary indebtedness with the credit support of the Company, in the amount of $231.2 million. The maximum amount permitted under this limitation was approximately $425.4 million at December 31, 1996. SHORT TERM BORROWING ARRANGEMENTS The Company and certain subsidiaries have available committed and uncommitted lines of credit to meet their short-term cash requirements. The Company, PSCCC, and certain subsidiaries have a credit facility with several banks which provides $300 million in committed bank lines of credit and is used primarily to support the issuance of commercial paper by the Company and PSCCC, and to provide for direct borrowings thereunder. Under the facility Cheyenne, 1480 Welton, Inc., Fuelco, e prime and PSRI are provided access to the credit facility with direct borrowings guaranteed by the Company. At December 31, 1996, $55.3 million remained unused under this facility. Generally, the banks participating in the credit facility would have no obligation to continue their commitments if there has been a material adverse change in the consolidated financial condition, operations, business or otherwise that would prevent the Company and its subsidiaries from performing their obligation under the credit facility. This facility expires on November 17, 2000. Also, the Company has individual arrangements for uncommitted bank lines of credit which totaled $75 million, and all remained unused at December 31, 1996. These individual arrangements expire on December 31, 1997. The Company may borrow under uncommitted preapproved lines of credit upon request; however, the banks have no firm commitment to make such loans (see Note 8. Bank Lines of Credit and Compensating Bank Balances in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA). PSCCC may periodically issue medium-term notes (in addition to the short-term debt discussed above) to supplement the financing/purchase of the Company's customer accounts receivable and fossil fuel inventories. As of December 31, 1996, PSCCC had issued and had outstanding $100 million in medium-term notes. The level of financing of PSCCC is tied directly to daily changes in the level of the Company's outstanding customer accounts receivable and monthly changes in fossil fuel inventories, and will vary minimally from year to year although seasonal fluctuations in the level of assets will cause corresponding fluctuations in the level of associated financing. 32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS The Board of Directors of the Company addresses its oversight responsibility for the consolidated financial statements through its Audit Committee. The Audit Committee meets regularly with the independent certified public accountants and the internal auditor to discuss results of their audit work and their evaluation of the adequacy of the internal controls and the quality of financial reporting. In fulfilling its responsibilities in 1996, the Audit Committee recommended to the Board of Directors, subject to shareholder approval, the selection of the Company's independent certified public accountants. The Audit Committee reviewed the overall scope and specific plans of the independent certified public accountants' and internal auditor's respective audit plans, and discussed the independent certified public accountants' management letter recommendations, approved their general audit fees, and reviewed their non-audit services to the Company. The committee meetings are designed to facilitate open communications among Company management, internal auditing, independent certified public accountants, and the Audit Committee. To ensure auditor independence, both the independent certified public accountants and internal auditor have full and free access to the Audit Committee. J. Michael Powers, Chairman Audit Committee February 24, 1997 33 REPORT OF MANAGEMENT The accompanying financial statements of Public Service Company of Colorado and subsidiaries have been prepared by Company personnel in conformity with generally accepted accounting principles consistent with the Uniform System of Accounts of the Federal Energy Regulatory Commission. The integrity and objectivity of the data in these financial statements are the responsibility of management. Financial information contained elsewhere in this Annual Report on Form 10-K is consistent with that in the financial statements. The accompanying financial statements have been audited by Arthur Andersen LLP, independent public accountants. Management has made available to Arthur Andersen LLP all the Company's and its subsidiaries' financial records and related data and has provided to them representations we believe to be valid and appropriate. The Company maintains a system of internal control over financial reporting, including the safeguarding of assets against unauthorized acquisition, use or disposition, which is designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation of reliable published financial statements and such asset safeguarding. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a code of conduct to foster a strong ethical climate, which are communicated throughout the Company, and the careful selection, training and development of our people. Internal auditors monitor the operation of the internal control system and report findings and recommendations to management and the Audit Committee of the Board of Directors, and corrective actions are taken to address control deficiencies and other opportunities for improving the system as they are identified. The board, operating through its Audit Committee, which is composed entirely of directors who are not officers or employees of the Company, provides oversight to the financial reporting process. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control system effectiveness may vary over time. The Company assessed its internal control system as of December 31, 1996 in relation to criteria for effective internal control over financial reporting described in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of its assessment, the Company believes that, as of December 31, 1996, the Company's system of internal control over external financial reporting, including the safeguarding of assets against unauthorized acquisition, use or disposition, met those criteria. W. Wayne Brown Wayne H. Brunetti Principal Accounting Officer Chief Executive Officer February 24, 1997 34 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO PUBLIC SERVICE COMPANY OF COLORADO We have audited the accompanying consolidated balance sheets of Public Service Company of Colorado (a Colorado corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Public Service Company of Colorado and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As more fully discussed in Note 11 to the consolidated financial statements, effective January 1, 1994, the Company changed its method of accounting for postemployment benefits. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. We have also audited, in accordance with generally accepted auditing standards, the consolidated balance sheets as of December 31, 1994, 1993 and 1992 and the related consolidated statements of income, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1993, (none of which are presented herein) and have expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the selected financial data for each of the five years in the period ended December 31, 1996 appearing in Item 6 of this Form 10-K, other than the ratios and percentages therein, is fairly stated, in all material respects, in relation to the financial statements from which it has been derived. ARTHUR ANDERSEN LLP Denver, Colorado February 24, 1997 35 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS) DECEMBER 31, 1996 AND 1995 ASSETS 1996 1995 ---------- ---------- Property, plant and equipment, at cost: Electric................................................. $3,931,413 $3,751,321 Gas...................................................... 1,035,394 989,215 Steam and other.......................................... 78,225 88,446 Common to all departments................................ 418,262 380,809 Construction in progress................................. 181,597 192,580 ---------- ---------- 5,644,891 5,402,371 Less: accumulated depreciation........................... 2,045,996 1,921,659 ---------- ---------- Total property, plant and equipment.................. 3,598,895 3,480,712 ---------- ---------- Investments, at cost, and receivables...................... 46,550 21,776 ---------- ---------- Current assets: Cash and temporary cash investments...................... 9,406 14,693 Accounts receivable, less reserve for uncollectible accounts ($4,049 at December 31, 1996; $3,630 at December 31, 1995) (Schedule II)............. 218,132 124,731 Accrued unbilled revenues (Note 1)....................... 85,894 96,989 Recoverable purchased gas and electric energy costs - net (Note 1)........................................... 31,288 - Materials and supplies, at average cost.................. 48,972 56,525 Fuel inventory, at average cost.......................... 24,739 35,654 Gas in underground storage, at cost (LIFO)............... 42,826 44,900 Current portion of accumulated deferred income taxes (Note 13).............................................. - 19,229 Regulatory assets recoverable within one year (Note 1)... 44,110 40,247 Prepaid expenses and other............................... 41,790 35,619 ---------- ---------- Total current assets................................. 547,157 468,587 ---------- ---------- Deferred charges: Regulatory assets (Note 1)............................... 304,456 321,797 Unamortized debt expense................................. 10,975 10,460 Other.................................................... 64,615 48,457 ---------- ---------- Total deferred charges............................... 380,046 380,714 ---------- ---------- $4,572,648 $4,351,789 ---------- ---------- ---------- ----------
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 36 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS) DECEMBER 31, 1996 AND 1995 CAPITAL AND LIABILITIES 1996 1995 ---------- ---------- Common stock (Note 5)...................................... $1,048,447 $ 997,106 Retained earnings.......................................... 389,841 346,539 ---------- ---------- Total common equity.................................. 1,438,288 1,343,645 Preferred stock (Note 5): Not subject to mandatory redemption...................... 140,008 140,008 Subject to mandatory redemption at par................... 39,913 41,289 Long-term debt (Note 6).................................... 1,259,528 1,195,553 ---------- ---------- 2,877,737 2,720,495 ---------- ---------- Noncurrent liabilities: Employees' postretirement benefits other than pensions (Note 11)................................ 55,677 49,198 Employees' postemployment benefits (Note 11)............. 25,182 23,500 Defueling and decommissioning liability (Note 2)......... - 23,115 ---------- ---------- Total noncurrent liabilities......................... 80,859 95,813 ---------- ---------- Current liabilities: Notes payable and commercial paper (Note 7).............. 244,725 288,050 Long-term debt due within one year....................... 155,030 82,836 Preferred stock subject to mandatory redemption within one year (Note 5)............................... 2,576 2,576 Accounts payable......................................... 254,256 156,109 Dividends payable........................................ 36,973 35,284 Recovered purchased gas and electric energy costs - net (Note 1)........................................... - 9,508 Customers' deposits...................................... 21,441 17,462 Accrued taxes............................................ 58,990 55,393 Accrued interest......................................... 33,797 32,071 Current portion of defueling and decommissioning liability (Note 2)..................................... 8,665 24,055 Current portion of accumulated deferred income taxes (Note 13).............................................. 4,560 - Other.................................................... 69,203 78,451 ---------- ---------- Total current liabilities............................ 890,216 781,795 ---------- ---------- Deferred credits: Customers' advances for construction..................... 50,269 99,519 Unamortized investment tax credits....................... 105,928 113,184 Accumulated deferred income taxes (Note 13).............. 539,082 508,143 Other.................................................... 28,557 32,840 ---------- ---------- Total deferred credits............................... 723,836 753,686 ---------- ---------- Commitments and contingencies (Note 9)..................... $4,572,648 $4,351,789 ---------- ---------- ---------- ----------
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 37 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 1995 1994 ---------- ---------- ---------- Operating revenues: Electric.......................................... $1,488,990 $1,449,096 $1,399,836 Gas............................................... 640,497 624,585 624,922 Other............................................. 41,899 36,920 32,626 ---------- ---------- ---------- 2,171,386 2,110,601 2,057,384 Operating expenses: Fuel used in generation........................... 195,442 181,995 198,118 Purchased power................................... 490,428 481,958 437,087 Gas purchased for resale.......................... 393,163 392,680 397,877 Other operating expenses.......................... 336,100 346,026 369,094 Maintenance....................................... 63,908 64,069 67,097 Defueling and decommissioning (Note 2)............ - - 43,376 Depreciation and amortization..................... 154,631 141,380 139,035 Taxes (other than income taxes)................... 82,899 81,319 86,408 Income taxes (Note 13)............................ 96,331 95,357 48,500 ---------- ---------- ---------- 1,812,902 1,784,784 1,786,592 ---------- ---------- ---------- Operating income.................................... 358,484 325,817 270,792 Other income and deductions: Allowance for equity funds used during construction.................................... 757 3,782 3,140 Gain on sale of WestGas Gathering, Inc. (Note 4)........................................ - - 34,485 Miscellaneous income and deductions - net (Notes 1 and 3)................................. (19,015) (6,837) (6,014) ---------- ---------- ---------- (18,258) (3,055) 31,611 Interest charges: Interest on long-term debt........................ 92,205 85,832 89,005 Amortization of debt discount and expense less premium.................................... 3,621 3,278 3,126 Other interest.................................... 57,398 58,109 44,021 Allowance for borrowed funds used during construction.................................... (3,344) (3,313) (4,018) ---------- ---------- ---------- 149,880 143,906 132,134 ---------- ---------- ---------- Net income.......................................... 190,346 178,856 170,269 Dividend requirements on preferred stock............ 11,848 11,963 12,014 ---------- ---------- ---------- Earnings available for common stock................. $ 178,498 $ 166,893 $ 158,255 ---------- ---------- ---------- ---------- ---------- ---------- Shares of common stock outstanding (thousands): Year-end....................................... 64,819 63,358 62,155 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average............................... 64,187 62,932 61,547 ---------- ---------- ---------- ---------- ---------- ---------- Earnings per weighted average share of common stock outstanding.......................... $ 2.78 $ 2.65 $ 2.57 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 38 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (THOUSANDS OF DOLLARS, EXCEPT SHARE INFORMATION) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 COMMON STOCK, $5 PAR VALUE -------------------------- PREMIUM ON RETAINED SHARES AMOUNT COMMON STOCK EARNINGS TOTAL ---------- --------- -------- --------- ---------- Balance at December 31, 1993.......... 60,457,375 $302,287 $608,561 $ 273,335 $1,184,183 Net income............................ - - - 170,269 170,269 Dividends declared Common stock, $2.00 per share....... - - - (123,379) (123,379) Preferred stock, $100 par value..... - - - (9,071) (9,071) Preferred stock, $25 par value...... - - - (2,940) (2,940) Issuance of common stock Employees' Savings Plan............. 334,223 1,671 8,439 - 10,110 Dividend Reinvestment Plan.......... 1,355,104 6,775 31,308 - 38,083 Omnibus Incentive Plan.............. 7,892 39 188 - 227 ---------- -------- -------- --------- ---------- Balance at December 31, 1994.......... 62,154,594 310,772 648,496 308,214 1,267,482 Net income............................ - - - 178,856 178,856 Dividends declared Common stock, $2.04 per share....... - - - (128,587) (128,587) Preferred stock, $100 par value..... - - - (9,004) (9,004) Preferred stock, $25 par value...... - - - (2,940) (2,940) Issuance of common stock Employees' Savings Plan............. 310,546 1,553 8,152 - 9,705 Dividend Reinvestment Plan.......... 889,331 4,447 23,575 - 28,022 Omnibus Incentive Plan.............. 3,657 19 92 - 111 ---------- -------- -------- --------- ---------- Balance at December 31, 1995.......... 63,358,128 316,791 680,315 346,539 1,343,645 Net income............................ - - - 190,346 190,346 Dividends declared Common stock, $2.10 per share....... - - - (135,111) (135,111) Preferred stock, $100 par value..... - - - (8,889) (8,889) Preferred stock, $25 par value...... - - - (2,940) (2,940) Issuance of common stock Employees' Savings Plan............. 274,934 1,374 8,420 - 9,794 Dividend Reinvestment Plan.......... 809,603 4,048 24,580 - 28,628 Omnibus Incentive Plan.............. 58,346 292 1,427 - 1,719 Acquisitions (Note 4)............... 317,748 1,589 9,611 - 11,200 Capital Stock Expense................. - - - (104) (104) ---------- -------- -------- --------- ---------- Balance at December 31, 1996.......... 64,818,759 $324,094 $724,353 $ 389,841 $1,438,288 ---------- -------- -------- --------- ---------- ---------- -------- -------- --------- ----------
Authorized shares of common stock were 160 million at December 31, 1996, 1995 and 1994. The accompanying notes to consolidated financial statements are an integral part of these financial statements. 39 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 1995 1994 --------- --------- --------- Operating activities: Net income.............................................. $ 190,346 $ 178,856 $ 170,269 Adjustments to reconcile net income to net cash provided by operating activities (Note 1): Depreciation and amortization....................... 159,400 145,370 142,843 Defueling and decommissioning expenses.............. - - 43,376 Gain on sale of WestGas Gathering, Inc.............. - - (34,485) Amortization of investment tax credits.............. (7,256) (5,348) (5,799) Deferred income taxes............................... 60,899 39,170 34,234 Allowance for equity funds used during construction...................................... (757) (3,782) (3,140) Change in accounts receivable....................... (88,680) 38,734 (16,281) Change in inventories............................... 20,542 4,246 10,007 Change in other current assets...................... (31,169) 7,618 (1,695) Change in accounts payable.......................... 88,473 (20,922) (35,364) Change in other current liabilities................. (36,615) 24,230 (39,730) Change in deferred amounts.......................... (19,550) (20,385) (33,920) Change in noncurrent liabilities.................... (9,779) (5,367) 15,321 Other............................................... 1,760 3,279 92 --------- --------- --------- Net cash provided by operating activities....... 327,614 385,699 245,728 Investing activities: Construction expenditures............................... (321,162) (285,516) (317,138) Allowance for equity funds used during construction..... 757 3,782 3,140 Proceeds from sale of WestGas Gathering, Inc............ - - 87,000 Proceeds from disposition of property, plant and equipment............................................. 20,454 2,470 49,438 Payment for purchase of companies, net of cash acquired (Note 4)..................................... 3,649 - - Purchase of other investments........................... (11,485) (10,249) (955) Sale of other investments............................... 664 4,898 1,148 --------- --------- --------- Net cash used in investing activities........... (307,123) (284,615) (177,367) Financing activities: Proceeds from sale of common stock (Note 1)............. 30,115 28,030 38,086 Proceeds from sale of long-term notes and bonds (Note 1).............................................. 217,415 101,860 250,068 Redemption of long-term notes and bonds................. (83,356) (44,713) (281,835) Short-term borrowings - net............................. (43,325) (36,750) 47,925 Redemption of preferred stock........................... (1,376) (1,376) (213) Dividends on common stock............................... (133,394) (127,352) (122,531) Dividends on preferred stock............................ (11,857) (11,973) (12,016) --------- --------- --------- Net cash used in financing activities........... (25,778) (92,274) (80,516) --------- --------- --------- Net increase (decrease) in cash and temporary cash investments.............................. (5,287) 8,810 (12,155) Cash and temporary cash investments at beginning of year............................. 14,693 5,883 18,038 --------- --------- --------- Cash and temporary cash investments at end of year....................................... $ 9,406 $ 14,693 $ 5,883 --------- --------- --------- --------- --------- ---------
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 40 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 1. SUMMARY OF SIGNIFICANT 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 CPUC with respect to its retail electric and gas operations and the FERC with respect to its wholesale electric operations and accounting policies and practices. Over 90% of the Company's electric and gas revenues are subject to CPUC jurisdiction. Cheyenne is subject to the jurisdiction of the WPSC. WGI and TOP are subject to the jurisdiction of the FERC. The gas marketing, power brokering and other operations of e prime and TOG are not regulated. REGULATORY ASSETS AND LIABILITIES The Company and its 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. On January 1, 1996, the Company adopted SFAS 121 which imposes stricter criteria for the continued recognition of regulatory assets on the balance sheet by requiring that such assets be probable of future recovery at each balance sheet date. The adoption of this statement did not have a material impact on the Company's results of operations, financial position or cash flow. The following regulatory assets are reflected in the Company's consolidated balance sheets: RECOVERY 1996 1995 THROUGH -------- -------- ------------ (THOUSANDS OF DOLLARS) Nuclear decommissioning costs (Note 2)......... $ 89,731 $ 97,801 2005 Income taxes (Note 13)......................... 98,355 110,617 2006 Employees' postretirement benefits other than pensions (Note 11)................ 54,449 47,600 2013 Early retirement costs (Note 11)............... 15,505 24,366 1998 Employees' postemployment benefits (Note 11)... 24,797 23,500 Undetermined Demand-side management costs................... 41,462 30,188 2002 Unamortized debt reacquisition costs........... 19,914 21,940 2024 Other.......................................... 4,353 6,032 1999 -------- -------- Total........................................ 348,566 362,044 Classified as current.......................... 44,110 40,247 -------- -------- Classified as noncurrent....................... $304,456 $321,797 -------- -------- -------- --------
Certain costs associated with the Company's DSM programs are deferred and recovered, along with the associated return, in rates over five to seven year periods through the DSMCA. Non-labor incremental expenses, carrying costs associated with deferred DSM costs and incentives associated with approved DSM programs are recovered on an annual basis. Costs incurred to reacquire debt prior to scheduled maturity dates are deferred and amortized over the life of the debt issued to finance the reacquisition or as approved by the applicable regulatory authority. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The regulatory assets of the Company and its regulated subsidiaries as of December 31, 1996, are reflected in rates charged to customers over the recovery periods noted above. The Company believes it 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 could be required to write-off related regulatory assets, determine any impairment to other assets resulting from deregulation and write-down any impaired assets to their estimated fair value. On January 27, 1997, the CPUC issued its order on the Company'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 $8.7 million regulatory asset recognized upon the adoption of SFAS 112 (see Note 11. Employee Benefits - Postemployment Benefits). The Company is appealing the decision related to this issue and addressing the impact of this decision on the future recovery of the electric jurisdictional portion of postemployment benefit costs totaling approximately $13.8 million. The Company believes that it will be successful on appeal and that the associated regulatory asset is realizable. If the appeal is unsuccessful, these amounts will be written off. RECOVERED/RECOVERABLE PURCHASED GAS AND ELECTRIC ENERGY COSTS - NET The Company's and Cheyenne's 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. Currently, these cost adjustment tariffs are revised periodically, as prescribed by the appropriate regulatory agencies, for any difference between the total amount collected under the clauses and the recoverable costs incurred. The cumulative effects are recognized as a current asset or liability until adjusted by refunds or collections through future billings to customers. The CPUC's order related to the Company's merger rate filing modified and replaced the Company's ECA with an ICA, which allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders (see Note 9. Commitments and Contingencies - Regulatory Matters). OTHER PROPERTY Property, plant and equipment includes approximately $18.4 million and $25.4 million, respectively, for costs associated with the engineering design of the future Pawnee 2 generating station and certain water rights located in southeastern Colorado, also obtained for a future generating station. 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. NON-UTILITY SUBSIDIARIES The Company's net investment in its non-utility subsidiaries approximated 4.5% of common equity at December 31, 1996. The subsidiaries are principally involved in non-regulated energy services, the management of real estate and certain life insurance policies and the financing of certain current assets of the Company. MANAGEMENT ESTIMATES The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONSOLIDATION The Company follows the practice of consolidating the accounts of its significant subsidiaries. All intercompany items and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year's presentation. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) REVENUE RECOGNITION The Company and Cheyenne accrue for estimated unbilled revenues for services provided after the meters were last read on a cycle billing basis through the end of each year. STATEMENTS OF CASH FLOWS For purposes of the consolidated statements of cash flows, the Company and its subsidiaries consider all temporary cash investments to be cash equivalents. These temporary cash investments are securities having original maturities of three months or less or having longer maturities but with put dates of three months or less. INCOME TAXES AND INTEREST (EXCLUDING AMOUNTS CAPITALIZED) PAID: 1996 1995 1994 -------- -------- -------- (THOUSANDS OF DOLLARS) Income taxes...................... $ 66,871 $ 58,662 $ 41,763 Interest.......................... $144,533 $140,823 $126,250 NON-CASH TRANSACTIONS: Shares of common stock (274,934 in 1996, 310,546 in 1995 and 334,223 in 1994), valued at the market price on date of issuance (approximately $10 million for each year), were issued to the Employees' Savings and Stock Ownership Plan of Public Service Company of Colorado and Participating Subsidiary Companies. The estimated issuance values were recognized in other operating expenses during the respective preceding years. Shares of common stock (6,673 in 1996, 3,390 in 1995 and 7,892 in 1994), valued at the market price on the date of issuance ($0.2 million in 1996, $0.1 million in 1995 and $0.2 million in 1994), were issued to certain executives pursuant to the applicable provisions of the executive compensation plans. During 1996, the Company exchanged 317,748 shares of its common stock valued at approximately $11.2 million in connection with the acquisition of TOG. During 1994, the Company sold all of its outstanding common stock of WGG (see Note 4. Acquisition and Divestiture of Investments). Cash flows from operating activities reflect the changes in assets and liabilities, net of the effects from these acquisitions and divestiture. The stock issuances referenced above were non-cash financing activities and are not reflected in the consolidated statements of cash flows. A $40.5 million capital lease obligation was recognized in 1995 in connection with a 30-year gas storage facility agreement. Additionally, other capital lease obligations totaling approximately $0.1 million were recognized in 1995. A $16.8 million capital lease obligation was incurred for computer equipment in 1994. PROPERTY, DEPRECIATION AND AMORTIZATION Replacements and betterments representing units of property are capitalized. Maintenance and repairs of property and replacements of items of property determined to be less than a unit of property are charged to operations as maintenance. The cost of units of property retired, together with cost or removal, less salvage, is charged against accumulated depreciation. Provisions for depreciation of property, plant and equipment for financial accounting purposes are based on straight-line composite rates applied to the various classes of depreciable property. Depreciation rates include provisions for disposal and removal costs of property, plant and equipment. Depreciation expense, expressed as a percentage of average depreciable property, approximated 2.7% for the year ended December 31, 1996 and 2.6% 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) for the years ended December 31, 1995 and 1994. For income tax purposes, the Company and its subsidiaries use accelerated depreciation and other elections provided by the tax laws. Intangible assets are amortized on a straight line basis over their estimated useful lives. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION AFDC, as defined in the system of accounts prescribed by the FERC and the CPUC, represents the net cost during the period of construction of borrowed funds used for construction purposes, and a reasonable rate on funds derived from other sources. AFDC does not represent current cash earnings. The Company capitalizes AFDC as a part of the cost of utility plant. The AFDC rates or ranges of rates used during 1996, 1995 and 1994 were 5.67%-6.78%, 7.97% and 6.81%-8.75%, respectively. MISCELLANEOUS INCOME AND DEDUCTIONS - NET Miscellaneous income and deductions - net includes items which are non-operating in nature or, in general, are not considered in the ratemaking process. Such items include, among other things, merger related costs, contributions, gains and losses on the sale of property and certain litigation, severance and environmental costs. Individually, these amounts did not have a material impact on the Company's results of operations. INCOME TAXES The Company and its subsidiaries file consolidated Federal and state income tax returns. Income taxes are allocated to the subsidiaries based on separate company computations of taxable income or loss. Investment tax credits have been deferred and are being amortized over the service lives of the related property. Deferred taxes are provided on temporary differences between the financial accounting and tax bases of assets and liabilities using the tax rates which are in effect at the balance sheet date (see Note 13. Income Taxes). STOCK-BASED COMPENSATION As allowed by SFAS 123, the Company uses the intrinsic value based method of accounting prescribed by APB Opinion No. 25, in accounting for its stock-based compensation plan (see Note 11. Employee Benefits - Incentive Compensation). GAS IN UNDERGROUND STORAGE Gas in underground storage is accounted for under the last-in, first-out (LIFO) cost method. The estimated replacement cost of gas in underground storage at December 31, 1996 and 1995 exceeded the LIFO cost by approximately $52.2 million and $5.3 million, respectively. CASH SURRENDER VALUE OF LIFE INSURANCE POLICIES The following amounts related to COLI contracts, issued by one major insurance company, are recorded as a component of Investments, at cost and receivables, on the consolidated balance sheets: 1996 1995 -------- -------- (THOUSANDS OF DOLLARS) Cash surrender value of contracts............... $359,136 $311,097 Borrowings against contracts.................... 356,421 308,833 -------- -------- Net investment in life insurance contracts.... $ 2,715 $ 2,264 -------- -------- -------- -------- 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. FORT ST. VRAIN OVERVIEW In 1989, the Company announced its decision to end nuclear operations at Fort St. Vrain and to proceed with the defueling and decommissioning of the reactor. While the defueling of the reactor to the ISFSI was completed in June 1992, several issues related to the ultimate storage/disposal of Fort St. Vrain's spent nuclear fuel remained unresolved. During 1994, the Company recognized additional expenses aggregating approximately $43.4 million for increased costs associated with defueling and decommissioning and the impairment of certain property and inventory. The additional expense was primarily associated with radiation levels in the reactor core being higher than originally anticipated and increased uncertainty related to spent fuel issues. In 1996, the Company and the DOE entered into a contract resolving all the defueling issues. Additionally, in early 1996, the Company announced that the physical decommissioning work at the facility was completed. NRC site release activities are continuing. The Company requested the NRC to terminate the Part 50 license and it is anticipated that the license will be terminated by mid-1997. 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 CPCN, which was received in July 1994, provides for the repowering of Fort St. Vrain in a phased approach as follows: Phase 1A - 130 Mw, commercial operations commenced on May 1, 1996, Phase 1B - 102 Mw, currently under construction with a 1998 expected in service date and Phase 2 - 239 Mw in 2000. 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. As part of this agreement, the Company 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 the Company $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) the Company 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 the Company anticipates approval in mid-1997. As a result of the DOE settlement, coupled with a complete review of expected remaining decommissioning costs and establishment of the anticipated refund to customers, pre-tax earnings for 1996 were positively impacted by approximately $16 million. In accordance with the 1991 CPUC approval to recover certain decommissioning costs, 50% of any cash amounts received from the DOE as part of a settlement, net of costs incurred by the Company, including legal fees, is to be refunded or credited to customers. While the amount to be refunded to customers has not yet been finally determined, the Company established an $8 million liability for such refunds. DECOMMISSIONING Following the 1991 CPUC approval, effective July 1, 1993 the Company began collecting from customers decommissioning costs expected to total approximately $124.4 million (plus a 9% carrying cost). Such amount, which is being collected over a twelve year period, represented the inflation-adjusted estimated remaining cost of decommissioning activities not previously recognized as expense at the time of CPUC approval. At December 31, 1996, approximately $89.7 million of such amount remains to be collected from customers and, therefore, is reflected as a regulatory asset on the consolidated balance sheet. The amount recovered from customers each year is approximately $13.9 million. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On March 22, 1996, the Company and the decommissioning contractors announced that the physical decommissioning activities at the facility have been completed. Additionally, the final site survey was completed in late October 1996 with only the NRC site release remaining to be obtained. At December 31, 1996, a remaining $8.7 million defueling and decommissioning liability was reflected on the consolidated balance sheet. The Company believes this remaining decommissioning liability is adequate to complete all final decommissioning activities. 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, which for several years included obtaining an unsecured irrevocable letter of credit. In December 1996, the Company placed $8.5 million in a trust to satisfy the remaining funding requirements. These funds are restricted for decommissioning expenditures and any unspent funds will remain in this trust until the NRC releases the Company from further obligation, which is anticipated to occur by mid-1997. 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, SPS, a New Mexico corporation, and NCE, a newly formed Delaware corporation, entered into a Merger Agreement providing for a business combination as peer firms involving the Company and SPS in a "merger of equals" transaction. Based on outstanding common stock of the Company and SPS at December 31, 1996, the Merger would result in the common shareholders of the Company owning 63% of the common equity of NCE and the common shareholders of SPS owning 37% of the common equity of NCE. In January 1996, NCE filed its application with the 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. 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 in addition to the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR"), as amended. The required authorizations from the CPUC, the Public Utility Commission of Texas, the WPSC, the New Mexico Public Utility Commission, the Kansas Corporation Commission, the NRC and the U.S. Department of Justice have been obtained. The waiting period under the HSR Act has expired. Related to FERC approval, a non-unanimous settlement agreement has been reached and hearings were held in late September 1996. On January 23, 1997, the sole party opposing the settlement filed a notice with the FERC withdrawing all of its pleadings. The Company has requested that the FERC give the matter expedited consideration. A final FERC order is expected in March 1997. The Company expects that the SEC will make its ruling on the Merger within 30-60 days following the FERC decision. While timing of the effective 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) date of the Merger is primarily dependent on the regulatory process, it is currently expected that the Merger will be completed in the second quarter of 1997. 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 NCE 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 1997. The Company recognized costs associated with the Merger of approximately $7.2 million in 1996 and $4.1 million in 1995. 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 proposed as part of the merger with SPS. The Company is seeking approval from the SEC to maintain these businesses and currently does not anticipate that divestiture will be required. If divestiture is ultimately required, the SEC has historically allowed companies sufficient time to accomplish divestitures in a manner that protects shareholder value. 4. ACQUISITION AND DIVESTITURE OF INVESTMENTS PROPOSED ACQUISITION OF YORKSHIRE ELECTRICITY On February 24, 1997, the Company and AEP jointly announced that they have reached agreement with the board of directors of Yorkshire Electricity, a UK regional electricity company, on the terms of a recommended cash tender offer for all of the outstanding and to be issued ordinary shares of Yorkshire Electricity. The Company and AEP, through a joint venture named Yorkshire Holdings, are offering the equivalent of US $15.02 (9.27 pounds) per ordinary share, for a total purchase price of approximately US $2.4 billion (1.5 billion pounds). The board of directors of the Company and AEP have approved the transaction. The board of directors of Yorkshire Electricity has agreed to recommend the offer to Yorkshire Electricity's shareholders. The offer will be made through Yorkshire Holdings, a wholly-owned subsidiary of Yorkshire Power, a newly formed UK corporation owned equally by the Company and AEP. Consummation of the Proposed Acquisition is subject to customary conditions in the UK, including regulatory clearance and acceptance of the offer by holders of at least 90% of the outstanding shares of Yorkshire Electricity. Yorkshire Holdings may waive the latter condition when it has received acceptances of its offer and has otherwise acquired shares which in total represent more than 50% of the outstanding shares of Yorkshire Electricity. The Company cannot predict at this time whether or not these conditions will be met or waived. If the Proposed Acquisition is completed, the Company would have an indirect 50% ownership interest in Yorkshire Electricity, which would be accounted for using the equity method of accounting. ACQUISITION OF TEXAS-OHIO GAS, INC. AND TEXAS-OHIO PIPELINE, INC. Effective September 1, 1996, the Company and e prime, a wholly-owned subsidiary, acquired all of the outstanding stock of TOG and TOP in exchange for a combination of common stock of the Company and cash. Such acquisitions were accounted for using the purchase method and the acquired assets and liabilities have been valued at their estimated fair market values as of the date of acquisition. These companies are primarily engaged in gas brokering and marketing activities and are subsidiaries of e prime. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) DIVESTITURE OF FUEL RESOURCES DEVELOPMENT CO. Since 1993, the Company has been pursuing the divestiture of all properties owned by Fuelco, a wholly-owned subsidiary which was primarily involved in the exploration and production of oil and natural gas. The Company recognized the estimated effects of the divestiture in the fourth quarter of 1993 and sold the remaining properties in 1994 and 1996 at approximately net book value. WESTGAS TRANSCOLORADO, INC. In September 1995, WGT sold its one-third interest in the TransColorado Gas Transmission Company for $3.8 million, which approximated net book value. ACQUISITION OF YOUNG GAS STORAGE COMPANY On June 25, 1995, the Company acquired all of the outstanding stock of YGSC for $6.3 million. The acquisition was accounted for using the purchase method. On February 1, 1996, the Company contributed the common stock of YGSC to e prime. YGSC owns a 47.5% general partnership interest in Young Storage, which owns and operates an underground facility in northeastern Colorado. SALE OF WESTGAS GATHERING, INC. In August 1994, the Company sold all of its outstanding common stock of WGG, its wholly-owned subsidiary, and certain related operating assets of the Company which were used by WGG for approximately $87 million, subject to certain final closing adjustments. The Company recognized a pre-tax gain of approximately $34.5 million ($19.5 million after-tax or approximately 31 cents per share). In the first quarter of 1995, the Company recognized $2.1 million of this gain as an amount to be refunded to customers in accordance with a March 30, 1995 settlement with the OCC. The refund was completed in late 1995. 5. CAPITAL STOCK COMMON STOCK During 1991, the Company's Board of Directors declared a dividend of one common share purchase right ("right") on each outstanding share of the Company's common stock. All common shares issued will contain this right. Each right stipulates an initial purchase price of $55 per share and also prescribes a means whereby the resulting effect is such that, under the circumstances described below, shareholders would be entitled to purchase additional shares of common stock at 50% of the prevailing market price at the time of exercise. These rights are not currently exercisable, but would become exercisable if certain events occurred related to a person or group acquiring or attempting to acquire 20% or more of the outstanding shares of common stock of the Company. On August 22, 1995, in connection with the proposed merger (see Note 3), the Company's Rights Agreement was amended to provide that NCE will not be considered an "Acquiring Person" as a result of the execution, delivery, and performance of the Merger Agreement. In the event a takeover results in the Company being merged into an acquiror, the unexercised rights could be used to purchase shares in the acquiror at 50% of market price. Subject to certain conditions, if a person or group acquires at least 20% but no more than 50% of the Company's common stock, the Company's Board of Directors may exchange each right held by shareholders other than the acquiring person or group for one share of common stock (or its equivalent). If a person or group successfully acquires 80% of the Company's common stock for cash, after tendering for all of the common stock, and satisfies certain other conditions, the rights would not operate. The rights expire 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) on March 22, 2001; however, each right may be redeemed by the Board of Directors for one cent at any time prior to the acquisition of 20% of the common stock by a potential acquiror. PREFERRED STOCK 1996 1995 ----------------------- ------------------------ SHARES AMOUNT SHARES AMOUNT --------- ----------- --------- ----------- (THOUSANDS (THOUSANDS OF DOLLARS) OF DOLLARS) Cumulative preferred stock, $100 par value: Authorized.................................... 3,000,000 3,000,000 --------- --------- --------- --------- Issued and outstanding: Not subject to mandatory redemption: 4.20% series.............................. 100,000 $ 10,000 100,000 $ 10,000 4 1/4% series (includes $7,500 premium)... 175,000 17,508 175,000 17,508 4 1/2% series............................. 65,000 6,500 65,000 6,500 4.64% series.............................. 160,000 16,000 160,000 16,000 4.90% series.............................. 150,000 15,000 150,000 15,000 4.90% 2nd series.......................... 150,000 15,000 150,000 15,000 7.15% series.............................. 250,000 25,000 250,000 25,000 --------- -------- --------- -------- Total................................... 1,050,000 $105,008 1,050,000 $105,008 --------- -------- --------- -------- --------- -------- --------- -------- Subject to mandatory redemption: 7.50% series.............................. 216,000 $ 21,600 216,000 $ 21,600 8.40% series.............................. 208,892 20,889 222,652 22,265 --------- -------- --------- -------- 424,892 42,489 438,652 43,865 Less: Preferred stock subject to mandatory redemption within one year................ (25,760) (2,576) (25,760) (2,576) --------- -------- --------- -------- Total................................... 399,132 $ 39,913 412,892 $ 41,289 Cumulative preferred stock, $25 par value: Authorized.................................... 4,000,000 4,000,000 --------- --------- --------- --------- Issued and outstanding: Not subject to mandatory redemption: 8.40% series.............................. 1,400,000 $ 35,000 1,400,000 $ 35,000 --------- -------- --------- -------- --------- -------- --------- --------
The preferred stock may be redeemed at the option of the Company upon at least 30, but not more than 60, days' notice in accordance with the following schedule of prices, plus an amount equal to the accrued dividends to the date fixed for redemption: CUMULATIVE PREFERRED STOCK, NOT SUBJECT TO MANDATORY REDEMPTION: $100 par value, all series: $101 per share. $25 par value, 8.40% series: $25.25 per share. CUMULATIVE PREFERRED STOCK, SUBJECT TO MANDATORY REDEMPTION: 7.50% series: $101.75 per share on or prior to August 31, 1997, reducing each year thereafter by $0.25 per share until August 31, 2003, after which the redemption price is $100 per share; 8.40% series: $102 per share on or prior to July 31, 1997, and reducing each year thereafter by $0.25 per share until July 31, 2004, after which the redemption price is $100 per share. In 1997 and in each year thereafter, the Company must offer to repurchase 12,000 shares of the 7.50% series subject to mandatory redemption at $100 per share, plus accrued dividends to the date set for repurchase, and 13,760 shares of the 8.40% series subject to mandatory redemption at $100 per share, plus accrued dividends to the date set for repurchase. Consequently, this preferred stock to be redeemed is classified as preferred stock 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) subject to mandatory redemption within one year in the December 31, 1996 consolidated balance sheet. In 1996 and 1995, the Company repurchased 13,760 shares of the 8.40% cumulative preferred series subject to mandatory redemption. In 1994, the Company repurchased 2,133 shares of the 8.40% cumulative preferred series subject to mandatory redemption. No other changes in preferred stock occurred in the three years ended December 31, 1996. 6. LONG-TERM DEBT 1996 1995 ---------- ---------- (THOUSANDS OF DOLLARS) Public Service Company of Colorado: First Collateral Trust Bonds: 6% series, due January 1, 2001............................. $ 102,667 $ 102,667 6 3/8% series, due November 1, 2005........................ 134,500 134,500 7 1/8% series, due June 1, 2006............................ 125,000 - 7 1/4% series, due January 1, 2024......................... 110,000 110,000 First Mortgage Bonds: 5 7/8% - 6 3/4% series, due May 1, 1996 - July 1, 1998............................................. 60,000 95,000 8 1/8% series, due March 1, 2004........................... 100,000 100,000 8 3/4% - 9 7/8% series, due July 1, 2020 - March 1, 2022............................................ 225,000 225,000 Pollution Control Series A, 5 7/8%, due March 1, 2004...... 22,500 23,000 Pollution Control Series F, 7 3/8%, due November 1, 2009... 27,250 27,250 Pollution Control Series G, 5 5/8% - 5 7/8%, due April 1, 2008 - April 1, 2014........................ 79,500 79,500 Pollution Control Series H, 5 1/2%, due June 1, 2012....... 50,000 50,000 Secured Medium-Term Notes, Series A: 6.05% - 9.25%, due Jan 15, 1996 - November 25, 2003.... 183,500 151,500 Unamortized premium.......................................... 13 24 Unamortized discount......................................... (5,032) (4,568) Capital lease obligations, 6.68-14.65%, due in installments through May 31, 2025.......................... 49,070 53,567 ---------- ---------- 1,263,968 1,147,440 Cheyenne Light, Fuel and Power Company: First Mortgage Bonds: 7 7/8% series, due April 1, 2003........................... 4,000 4,000 7.50% series, due January 1, 2024.......................... 8,000 8,000 Industrial Development Revenue Bonds, 7.25%, due September 1, 2021.................................... 7,000 7,000 PS Colorado Credit Corporation, Inc.: Unsecured Medium-Term Notes, Series A: 5.75% - 6.03%, due November 24, 1997 - December 1, 1998......................................... 100,000 80,000 1480 Welton, Inc.: 13.25% secured promissory note, due in installments through October 1, 2016....................... 31,506 31,814 Natural Fuels Corporation: Capital lease obligations, 4.21-11.11%, due in installments through November 5, 2000...................... 84 135 ---------- ---------- 1,414,558 1,278,389 Less: maturities due within one year........................... 155,030 82,836 ---------- ---------- $1,259,528 $1,195,553 ---------- ---------- ---------- ----------
Substantially all properties of the Company and its subsidiaries, other than expressly excepted property, are subject to the liens securing the Company's First Mortgage Bonds or the mortgage bonds and notes of subsidiaries. Additionally, there is a second lien on the electric property securing the Company's First Collateral Trust Bonds. The Company's First Collateral Trust Bonds are additionally secured by an equal amount of First Mortgage Bonds which bear no interest. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The aggregate annual maturities and sinking fund requirements during the five years subsequent to December 31, 1996 are (in thousands of dollars): YEAR MATURITIES SINKING FUND REQUIREMENTS TOTAL 1997 $155,030 $810 $155,840 1998 76,499 560 77,059 1999 44,196 560 44,756 2000 31,656 560 32,216 2001 8,302 560 8,862 The Company and Cheyenne expect to satisfy substantially all of their sinking fund obligations through the application of property additions. 7. NOTES PAYABLE AND COMMERCIAL PAPER Information regarding notes payable and commercial paper for the years ended December 31, 1996 and 1995 is as follows: 1996 1995 --------- ---------- (THOUSANDS OF DOLLARS) Notes payable to banks (weighted average interest rates of 5.98% at December 31, 1996 and 6.12% at December 31, 1995)............................... $ 18,375 $ 45,800 Commercial paper (weighted average interest rates of 6.10% at December 31, 1996 and 6.21% at December 31, 1995).................................. 226,350 242,250 -------- -------- $244,725 $288,050 -------- -------- -------- -------- Maximum amount outstanding at any month-end during the period.......................................... $306,675 $329,475 -------- -------- -------- -------- Weighted average amount (based on the daily outstanding balance) outstanding for the period (weighted average interest rates of 5.63% for the year ended December 31, 1996 and 6.18% for the year ended December 31, 1995)....................... $250,324 $292,226 -------- -------- -------- -------- 8. BANK LINES OF CREDIT AND COMPENSATING BANK BALANCES Arrangements by the Company and its subsidiaries for committed lines of credit are maintained entirely by fee payments in lieu of compensating balances. Arrangements for uncommitted lines of credit have no fee or compensating balance requirements. The Company, PSCCC, and certain subsidiaries have entered into a credit facility with several banks providing $300 million in committed bank lines of credit. The credit facility, which is used primarily to support the issuance of commercial paper by the Company and PSCCC, alternatively provides for direct borrowings thereunder. Cheyenne, 1480 Welton, Inc., Fuelco, e prime and PSRI are provided access to the credit facility with direct borrowings guaranteed by the Company. The facility expires November 17, 2000. Individual arrangements for uncommitted bank lines of credit totaled $75 million at December 31, 1996, of which all remained unused. The Company may borrow under uncommitted preapproved lines of credit upon request; however, the banks have no firm commitment to make such loans. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. COMMITMENTS AND CONTINGENCIES REGULATORY MATTERS MERGER RATE FILINGS In connection with the Merger with SPS, in November 1995 the Company filed comprehensive proposals with the CPUC, the WPSC and the FERC to obtain approval of the Merger and the associated comprehensive proposals from such regulatory agencies. On November 29, 1996, and as modified on January 15, 1997, the CPUC issued a written decision approving the Merger as well the major provisions of a stipulation and agreement entered into among the Company, the CPUC Staff, the OCC, and substantially all other parties. The decision establishes a five year performance based regulatory plan and acknowledges that the Merger is in the public interest. The major provisions of the decision include: - $6 million electric rate reduction, which was instituted October 1, 1996, to be followed by an additional $12 million electric rate reduction effective with the implementation of new gas rates on February 1, 1997 resulting from the 1996 general gas rate case, - 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 as follows: Sharing of Excess Earnings Electric Department -------------------------- Return on Equity Customers Shareholders ------------------- --------- ------------ 11-12% 65% 35% 12-14% 50% 50% 14-15% 35% 65% over 15% 100% 0%; - the termination of the QFCCA earnings test which was to become effective on October 1, 1996; - 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 and decommissioning costs; - a replacement of the Company's ECA with an ICA to allow for a 50%/50% sharing of certain fuel and energy cost increases or decreases among customers and shareholders; and - the implementation of a QSP which provides for penalties totaling up to $5 million in year one and increasing to $11 million in year five, if the Company does not achieve certain performance measures relating to electric reliability, customer complaints and telephone response to inquiries. A new docket is expected to be opened to address the implementation of a reward structure for performance above certain standards. The rate reductions, the earnings sharing, the QSP and the adoption of an ICA will remain in effect even if the Merger is not consummated. The freeze in base electric rates does not prohibit the Company from filing a general rate case or deny any party the opportunity to initiate a complaint or show cause proceeding. Approval of the Merger was received from the WPSC on August 16, 1996. Hearings in the FERC proceedings were held in September and a non-unanimous settlement agreement was reached. On January 23, 1997, the sole party opposing the settlement filed a notice with the FERC withdrawing all of its pleadings. The Company has requested that the FERC give the matter expedited consideration. A final FERC order is expected in March 1997. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) RATE CASES On June 5, 1996, the Company filed a retail rate case with the CPUC requesting an annual increase in its jurisdictional gas department revenues of approximately $34 million. Intervenor testimony was filed in the third quarter of 1996 with the primary issue being authorized rate of return on common equity. In January 1997, the CPUC approved an overall increase of $17.6 million with an 11.25% return on equity, effective February 1, 1997. On February 20, 1997, the Company filed for rehearing, reargument and reconsideration on the treatment of certain issues (see Note 1). 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 OPEB costs under SFAS 106, postemployment benefit costs under SFAS 112 and new depreciation rates based on the Company's most recent depreciation study. Settlement agreements have been reached with all parties and filed with the FERC which recognized recovery of the benefit costs discussed above and results in an overall slight decrease in rates. A final order is expected to be issued in early 1997. ELECTRIC AND GAS COST ADJUSTMENT MECHANISMS 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 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. The CPUC has had an on-going 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 to be addressed in this docket include whether the GCA should be maintained in its present form, altered or eliminated. The CPUC conducted hearings regarding this matter on February 14, 1997. Additional hearings have been scheduled for March 7, 1997. The CPUC approved the recovery of certain energy efficiency credits from retail jurisdiction customers through the DSMCA in June 1994. The OCC filed an appeal of the CPUC's decision in the Denver District Court. The Denver District Court approved the collection of these credits in June 1995, subject to refund. On April 9, 1996, the Denver District Court issued an order affirming the CPUC's decision, however, the OCC appealed this issue to the Colorado Supreme Court. On August 20, 1996, the OCC filed a motion for voluntary dismissal with prejudice with the Colorado Supreme Court which was accepted and effectively resolved this matter. FEDERAL ENERGY REGULATORY COMMISSION On April 24, 1996, the FERC issued Order No. 888, Order No. 889 and a NOPR. Order No. 888 requires jurisdictional utilities owning, controlling, or operating transmission facilities to file non-discriminatory open-access tariffs that satisfy the comparability standard -- i.e., that offer transmission services consistent with what is provided for in their own operations. The FERC required that all such utilities file the single pro forma tariff (combined network and point-to-point tariff) by July 9, 1996. The Company has filed the required pro forma tariff. Order No. 888 also provides for the recovery of legitimate, prudent, and verifiable stranded investment costs incurred when existing wholesale requirements customers and retail customers leave utilities' generation systems through FERC jurisdictional open-access tariffs and obtain their electric power from other energy suppliers. 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 the authority to address retail stranded costs at the time when retail wheeling is required. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Order No. 889 requires utilities to implement standards of conduct and an Open Access Same-time Information System ("OASIS") 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. In summary, it requires that utilities completely separate their wholesale power marketing and transmission operations functions. The NOPR on Capacity Reservation Open Access Transmission Tariffs 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. As required by Order No. 888, the Company filed a compliance transmission tariff on behalf of itself and Cheyenne on July 9, 1996. The Company made various additional filings with the FERC throughout 1996 to meet the requirements of Order Nos. 888 and 889. On January 29, 1997, the FERC issued an order accepting the non-rate terms and conditions contained in the Company's Order No. 888 transmission tariff. The rates set out in that tariff are the same as those proposed by the Company and Cheyenne in an Offer of Settlement submitted in an earlier proceeding and now pending before the FERC for review. On March 29, 1996, the FERC accepted the request of e prime, a non-regulated subsidiary, for authorization to act as a power marketer, subject to certain conditions. On April 15, 1996, e prime made a required compliance filing, but also submitted a request for rehearing on one of the conditions imposed by the FERC. The FERC accepted the compliance filing, but the request for rehearing is still pending. ENVIRONMENTAL ISSUES ENVIRONMENTAL SITE CLEANUP 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 PRPs. 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. 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. Under the CERCLA, the EPA has identified, and a Phase II environmental assessment has revealed, low level, widespread contamination from hazardous substances at the Barter Metals Company ("Barter")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 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 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 cleanup costs at Barter. Several appeals and cross appeals have been filed by 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 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, the Company expects to recoup additional expenditures beyond insurance proceeds through the sale of the Barter property and from other PRPs. In August 1996, the Company filed a lawsuit against four PRPs seeking recovery of certain Barter related costs. 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 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) owners resolving all claims. In December 1995, complaints were filed by the Company against all applicable insurance carriers in the Denver District Court. A trial date regarding the insurance carriers has been established for August 1997. The Ramp Industries disposal facility, located in Denver, Colorado has been designated by the EPA as a Superfund hazardous substance site pursuant to CERCLA. On November 29, 1995, the Company received from the EPA a Notice of Potential Liability and Request for Information related to such site and the Company has responded to this request. 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 PRPs. As of the end of 1996, the EPA has not yet developed a site specific plan for the cleanup or remediation, therefore at this time, the Company cannot estimate the amount, if any, of its potential liability related to this matter. It is anticipated that the EPA will notify the Company with the results of its investigation sometime during 1997. 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. ENVIRONMENTAL MATTERS RELATED TO AIR QUALITY AND POLLUTION CONTROL Under the Clean Air Act Amendments of 1990, coal burning power plants are required to reduce SO2 and NOx emissions to specified levels through a phased approach. The Company's facilities must comply with the Phase II requirements which will be effective in the year 2000. The Company expects to meet the Phase II 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 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 $13 million. The Company is studying its options to reduce NOx and SO2 emissions and, currently does not anticipate that these regulations will significantly impact its operations. HAYDEN STEAM ELECTRIC GENERATING STATION On May 21, 1996, the Company and the other joint owners of the Hayden station reached an agreement, as discussed below, with a conservation organization, the CDPHE and the EPA which provides for a complete and final release of all civil claims for violations alleged in complaints filed by the conservation organization, the CDPHE and the EPA against the joint owners. The complaints filed, pursuant to provisions of the Federal Clean Air Act, by a conservation organization and the EPA alleged, among other things, that the station exceeded the 20% opacity limitations during various periods extending from 1988 to mid-1995. 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 the operator and owns an average undivided interest of approximately 53% of the station's two generating units. In connection with the above settlement, the joint owners of the Hayden station made the following payments in 1996: 1) a $2 million payment to the U.S. Treasury, 2) a contribution of $2 million to a "Land Trust Fund" to be used for the purchase of land and/or conservation easements in the Yampa Valley and 3) a contribution of $250,000 to be used for the conversion of vehicles and/or wood burning appliances to natural gas in the Yampa Valley. The Company's portion of these costs is approximately $2.3 million, which has been expensed in the accompanying financial statements. The joint owners have committed to the installation of emission control equipment on both generating units to reduce future particulate (opacity), SO2 and NOx emissions over the next three years. The joint owners estimate that the cost of installing emission control equipment capable of reducing the emissions to the levels required under the agreement, consisting of fabric filter dust collectors, lime spray dryers and low NOx burners on both units, is approximately $130 million, with the Company's portion totaling approximately $70 million. Also, the settlement includes stipulated future penalties for failure to comply with the terms of the agreement, including specific provisions related to meeting 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) construction deadlines associated with the installation of additional emission control equipment and complying with particulate, SO2 and NOx emissions limitations. CRAIG STEAM ELECTRIC GENERATING STATION On October 9, 1996, a conservation organization filed a complaint in the U.S. District Court pursuant to provisions of the Federal Clean Air Act (the "Act") against the joint owners of the Craig Steam Electric Generating Station. Tri-State is the operator of the Craig station and the Company 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. The Company does not believe that its potential liability or the future impact of this litigation on plant operations will have a material impact on the Company's results of operations, financial position or cash flows. VALMONT STEAM ELECTRIC GENERATING STATION On July 1, 1996, the Company received a Notice of Violation ("NOV") from the CDPHE which alleges inadequate reporting of NOx and SO2 information and excess NOx emissions at the Valmont Steam Electric Generating Station for the period January 1, 1995 through August 22, 1995. The Company has responded to the NOV and believes that the amount of penalties, if any, that may result from such alleged violations would not have a material impact on the Company's results of operations, financial position or cash flows. PURCHASE REQUIREMENTS COAL PURCHASES AND TRANSPORTATION At December 31, 1996, the Company had in place long-term contracts for the purchase of coal through 2017. The minimum remaining quantities to be purchased under these contracts total 78 million tons. The coal purchase prices are subject to periodic adjustment for inflation and market conditions. Total estimated obligations, based on current prices, were approximately $678 million at December 31, 1996. The Company has entered into long-term contracts for the transportation of coal by railroad in Company-owned or leased railcars to existing power plants. These agreements, expiring in 2000, provide for a minimum remaining transport quantity of 15 million tons. Contract prices for coal transportation are negotiated based on market conditions and are adjusted periodically for inflation and operating factors. Total estimated obligations, based on current prices, were approximately $31 million at December 31, 1996. NATURAL GAS PURCHASES AND TRANSPORTATION The Company and Cheyenne have entered into long-term contracts for the purchase, firm transportation and storage of natural gas. These contracts, excluding the thirty year contract with Young Storage which has been accounted for as a capital lease, expire on various dates through 2002. During 1996, the Company renegotiated contracts with its primary gas pipeline supplier and committed to continue purchasing firm transportation and gas storage services through 2002. At December 31, 1996, the Company and Cheyenne have minimum obligations under such contracts of approximately $123 million in 1997 declining thereafter for a total estimated commitment of approximately $516 million. 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) PURCHASED POWER The Company and Cheyenne have entered into agreements with utilities and QFs for purchased power to meet system load and energy requirements, replace generation from Company-owned units under maintenance and during outages, and meet the Company's operating reserve obligation to the Pool. The Company has various pay-for-performance contracts with QFs having expiration dates through the year 2022. In general, these contracts provide for capacity payments, subject to the QFs meeting certain contract obligations, and energy payments based on actual power taken under the contracts. The capacity and energy costs are recovered through base rates, the ECA/ICA and the QFCCA. Additionally, the Company and Cheyenne have long-term purchased power contracts with various regional utilities expiring through 2018. In general, these contracts provide for capacity and energy payments which approximate the cost of the sellers. Total capacity and energy payments associated with such contracts were $453 million, $445 million, and $427 million in 1996, 1995 and 1994, respectively. At December 31, 1996, the estimated future payments for capacity that the Company and Cheyenne are obligated to purchase, subject to availability, are as follows: REGIONAL QFS UTILITIES TOTAL ---------- ---------- ---------- (THOUSANDS OF DOLLARS) 1997.................. $ 143,236 $ 180,896 $ 324,132 1998.................. 143,502 184,701 328,203 1999.................. 143,827 175,662 319,489 2000.................. 141,910 164,994 306,904 2001.................. 140,438 143,894 284,332 2002 and thereafter... 1,000,001 1,270,872 2,270,873 ---------- ---------- ---------- Total............... $1,712,914 $2,121,019 $3,833,933 ---------- ---------- ---------- ---------- ---------- ---------- Historically, all minimum coal, coal transportation, natural gas and purchased power requirements have been met. OTHER PURCHASES Commitments made for the purchase of materials, plant and equipment additions, DSM expenditures and other various items aggregated approximately $478 million at December 31, 1996. EMPLOYEE LITIGATION Several employee lawsuits have been filed against the Company involving alleged discrimination and breach of certain fiduciary duties to employees. The Company is actively contesting all such lawsuits and believes that the ultimate outcome will not have a material impact on the Company's results of operations, financial position or cash flow. On August 13, 1996, eighty-eight former Information Technology and Systems ("IT&S") employees filed a lawsuit against the Company. The complaint, which was subsequently amended to add two other former IT&S employees, alleges that the Company unfairly amended its severance plan in connection with a restructuring in late 1994 to exclude the IT&S function/positions that were outsourced to IBM, effective February 1, 1995. The Company believes that the amended severance plan is lawful and enforceable and believes that the ultimate outcome of the lawsuit will not have a material impact on the Company's results of operations, financial position or cash flows. On July 19, 1996, a class action complaint was filed by fourteen plaintiffs allegedly on behalf of all non-managerial, non-clerical women in the Company's regional facilities. The complaint asserts that the Company has 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) engaged in company-wide pattern and practice of sexual discrimination, including sexual harassment and retaliation. A previous class complaint filed by some of these plaintiffs along with other named plaintiffs, was withdrawn after the Company filed its response. It is too early to predict the outcome of the class action complaint. The Company intends to actively contest the class action and believes the ultimate outcome of the individual plaintiffs' cases will not have a material impact on the Company's results of operations, financial position or cash flows. 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. A jury entered verdicts adverse to the Company in two cases which were subsequently appealed by the Company. On February 6, 1997, the Colorado Court of Appeals issued a decision on all issues in favor of the Company. The employees can appeal the decision of the Colorado Court of Appeals to the Colorado Supreme Court. The Company believes that the ultimate outcome of the lawsuit will not have a material impact on the Company's results of operations, financial position or cash flow. UNION CONTRACTS In late December 1995, the Company's contracts with the International Brotherhood of Electrical Workers, Local 111 ("IBEW Local 111") expired. Previously, an arbitrator had rejected the Company's attempt to terminate the contracts on the expiration dates. Therefore, negotiation of limited issues was reopened. The parties were unable to reach agreement on the contract issues reopened through the negotiation process and, as a result, the Company and IBEW Local 111 entered into binding arbitration on March 20, 1996, as required under the contracts. On June 4, 1996, the arbitrator ruled that the Operations, Production and Maintenance ("OP&M") collective bargaining agreement with the Union would continue until May 31, 1997 and that the employees covered by the agreement would receive a wage increase of 3.5% retroactive to December 1995. Such amount had been previously accrued. Subsequent to the arbitrator's decision on the OP&M agreement, the Company and IBEW Local 111 came to an agreement on the Meter Reader, Order Reader and Field Credit Representative contract with a contract term and a wage increase consistent with the OP&M agreement. At December 31, 1996, approximately 2,090 employees, or 45% of the Company's total workforce, are represented by IBEW Local 111. On June 21, 1996, the National Labor Relations Board ordered the Company to reinstate approximately 150 union employees laid off or moved to other positions in the 1994 restructuring. The Company was ordered to make whole, with interest, any net loss of earnings or other benefits since the layoff. Thirty-two employees were reinstated and, while the final costs associated with the order have not been determined, the Company accrued $2.0 million during 1996 related to this obligation. In addition, IBEW Local 111 filed several grievances during 1996 relating to the employment of certain non-union personnel to perform services for the Company. A decision has been entered on three of the multiple grievances, with two of those decisions requiring that the Company pay union wage rates on new construction jobs performed by outside vendors. The Company has filed suit seeking to reverse one of these decisions and challenging the subcontracting provision of the labor agreement, all of the outstanding subcontracting grievances and both of the existing adverse decisions as violations of federal law. The Company and the union have entered into negotiations to resolve this dispute over contracting. A decision is expected in March 1997. LEASING PROGRAM The Company and its subsidiaries lease various equipment and facilities used in the normal course of business, some of which are accounted for as capital leases. Expiration of the capital leases range from 1998 to 2025. The net book value of property under capital leases was $49.2 million and $53.7 million at December 31, 1996, and 1995, respectively. Assets acquired under capital leases are recorded as property at the lower of fair-market value or the present value of future lease payments, and are amortized over their actual contract term in 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) accordance with practices allowed by the CPUC. The related obligation is classified as long-term debt. Executory costs are excluded from the minimum lease payments. The majority of the operating leases are under a leasing program that has initial noncancellable terms of one year, while the remaining leases have various terms. These leases may be renewed or replaced. No material restrictions exist in these leasing agreements concerning dividends, additional debt, or further leasing. Rental expense for 1996, 1995 and 1994 was $25.0 million, $23.5 million and $29.7 million, respectively. Estimated future minimum lease payments at December 31, 1996 are as follows: CAPITAL OPERATING LEASES LEASES -------- --------- (THOUSANDS OF DOLLARS) 1997.............................................. $ 9,585 $ 20,790 1998.............................................. 9,392 20,947 1999.............................................. 7,903 18,019 2000.............................................. 5,097 16,129 2001.............................................. 5,035 11,880 All years thereafter.............................. 81,177 20,489 -------- --------- Total future minimum lease payments............. 118,189 $108,254 --------- --------- Less amounts representing interest.............. 69,035 -------- Present value of net minimum lease payments..... $ 49,154 -------- -------- The Company has in place a leasing program which includes a provision whereby the Company indemnifies the lessor for all liabilities which might arise from the acquisition, use, or disposition of the leased property. 10. JOINTLY-OWNED ELECTRIC UTILITY PLANTS The Company's investment in jointly-owned plants and its ownership percentages as of December 31, 1996 is: PLANT CONSTRUCTION IN ACCUMULATED WORK IN SERVICE DEPRECIATION PROGRESS OWNERSHIP % -------- ------------- ------------ ----------- (THOUSANDS OF DOLLARS) Hayden Unit 1.................................... $ 38,213 $ 29,860 $1,526 75.50 Hayden Unit 2.................................... 58,211 32,873 300 37.40 Hayden Common Facilities......................... 2,117 392 3,287 53.10 Craig Units 1 & 2................................ 57,057 23,352 647 9.72 Craig Common Facilities Units 1 & 2.............. 7,714 3,033 958 9.72 Craig Common Facilities Units 1, 2 & 3........... 8,371 3,310 407 6.47 Transmission Facilities, Including Substations... 79,166 22,105 95 42.0-73.0 -------- -------- ------ $250,849 $114,925 $7,220 -------- -------- ------ -------- -------- ------
These assets include approximately 320 Mw of net dependable generating capacity. The Company is responsible for its proportionate share of operating expenses (reflected in the consolidated statements of income) and construction expenditures. 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. EMPLOYEE BENEFITS PENSIONS The Company and Cheyenne maintain a noncontributory defined benefit pension plan covering substantially all employees. The net pension expense in 1996, 1995 and 1994 was comprised of: 1996 1995 1994 -------- --------- -------- (THOUSANDS OF DOLLARS) Service cost...................................... $ 14,317 $ 11,659 $ 16,169 Interest cost on projected benefit obligation..... 46,497 46,570 45,518 Actual return on plan assets...................... (74,646) (123,531) 5,844 Amortization of net transition asset.............. (3,674) (3,674) (3,674) Other items....................................... 24,362 75,521 (56,996) -------- --------- -------- Net pension expense......................... $ 6,856 $ 6,545 $ 6,861 -------- --------- -------- -------- --------- --------
The pension plan was amended in 1994 (as discussed below) requiring the use of two sets of assumptions in the calculation of the 1994 net periodic pension cost. Significant assumptions used in determining net periodic pension cost were: APR - DEC JAN - MAR 1996 1995 1994 1994 ---- ---- --------- --------- Discount rate....................................... 7.25% 8.75% 8.0% 7.5% Expected long-term increase in compensation level... 4.0 % 5.0 % 5.0% 5.0% Expected weighted average long-term rate of return on assets............................... 9.75% 9.75% 10.5% 10.5%
Variances between actual experience and assumptions for costs and returns on assets are amortized over the average remaining service lives of employees in the plan. A comparison of the actuarially computed benefit obligations and plan assets at December 31, 1996 and 1995, is presented in the following table. Plan assets are stated at fair value and are comprised primarily of corporate debt and equity securities, a real estate fund and government securities held either directly or in commingled funds. The Company and Cheyenne's funding policy is to contribute annually, at a minimum, the amount necessary to satisfy the IRS funding standards. 1996 1995 --------- --------- (THOUSANDS OF DOLLARS) Actuarial present value of benefit obligations: Vested................................................ $ 514,762 $ 523,539 Nonvested............................................. 28,689 31,678 --------- --------- 543,451 555,217 Effect of projected future salary increases............. 85,216 91,810 --------- --------- Projected benefit obligation for service rendered to date...................................... 628,667 647,027 Plan assets at fair value............................... (634,967) (588,314) --------- --------- Projected benefit obligation in excess of plan assets........................................... 6,300 (58,713) Unrecognized net loss................................... 1,110 62,092 Prior service cost not yet recognized in net periodic pension cost................................. 27,758 30,063 Unrecognized net transition asset at January 1, 1986, being recognized over 17 years........................ (22,042) (25,716) --------- --------- Prepaid pension asset................................... $ 13,126 $ 7,726 --------- --------- --------- --------- 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Significant assumptions used in determining the benefit obligations at the end of each respective year were: 1996 1995 --------- --------- Discount rate........................................... 7.75% 7.25% Expected long-term increase in compensation level....... 4.25% 4.0% On January 25, 1994, the Board of Directors approved an amendment to the Plan which offered an incentive for early retirement for employees age 55 or older with 20 years of service as well as a Severance Enhancement Program ("SEP") option for these same eligible employees for the period February 4, 1994 to April 1, 1994. The Plan amendment generally provided for the following retirement enhancements: a) unreduced early retirement benefits, b) three years of additional credited service, and c) a supplement of either a one-time payment equal to $400 for each full year of service to be paid from general corporate funds or a $250 social security supplement each month up to age 62 to be paid by the Plan. The SEP provided for: a) a one-time severance ranging from $20,000 - $90,000, depending on an employee's organization level, b) a continuous years of service bonus (up to 30 years), and c) a cash benefit of $10,000. Approximately 550 employees elected to participate in the early retirement/severance enhancement program, of which approximately 370 employees elected the early retirement benefit. The total cost of the program was approximately $39.7 million. These costs were deferred and, effective April 1, 1994, are being amortized to expense over approximately 4.5 years in accordance with rate regulatory treatment. This amortization period represents the participants' average remaining years of service to their expected retirement date. INVOLUNTARY SEVERANCE PROGRAM During 1994, in a continuing effort to lower operating costs, the Company implemented an involuntary severance program which reduced management and staff levels by approximately 550 employees. Approximately $10.7 million of involuntary severance costs were accrued, of which $8.7 million reduced pre-tax earnings. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company and Cheyenne provide certain health care and life insurance benefits for retired employees. A significant portion of the employees become eligible for these benefits if they reach either early or normal retirement age while working for the Company or Cheyenne. Historically, the Company has recorded the cost of these benefits on a pay-as-you-go basis, consistent with the regulatory treatment. Effective January 1, 1993, the Company and Cheyenne adopted SFAS 106 costs based on the level of expense determined in accordance with the CPUC and WPSC. SFAS 106 requires the accrual, during the years that an employee renders service to the Company, of the expected cost of providing postretirement benefits other than pensions to the employee and the employee's beneficiaries and covered dependents. The Company is transitioning to full accrual accounting for OPEB costs between January 1, 1993 and December 31, 1997, consistent with the accounting requirements for rate regulated enterprises. All OPEB costs deferred during the transition period will be amortized on a straight line basis over the subsequent 15 years. Effective December 1, 1993, the Company began recovering such costs as provided in the Fort St. Vrain Supplemental Settlement Agreement. On January 13, 1995, the CPUC approved the 1994 revision to the Supplemental Settlement Agreement, which accelerated the recovery of OPEB costs to comply with SFAS 106 and approved other changes to certain ratemaking principles. The change in recovery was retroactive to January 1, 1994, and accordingly, resulted in an increased OPEB expense for that year and subsequent years. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company filed a FERC rate case in December 1995 which included a request for approval to recover all electric wholesale jurisdiction SFAS 106 costs (see Note 9.). Effective January 1, 1993, Cheyenne began recovering SFAS 106 costs as approved by the WPSC. The Company and Cheyenne fund SFAS 106 costs in external trusts based on the amounts reflected in cost-of-service, consistent with the respective rate orders. The net periodic postretirement benefit cost in 1996, 1995 and 1994 under SFAS 106 was comprised of: 1996 1995 1994 -------- -------- -------- (THOUSANDS OF DOLLARS) Service cost...................................... $ 6,928 $ 6,027 $ 6,101 Interest cost on projected benefit obligation...................................... 22,982 24,761 24,111 Return on plan assets............................. (4,500) (2,578) (938) Amortization of net transition obligation at January 1, 1993 assuming a 20 year amortization period............................. 12,710 12,710 12,710 -------- -------- -------- Net postretirement benefit cost required by SFAS 106..................................... 38,120 40,920 41,984 OPEB expense recognized in accordance with current regulation.............................. (31,271) (30,893) (30,266) -------- -------- -------- Increase in regulatory asset (Note 1)............. 6,849 10,027 11,718 Regulatory asset at beginning of year............. 47,600 37,573 25,855 -------- -------- -------- Regulatory asset at end of year................... $ 54,449 $ 47,600 $ 37,573 -------- -------- -------- -------- -------- --------
Significant assumptions used in determining net periodic postretirement benefit cost were: APR - DEC JAN - MAR 1996 1995 1994 1994 ---- ---- --------- --------- Discount rate............................... 7.25% 8.75% 8.0% 7.5% Expected long-term increase in compensation level........................ 4.0 % 5.0 % 5.0% 5.0% Expected weighted average long-term rate of return on assets.................. 9.75% 9.75% 10.5% 10.5%
A comparison of the actuarially computed benefit obligations and plan assets at December 31, 1996 and 1995 is presented in the following table. Plan assets are stated at fair value and are comprised primarily of corporate debt and equity securities, a real estate fund, government securities and other short-term investments held either directly or in commingled funds. 1996 1995 --------- --------- (THOUSANDS OF DOLLARS) Accumulated postretirement benefit obligation: Retirees and eligible beneficiaries........... $ 110,692 $ 122,395 Other fully eligible plan participants........ 81,676 93,161 Other active plan participants................ 90,559 102,739 --------- --------- Total....................................... 282,927 318,295 Plan assets at fair value......................... (63,744) (41,129) --------- --------- Accumulated benefit obligation in excess of plan assets..................................... 219,183 277,166 Unrecognized net gain (loss)...................... 39,847 (11,905) Unrecognized transition obligation................ (203,353) (216,063) --------- --------- Accrued postretirement benefit obligation......... $ 55,677 $ 49,198 --------- --------- --------- --------- Significant assumptions used in determining the accumulated postretirement benefit obligation at the end of each respective year were: 1996 1995 --------- --------- Discount rate..................................... 7.75% 7.25% Ultimate health care cost trend rate.............. 5.0 % 4.5 % Expected long-term increase in compensation level.............................. 4.0 % 4.0 % The assumed health care cost trend rate for 1997 is 9.0%, decreasing to 4.5% in 2006 in 0.5% annual increments. A 1% increase in the assumed health care cost trend will increase the estimated total accumulated 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) benefit obligation by $35.1 million, and the service and interest cost components of net periodic postretirement benefit costs by $5.1 million. POSTEMPLOYMENT BENEFITS The Company and Cheyenne adopted SFAS 112 on January 1, 1994, the effective date of the statement. SFAS 112 establishes the accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement (postemployment benefits). At December 31, 1996 and 1995, the Company had recorded a $24.8 million and $23.5 million regulatory asset and a corresponding liability on the consolidated balance sheet, assuming a 7.75% and an 7.25% discount rate, respectively. The Company has historically recorded these costs on a pay-as-you-go basis. The Company filed a FERC rate case in December 1995 and a retail gas rate case in June 1996 which included a request for recovery of all electric wholesale and retail jurisdiction SFAS 112 costs. For discussion regarding the recovery of these costs, see Note 1 and Note 9. INCENTIVE COMPENSATION The Omnibus Incentive Plan ("OIP") provides for annual and long-term incentive awards for officers and management employees. One million shares of common stock have been authorized for awards under the OIP as it allows for the issuance of restricted shares and/or stock options. The Company recognizes compensation expense for restricted stock awards based on the fair value of the Company's common stock on the date of grant, consistent with SFAS 123. Cash, restricted stock awards (restrictions lapse two years from the grant date) and stock option awards (which vest ratably during a three-year period) were made under the OIP during 1996, 1995 and 1994. As allowed in SFAS 123, the Company applies APB Opinion No. 25 in accounting for its stock-based compensation and, accordingly, no compensation cost is recognized for the issuance of stock options as the exercise price of the options equals the fair-market value of the Company's common stock at the date of grant. Assuming compensation cost for stock options granted in 1996 and 1995 had been determined consistent with SFAS 123 using the fair-value based method, the Company's reported net income would have been reduced by $0.3 million in 1996 and $0.2 million in 1995 which would not have impacted reported earnings per share for 1996 and 1995. SFAS 123's method of accounting for stock-based compensation plans has not been applied to options granted prior to January 1, 1995 and as a result the pro forma compensation cost may not be representative of that to be expected in future years. A summary of the Company's stock options at December 31, 1996, 1995 and 1994 and changes during the years then ended is presented in the table below: 1996 1995 1994 ------------------------- ------------------------ ------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------- -------------- ------- -------------- ------- -------------- Outstanding at beginning of year 347,931 $29.33 195,744 $28.53 58,544 $28.13 Granted 158,270 $35.13 161,000 $30.29 149,700 $28.73 Exercised (51,673) $30.21 (267) $29.00 - $ - Forfeited (13,301) $32.84 (8,546) $29.17 (12,500) $29.00 ------- ------- ------- Outstanding at end of year 441,227 $31.38 347,931 $29.33 195,744 $28.53 ------- ------- ------- Exercisable at end of year 158,970 $29.05 125,931 $28.52 19,515 $28.13 ------- ------- ------- ------- ------- ------- Weighted-average fair value of options granted $ 4.31 $ 5.39
63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option-Pricing Model with the following weighted-average assumptions: 1996 1995 -------- -------- Expected option life........................... 10 years 10 years Stock volatility................................ 11.95% 16.11% Risk-free interest rate......................... 6.21% 7.45% Dividend yield.................................. 5.8 % 6.6 % The Employee Incentive Plan ("EIP") provides for cash awards to all employees based on the achievement of corporate goals. Certain performance goals were met in each of the last three years. The expenses accrued under the OIP and the EIP totaled approximately $7.8 million in 1996, $6.4 million in 1995 and $6.0 million in 1994. In the event that the Company is subject to a change in control, all stock-based awards, such as options and restricted shares, will vest 100% and all performance awards will be paid out immediately in cash, as if the performance objectives have been obtained through the effective date of the change in control. The Merger, when effective, qualifies as a change in control condition. 12. FINANCIAL INSTRUMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and fair values of the Company's and subsidiaries' significant financial instruments at December 31, 1996 and 1995. The carrying amount of all other financial instruments approximates fair value. SFAS 107 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. 1996 1995 ----------------------- ----------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- (THOUSANDS OF DOLLARS) Investments, at cost............ $ 30,249 $ 30,416 $ 7,575 $ 7,623 Preferred stock subject to mandatory redemption.......... 42,489 43,685 43,865 45,184 Long-term debt.................. 1,370,423 1,404,972 1,229,231 1,307,128
The fair value of the debt and equity securities included in Investments, at cost, is estimated based on quoted market prices for the same or similar investments. The debt securities are classified as held-to-maturity and the equity securities are classified as available-for-sale. The unrealized holding gains and losses for these debt and equity securities are not significant. The estimated fair values of preferred stock subject to mandatory redemption and long-term debt are based on quoted market prices of the same or similar instruments. Since the Company and Cheyenne are subject to regulation, any gains or losses related to the difference between the carrying amount and the fair value of these financial instruments would not be realized by the Company's shareholders. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS YGSC, a wholly-owned subsidiary of e prime, and the Company have guaranteed 50% of amounts financed under a $32 million Credit Agreement among Young Gas and various lending institutions entered into on 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 27, 1995. This debt financing is for the development, construction and operation of an underground natural gas storage facility in northeastern Colorado. CONCENTRATION OF CREDIT RISK - ACCOUNTS RECEIVABLE No individual customer or group of customers engaged in similar activities represents a material concentration of credit risk to the Company and its subsidiaries. 13. INCOME TAXES The provisions for income taxes for the years ended December 31, 1996, 1995 and 1994 consist of the following: 1996 1995 1994 ------- ------- ------- (THOUSANDS OF DOLLARS) Current income taxes: Federal.............................. $41,737 $58,728 $22,081 State................................ 951 2,807 (2,016) ------- ------- ------- Total current income taxes......... 42,688 61,535 20,065 ------- ------- ------- Deferred income taxes: Federal.............................. 53,612 38,006 31,042 State................................ 7,287 1,164 3,192 ------- ------- ------- Total deferred income taxes........ 60,899 39,170 34,234 ------- ------- ------- Investment tax credits - net........... (7,256) (5,348) (5,799) ------- ------- ------- Total provision for income taxes....... $96,331 $95,357 $48,500 ------- ------- ------- ------- ------- ------- During 1994, as a result of a detailed analysis of the income tax accounts, the Company recorded a decrease in its income tax liabilities, which served to reduce Federal and state income tax expenses by approximately $21.3 million, or 34 cents per share. The detailed analysis was completed in conjunction with the Company's implementation of the full normalization method of accounting for income taxes as provided for in a rate order from the CPUC. A reconciliation of the statutory U.S. income tax rates and the effective tax rates follows: 1996 1995 1994 --------------- -------------- --------------- (THOUSAND OF DOLLARS) Tax computed at U.S. statutory rate on pre-tax accounting income.............. $100,337 35.0% $95,975 35.0% $ 76,569 35.0% Increase (decrease) in tax from: Allowance for funds used during construction.................... (1,438) (0.5) (2,495) (0.9) (2,449) (1.1) Amortization of investment tax credits... (7,256) (2.5) (5,348) (1.9) (5,792) (2.6) Cash surrender value of life insurance policies..................... (11,265) (3.9) (9,546) (3.5) (7,643) (3.5) Amortization of prior flow-through amounts................................ 10,509 3.6 10,509 3.8 10,509 4.8 Tax accrual adjustment................... - - - - (21,262) (9.7) Other-net................................ 5,444 1.9 6,262 2.3 (1,432) (0.7) -------- ---- ------- ---- -------- ---- Total income taxes................... $ 96,331 33.6% $95,357 34.8% $ 48,500 22.2% -------- ---- ------- ---- -------- ---- -------- ---- ------- ---- -------- ----
The Company and its regulated subsidiaries have historically provided for deferred income taxes to the extent allowed by their regulatory agencies whereby deferred taxes were not provided on all differences between financial statement and taxable income (the flow-through method). To give effect to temporary differences for which deferred taxes were not previously required to be provided, a regulatory asset was recognized. The regulatory asset represents temporary differences primarily associated with prior flow-through amounts and the equity component of allowance for funds used during construction, net of temporary differences related to 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) unamortized investment tax credits and excess deferred income taxes that have resulted from historical reductions in tax rates (see Note 1). The tax effects of significant temporary differences representing deferred tax liabilities and assets as of December 31, 1996 and 1995 are as follows: 1996 1995 -------- -------- (THOUSANDS OF DOLLARS) Deferred income tax liabilities: Accelerated depreciation and amortization....... $412,047 $376,468 Plant basis differences (prior flow-through).... 132,149 152,631 Allowance for equity funds used during construction.................................. 48,952 50,411 Pensions........................................ 38,790 36,583 Other........................................... 68,940 50,760 -------- -------- Total....................................... 700,878 666,853 Deferred income tax assets: Investment tax credits.......................... 65,278 69,751 Contributions in aid of construction............ 63,317 55,654 Other........................................... 28,641 52,534 -------- -------- Total....................................... 157,236 177,939 -------- -------- Net deferred income tax liability................ $543,642 $488,914 -------- -------- -------- -------- As of December 31, 1996, the Company has cumulative AMT carryforwards of approximately $3.8 million and state tax credit carryforwards of approximately $1.6 million. A valuation allowance has not been recorded as the Company expects that all deferred income tax assets will be realized in the future. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. SEGMENTS OF BUSINESS 1996 ELECTRIC GAS OTHER TOTAL ------ ---------- -------- ------- ---------- (THOUSANDS OF DOLLARS) Operating revenues............................. $1,488,990 $640,497 $41,899 $2,171,386 ---------- -------- ------- ---------- Operating expenses, excluding depreciation and income taxes............................. 1,006,904 549,223 5,813 1,561,940 Depreciation and amortization.................. 116,801 35,735 2,095 154,631 ---------- -------- ------- ---------- Total operating expenses*.................. 1,123,705 584,958 7,908 1,716,571 ---------- -------- ------- ---------- Operating income*.............................. 365,285 55,539 33,991 454,815 ---------- -------- ------- ---------- ---------- -------- ------- ---------- Plant construction expenditures**.............. 223,395 96,842 925 321,162 ---------- -------- ------- ---------- ---------- -------- ------- ---------- Identifiable assets: Property, plant and equipment**.............. 2,733,699 805,372 59,824 3,598,895 Materials and supplies....................... 41,418 7,325 229 48,972 Fuel inventory............................... 24,594 - 145 24,739 Gas in underground storage................... - 42,826 - 42,826 Other corporate assets....................... 857,216 ---------- $4,572,648 ---------- ---------- 1995 ------ Operating revenues............................. $1,449,096 $624,585 $36,920 $2,110,601 ---------- -------- ------- ---------- Operating expenses, excluding depreciation and income taxes............................. 1,002,381 538,620 7,046 1,548,047 Depreciation and amortization.................. 109,498 29,901 1,981 141,380 ---------- -------- ------- ---------- Total operating expenses*.................. 1,111,879 568,521 9,027 1,689,427 ---------- -------- ------- ---------- Operating income*.............................. 337,217 56,064 27,893 421,174 ---------- -------- ------- ---------- ---------- -------- ------- ---------- Plant construction expenditures**.............. 198,341 86,482 693 285,516 ---------- -------- ------- ---------- ---------- -------- ------- ---------- Identifiable assets: Property, plant and equipment**.............. 2,645,045 777,420 58,247 3,480,712 Materials and supplies....................... 47,636 8,886 3 56,525 Fuel inventory............................... 35,509 - 145 35,654 Gas in underground storage................... - 44,900 - 44,900 Other corporate assets....................... 733,998 ---------- $4,351,789 ---------- ---------- 1994 ------ Operating revenues............................. $1,399,836 $624,922 $32,626 $2,057,384 ---------- -------- ------- ---------- Operating expenses, excluding depreciation and income taxes (1)......................... 1,032,396 558,929 7,732 1,599,057 Depreciation and amortization.................. 107,769 29,078 2,188 139,035 ---------- -------- ------- ---------- Total operating expenses*.................. 1,140,165 588,007 9,920 1,738,092 ---------- -------- ------- ---------- Operating income*.............................. 259,671 36,915 22,706 319,292 ---------- -------- ------- ---------- ---------- -------- ------- ---------- Plant construction expenditures**.............. 223,773 91,492 1,873 317,138 ---------- -------- ------- ---------- ---------- -------- ------- ---------- Identifiable assets: Property, plant and equipment**.............. 2,543,267 674,974 73,161 3,291,402 Materials and supplies....................... 55,756 11,782 62 67,600 Fuel inventory............................... 31,225 - 145 31,370 Gas in underground storage................... - 42,355 - 42,355 Other corporate assets....................... 775,105 ---------- $4,207,832 ---------- ----------
(1) Includes additional expense of approximately $43.4 million for defueling and decommissioning. * Before income taxes. ** Includes allocation of common utility property. 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. QUARTERLY FINANCIAL DATA (UNAUDITED) The following summarized quarterly information for 1996 and 1995 is unaudited, but includes all adjustments (consisting only of normal recurring accruals) which the Company considers necessary for a fair presentation of the results for the periods. Information for any one quarterly period is not necessarily indicative of the results which may be expected for a twelve-month period due to seasonal and other factors. THREE MONTHS ENDED --------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- 1996 (IN THOUSANDS-EXCEPT PER SHARE DATA) ------ Operating revenues........................... $622,917 $484,787 $476,861 $586,821 Operating income (1)......................... $104,846 $ 73,286 $ 88,222 $ 92,130 Net income................................... $ 64,429 $ 34,537 $ 39,256 $ 52,124 Earnings available for common stock.......... $ 61,457 $ 31,566 $ 36,294 $ 49,181 Weighted average common shares outstanding... 63,679 63,998 64,324 64,748 Earnings per weighted average common share... $ 0.97 $ 0.49 $ 0.56 $ 0.76 1995 ------ Operating revenues........................... $620,596 $498,699 $468,453 $522,853 Operating income (1)......................... $ 91,689 $ 62,736 $ 82,736 $ 88,656 Net income................................... $ 53,644 $ 28,255 $ 45,819 $ 51,138 Earnings available for common stock.......... $ 50,643 $ 25,255 $ 42,828 $ 48,167 Weighted average common shares outstanding... 62,513 62,846 63,077 63,291 Earnings per weighted average common share... $ 0.81 $ 0.40 $ 0.68 $ 0.76
(1) Operating income amounts have been restated to reflect the reclassification of Merger expenses from operating expenses to miscellaneous income and deductions in accordance with FERC guidance received during the third quarter of 1996. 68 SCHEDULE II PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 ADDITIONS --------------------- BALANCE AT CHARGED CHARGED TO DEDUCTIONS BALANCE BEGINNING TO OTHER FROM AT END OF PERIOD INCOME ACCOUNTS(1) RESERVES(2) OF YEAR --------------------------------------------------------- (THOUSANDS OF DOLLARS) Reserve deducted from related assets: Provision for uncollectible accounts: 1996................................... $3,630 $6,741 $477 $6,799 $4,049 ------ ------ ---- ------ ------ ------ ------ ---- ------ ------ 1995................................... $3,173 $7,815 $ 4 $7,362 $3,630 ------ ------ ---- ------ ------ ------ ------ ---- ------ ------ 1994................................... $3,276 $8,533 $132 $8,768 $3,173 ------ ------ ---- ------ ------ ------ ------ ---- ------ ------
---------------- (1) Uncollectible accounts subsequently recovered, transfers from customers' deposit, etc. (2) Uncollectible accounts written off. 69 EXHIBIT 12(a) PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO CONSOLIDATED FIXED CHARGES (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS) YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (THOUSANDS OF DOLLARS, EXCEPT RATIOS) FIXED CHARGES: Interest on long-term debt............................... $ 92,205 $ 85,832 $ 89,005 $ 98,089 $ 92,581 Interest on borrowings against COLI contracts............ 40,160 34,717 29,786 25,333 18,312 Other interest........................................... 17,238 23,392 14,235 9,445 12,357 Amortization of debt discount and expense less premium... 3,621 3,278 3,126 2,018 1,790 Interest component of rental expense..................... 10,649 6,729 6,888 6,824 7,904 -------- -------- -------- -------- -------- Total................................................ $163,873 $153,948 $143,040 $141,709 $132,944 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- EARNINGS (BEFORE FIXED CHARGES AND TAXES ON INCOME): Net income............................................... $190,346 178,856 $170,269 $157,360 $136,623 Fixed charges as above................................... 163,873 153,948 143,040 141,709 132,944 Provisions for Federal and state taxes on income, net of investment tax credit amortization.............. 96,331 95,357 48,500 60,994 53,149 -------- -------- -------- -------- -------- Total................................................ $450,550 428,161 $361,809 $360,063 $322,716 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- RATIO OF EARNINGS TO FIXED CHARGES......................... 2.75 2.78 2.53 2.54 2.43 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
70 EXHIBIT 12(b) PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO CONSOLIDATED COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS) YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (THOUSANDS OF DOLLARS, EXCEPT RATIOS) FIXED CHARGES AND PREFERRED STOCK DIVIDENDS: Interest on long-term debt................................ $ 92,205 $ 85,832 $ 89,005 $ 98,089 $ 92,581 Interest on borrowings against COLI contracts............. 40,160 34,717 29,786 25,333 18,312 Other interest............................................ 17,238 23,392 14,235 9,445 12,357 Amortization of debt discount and expense less premium.... 3,621 3,278 3,126 2,018 1,790 Interest component of rental expense...................... 10,649 6,729 6,888 6,824 7,904 Preferred stock dividend requirement...................... 11,848 11,963 12,014 12,031 12,077 Additional preferred stock dividend requirement........... 5,995 6,377 3,422 4,662 4,699 -------- -------- -------- -------- -------- Total................................................. $181,716 $172,288 $158,476 $158,402 $149,720 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- EARNINGS (BEFORE FIXED CHARGES AND TAXES ON INCOME): Net income................................................ $190,346 $178,856 $170,269 $157,360 $136,623 Interest on long-term debt................................ 92,205 85,832 89,005 98,089 92,581 Interest on borrowings against COLI contracts............. 40,160 34,717 29,786 25,333 18,312 Other interest............................................ 17,238 23,392 14,235 9,445 12,357 Amortization of debt discount and expense less premium.... 3,621 3,278 3,126 2,018 1,790 Interest component of rental expense...................... 10,649 6,729 6,888 6,824 7,904 Provisions for Federal and state taxes on income, net of investment tax credit amortization............... 96,331 95,357 48,500 60,994 53,149 -------- -------- -------- -------- -------- Total................................................. $450,550 $428,161 $361,809 $360,063 $322,716 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS............................. 2.48 2.49 2.28 2.27 2.16 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
71 EXHIBIT 99 NCE UNAUDITED PRO FORMA INFORMATION The following unaudited pro forma combined balance sheet at December 31, 1996 gives effect to the Merger as if it had occurred at December 31, 1996. The unaudited pro forma combined statements of income for each of the three years ended December 31, 1996 give effect to the Merger as if it had occurred on January 1, 1994. These statements are prepared on the basis of accounting as required under a pooling of interests and do not reflect any cost savings or other synergies anticipated by management as a result of the Merger. Accordingly, the pro forma information is not necessarily indicative of the financial position or results of operations that would have occurred had the Merger been consummated for the periods for which it is given effect, nor is it necessarily indicative of future operating results or financial condition. NEW CENTURY ENERGIES, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET (THOUSANDS OF DOLLARS) DECEMBER 31, 1996 ASSETS PSCO SPS PRO FORMA ----------- ----------- ----------- Property, plant and equipment, at cost: Electric............................................. $ 3,931,413 $ 2,517,580 $ 6,448,993 Gas ................................................ 1,035,394 - 1,035,394 Steam................................................ 17,476 - 17,476 Other................................................ 60,749 37,541 98,290 Common to all departments............................ 418,262 - 418,262 Construction in progress............................. 181,597 79,346 260,943 ----------- ----------- ----------- 5,644,891 2,634,467 8,279,358 Less: accumulated depreciation....................... 2,045,996 944,279 2,990,275 ----------- ----------- ----------- Total property, plant and equipment.............. 3,598,895 1,690,188 5,289,083 ----------- ----------- ----------- Investments, at cost, and receivables.................. 46,550 34,446 80,996 Current assets: Cash and temporary cash investments.................. 9,406 40,609 50,015 Accounts receivable - net............................ 218,132 67,780 285,912 Accrued unbilled revenues............................ 85,894 20,304 106,198 Recoverable purchased gas and electric energy costs.. 31,288 15,715 47,003 Materials and supplies, at average cost.............. 48,972 17,776 66,748 Fuel inventory, at average cost...................... 24,739 2,320 27,059 Gas in underground storage, at cost (LIFO)........... 42,826 - 42,826 Regulatory assets recoverable within one year........ 44,110 - 44,110 Prepaid expenses and other........................... 41,790 7,469 49,259 ----------- ----------- ----------- Total current assets............................. 547,157 171,973 719,130 ----------- ----------- ----------- Deferred charges: Regulatory assets.................................... 304,456 107,834 412,290 Unamortized debt expense............................. 10,975 9,864 20,839 Other................................................ 64,615 30,489 95,104 Total deferred charges........................... 380,046 148,187 528,233 ----------- ----------- ----------- $ 4,572,648 $ 2,044,794 $ 6,617,442 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes to unaudited pro forma combined balance sheet and statements of income are an integral part of this statement. 72 NEW CENTURY ENERGIES, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET (THOUSANDS OF DOLLARS) DECEMBER 31, 1996 CAPITAL AND LIABILITIES PSCO SPS PRO FORMA ----------- ----------- ----------- Common stock (2)................................................... $ 324,094 $ 40,918 $ 103,691 Paid in capital (2)................................................ 724,353 307,484 1,293,158 Retained earnings (5).............................................. 389,841 383,350 764,646 ----------- ----------- ----------- Total common equity.......................................... 1,438,288 731,752 2,161,495 Preferred stock: Not subject to mandatory redemption.............................. 140,008 - 140,008 Subject to mandatory redemption at par........................... 39,913 - 39,913 Long-term debt..................................................... 1,259,528 720,400 1,979,928 ----------- ----------- ----------- 2,877,737 1,452,152 4,321,344 ----------- ----------- ----------- Noncurrent liabilities: Employees' postretirement benefits other than pensions........... 55,677 2,967 58,644 Employees' postemployment benefits............................... 25,182 2,369 27,551 ----------- ----------- ----------- Total noncurrent liabilities................................. 80,859 5,336 86,195 ----------- ----------- ----------- Current liabilities: Notes payable and commercial paper............................... 244,725 53,836 298,561 Long-term debt due within one year............................... 155,030 15,231 170,261 Preferred stock subject to mandatory redemption within one year.. 2,576 - 2,576 Accounts payable................................................. 254,256 63,004 317,260 Dividends payable................................................ 36,973 - 36,973 Customers' deposits.............................................. 21,441 5,842 27,283 Accrued taxes.................................................... 58,990 19,999 78,989 Accrued interest................................................. 33,797 13,151 46,948 Current portion of defueling and decommissioning liability....... 8,665 - 8,665 Current portion of accumulated deferred income taxes............. 4,560 3,583 8,143 Merger costs (5)................................................. - - 8,545 Other............................................................ 69,203 28,503 97,706 ----------- ----------- ----------- Total current liabilities.................................... 890,216 203,149 1,101,910 ----------- ----------- ----------- Deferred credits: Customers' advances for construction............................. 50,269 366 50,635 Unamortized investment tax credits............................... 105,928 5,719 111,647 Accumulated deferred income taxes................................ 539,082 367,272 906,354 Other............................................................ 28,557 10,800 39,357 ----------- ----------- ----------- Total deferred credits....................................... 723,836 384,157 1,107,993 ----------- ----------- ----------- $ 4,572,648 $ 2,044,794 $ 6,617,442 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes to unaudited pro forma combined balance sheet and statements of income are an integral part of this statement. 73 NEW CENTURY ENERGIES, INC. UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, 1996 PSCO SPS PRO FORMA ----------- ----------- ----------- Operating revenues: Electric....................................................... $ 1,488,990 $ 927,549 $ 2,416,539 Gas............................................................ 640,497 - 640,497 Other.......................................................... 41,899 - 41,899 ----------- ----------- ----------- 2,171,386 927,549 3,098,935 Operating expenses: Fuel used in generation........................................ 195,442 439,838 635,280 Purchased power................................................ 490,428 20,154 510,582 Gas purchased for resale....................................... 393,163 - 393,163 Other operating expenses....................................... 336,100 113,123 449,223 Maintenance.................................................... 63,908 34,376 98,284 Depreciation and amortization.................................. 154,631 65,864 220,495 Taxes (other than income taxes)................................ 82,899 45,306 128,205 Income taxes................................................... 96,331 57,322 153,653 ----------- ----------- ----------- 1,812,902 775,983 2,588,885 ----------- ----------- ----------- Operating income................................................. 358,484 151,566 510,050 Other income and deductions: Allowance for equity funds used during construction............ 757 179 936 Miscellaneous income and deductions - net...................... (19,015) (5,018) (24,033) ----------- ----------- ----------- (18,258) (4,839) (23,097) Interest charges: Interest on long-term debt..................................... 92,205 46,096 138,301 Amortization of debt discount and expense less premium......... 3,621 2,145 5,766 Other interest................................................. 57,398 5,597 62,995 Allowance for borrowed funds used during construction.......... (3,344) (2,601) (5,945) Dividend requirements on preferred stock of subsidiaries....... - 1,526 13,495 ----------- ----------- ----------- 149,880 52,763 214,612 ----------- ----------- ----------- Net income....................................................... 190,346 93,964 272,341 Dividend requirements on preferred stock......................... 11,848 121 - ----------- ----------- ----------- Earnings available for common stock.............................. $ 178,498 $ 93,843 $ 272,341 ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common shares outstanding (2).................. 64,187 40,918 103,059 ----------- ----------- ----------- ----------- ----------- ----------- Earnings per weighted average share of common stock outstanding.. $ 2.78 $ 2.29 $ 2.64 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes to unaudited pro forma combined balance sheet and statements of income are an integral part of this statement. 74 NEW CENTURY ENERGIES, INC. UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, 1995 PSCO SPS PRO FORMA ----------- ----------- ----------- Operating revenues: Electric........................................................ $ 1,449,096 $ 852,510 $ 2,301,606 Gas ........................................................... 624,585 - 624,585 Other........................................................... 36,920 - 36,920 ----------- ----------- ----------- 2,110,601 852,510 2,963,111 Operating expenses: Fuel used in generation......................................... 181,995 376,544 558,539 Purchased power................................................. 481,958 6,485 488,443 Gas purchased for resale........................................ 392,680 - 392,680 Other operating expenses(3)..................................... 346,025 108,411 454,436 Maintenance..................................................... 64,069 27,594 91,663 Depreciation and amortization................................... 141,380 62,552 203,932 Taxes (other than income taxes)................................. 81,319 43,316 124,635 Income taxes.................................................... 95,357 69,840 165,197 ----------- ----------- ----------- 1,784,783 694,742 2,479,525 ----------- ----------- ----------- Operating income.................................................. 325,818 157,768 483,586 Other income and deductions: Allowance for equity funds used during construction............. 3,782 245 4,027 Miscellaneous income and deductions - net (3)................... (6,838) 8,141 1,303 ----------- ----------- ----------- (3,056) 8,386 5,330 Interest charges: Interest on long-term debt...................................... 85,832 42,421 128,253 Amortization of debt discount and expense less premium.......... 3,278 2,048 5,326 Other interest.................................................. 58,109 1,695 59,804 Allowance for borrowed funds used during construction........... (3,313) (2,744) (6,057) Dividend requirements on preferred stock of subsidiaries........ - - 17,588 ----------- ----------- ----------- 143,906 43,420 204,914 ----------- ----------- ----------- Net income........................................................ 178,856 122,734 284,002 Dividend requirements on preferred stock.......................... 11,963 5,625 - ----------- ----------- ----------- Earnings available for common stock............................... $ 166,893 $ 117,109 $ 284,002 ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common shares outstanding (2).................... 62,932 40,918 101,804 ----------- ----------- ----------- ----------- ----------- ----------- Earnings per weighted average share of common stock outstanding... $ 2.65 $ 2.86 $ 2.79 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes to unaudited pro forma combined balance sheet and statements of income are an integral part of this statement. 75 NEW CENTURY ENERGIES, INC. UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, 1994 PSCO SPS PRO FORMA ----------- ----------- ----------- Operating revenues: Electric........................................................ $ 1,399,836 $ 824,008 $ 2,223,844 Gas ........................................................... 624,922 - 624,922 Other........................................................... 32,626 - 32,626 ----------- ----------- ----------- 2,057,384 824,008 2,881,392 Operating expenses: Fuel used in generation......................................... 198,118 386,796 584,914 Purchased power................................................. 437,087 4,401 441,488 Gas purchased for resale........................................ 397,877 - 397,877 Other operating expenses........................................ 369,094 107,130 476,224 Maintenance..................................................... 67,097 30,245 97,342 Defueling and decommissioning................................... 43,376 - 43,376 Depreciation and amortization................................... 139,035 59,759 198,794 Taxes (other than income taxes)................................. 86,408 42,510 128,918 Income taxes.................................................... 48,500 57,126 105,626 ----------- ----------- ----------- 1,786,592 687,967 2,474,559 ----------- ----------- ----------- Operating income.................................................. 270,792 136,041 406,833 Other income and deductions: Allowance for equity funds used during construction............. 3,140 179 3,319 Gain on sale of WestGas Gathering, Inc.......................... 34,485 - 34,485 Miscellaneous income and deductions - net....................... (6,014) 1,867 (4,147) ----------- ----------- ----------- 31,611 2,046 33,657 Interest charges: Interest on long-term debt...................................... 89,005 37,710 126,715 Amortization of debt discount and expense less premium.......... 3,126 2,020 5,146 Other interest.................................................. 44,021 2,028 46,049 Allowance for borrowed funds used during construction........... (4,018) (1,303) (5,321) Dividend requirements on preferred stock of subsidiaries........ - - 16,892 ----------- ----------- ----------- 132,134 40,455 189,481 ----------- ----------- ----------- Net income........................................................ 170,269 97,632 251,009 Dividend requirements on preferred stock.......................... 12,014 4,878 - ----------- ----------- ----------- Earnings available for common stock............................... $ 158,255 $ 92,754 $ 251,009 ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common shares outstanding (2).................... 61,547 40,918 100,419 ----------- ----------- ----------- ----------- ----------- ----------- Earnings per weighted average share of common stock outstanding... $ 2.57 $ 2.27 $ 2.50 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes to unaudited pro forma combined balance sheet and statements of income are an integral part of this statement. 76 NEW CENTURY ENERGIES, INC. NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AND STATEMENTS OF INCOME DECEMBER 31, 1996 (1) The unaudited pro forma combined statements of income have been prepared from the historical consolidated financial statements of PSCo and SPS and are presented as if the companies were combined during all periods presented herein. (2) The unaudited pro forma combined balance sheet and statements of income reflect the conversion of each outstanding share of PSCo Common Stock into one share of NCE Common Stock, and each outstanding share of SPS Common Stock into 0.95 of one share of NCE Common Stock in accordance with the terms of the Merger. (3) There were no intercompany transactions and, accordingly, no pro forma elimination adjustments were made. Certain amounts have been reclassified in order to provide consistent presentation. (4) For a discussion regarding material commitments and contingencies relating to PSCo, see Note 9. Commitments and Contingencies in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. For SPS, reference is made to its 1996 Annual Report on Form 10-K and its Form 10-Q for the quarter ended November 30, 1996. (5) The unaudited pro forma combined financial statements include nonrecurring charges directly related to the Merger totaling $9.4 million and $6.8 million for the years ended December 31, 1996 and 1995, respectively. These nonrecurring charges include merger transaction costs and benefits expense resulting from an accelerated vesting of certain benefits. The unaudited pro forma combined statements of income do not reflect future nonrecurring charges directly related to the Merger, estimated to total approximately $8.5 million. The pro forma combined balance sheet at December 31, 1996 has been adjusted to include these items with the recognition of additional current liabilities and the reduction of retained earnings. 77 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Does not apply. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Biographies concerning the directors of the registrant are contained under ELECTION OF DIRECTORS in the registrant's 1997 Proxy Statement, which is incorporated herein by reference. The following table sets forth certain information concerning the directors and executive officers of the Company as of December 31, 1996. Name Age Occupation/Title Initial Date as Director - ---- --- ---------------- ------------------------ D.D. Hock (b) 61 Chairman of the Board 1985 Wayne H. Brunetti 54 President and CEO 1994 Collis P. Chandler, Jr. (g) 70 Chairman, Chandler & Associates, Inc., Chandler-Simpson, Inc. and Chandler Drilling Corp. 1985 Doris M. Drury, Ph.D. (a)(h) 70 John J. Sullivan Professor of Free Enterprise Economics at Regis University, and President of the Center for Business and Economic Forecasting, Inc. 1975 Thomas T. Farley (c) 62 President, Petersen & Fonda, P.C. 1983 Gayle L. Greer (c) 55 Vice President, Time Warner Cable 1986 A. Barry Hirschfeld (e) 54 President, A.B. Hirschfeld Press, Inc. 1988 George B. McKinley (a)(g) 69 Chairman and CEO, First National Banks of Evanston and Kemmerer, Wyoming and President & CEO, First McKinley Corporation 1976 Will F. Nicholson, Jr. (a)(g) 67 Chairman, Rocky Mountain Bank Card System 1981 J. Michael Powers (d) 54 President, Powers Products Co. and Powers Masonry Supply 1978 Thomas E. Rodriguez (c) 52 President and General Manager, Thomas E. Rodriguez & Associates, P.C. 1986 Rodney E. Slifer (e) 62 Partner, Slifer, Smith & Frampton/Vail Associates Real Estate 1988 W. Thomas Stephens (f)(g) 54 Retired Chairman, Manville Corporation 1989 Robert G. Tointon (a)(g) 63 President and CEO Phelps-Tointon, Inc. 1988
- --------------------------------- (a) Member of Executive Committee. (b) Chairperson of Executive Committee. (c) Member of Audit Committee. 78 (d) Chairperson of Audit Committee. (e) Member of Pension Investment Committee. (f) Chairperson of Pension Investment Committee. (g) Member of Compensation Committee. (h) Chairperson of Compensation Committee. Executive Officers Initial Effective Date - ------------------ ---------------------- D. D. Hock, Age 61 Chairman of the Board................................................ February 28, 1989 Chairman of the Board, Cheyenne Light, Fuel and Power Company........ September 21, 1988 Chairman of the Board, Fuel Resources Development Co. ............... March 22, 1989 Chairman of the Board, 1480 Welton, Inc. ............................ September 26, 1988 Chairman of the Board, PSR Investments, Inc. ........................ March 22, 1990 Chairman of the Board, PS Colorado Credit Corporation................ March 22, 1990 Chairman of the Board, Green and Clear Lakes Company................. December 6, 1988 Chairman of the Board, WestGas InterState, Inc. ..................... April 22, 1993 Chairman of the Board, Natural Fuels Corporation..................... June 11, 1993 Chairman of the Board, e prime, inc. ................................ January 30, 1995 Chairman of the Board, Young Gas Storage Company..................... June 27, 1995 Company Service: September, 1962 Wayne H. Brunetti, Age 54 President............................................................ June 28, 1994 and Chief Executive Officer........................................ January 1, 1996 President, 1480 Welton, Inc. ........................................ March 29, 1996 President, PSR Investments, Inc. .................................... March 29, 1996 President, PS Colorado Credit Corporation............................ March 29, 1996 President, WestGas InterState, Inc. ................................. April 19, 1995 President, Fuel Resources Development Co. ........................... April 27, 1995 President, Natural Fuels Corporation................................. April 25, 1996 President, Green and Clear Lakes Company............................. December 5, 1995 Company Service: June, 1994 Richard C. Kelly, Age 50 Senior Vice President, Finance, Treasurer............................ June 28, 1994 and Chief Financial Officer........................................ January 23,1990 President and Treasurer, New Century Energies, Inc. ................. August 21, 1995 Vice President, Fuel Resources Development Co. ..................... April 26, 1990 Treasurer, Fuel Resources Development Co. ........................... August 5, 1994 Vice President, PSR Investments, Inc. ............................... September 22, 1986 Vice President, PS Colorado Credit Corporation....................... March 30, 1987 Treasurer, Cheyenne Light, Fuel and Power Company.................... July 15, 1994 Treasurer, 1480 Welton, Inc. ........................................ July 15, 1994 Treasurer, Green and Clear Lakes Company............................. July 15, 1994 Treasurer, WestGas InterState, Inc. ................................. July 15, 1994 Vice President and Treasurer, e prime inc. .......................... January 30, 1995 Vice President and Treasurer, Young Gas Storage Company.............. June 27, 1995 Company Service: May, 1968 79 Patricia T. Smith, Age 49 Senior Vice President and General Counsel............................ December 5, 1994 Company Service: December, 1994 W. Wayne Brown, Age 46 Controller........................................................... November 24, 1987 Corporate Secretary.................................................. November 23, 1993 Secretary, Cheyenne Light, Fuel and Power Company.................... December 15, 1993 Secretary, 1480 Welton, Inc. ........................................ December 16, 1993 Secretary, PSR Investments, Inc. .................................... December 16, 1993 Secretary, PS Colorado Credit Corporation............................ December 16, 1993 Secretary, Green and Clear Lakes Company............................. December 7, 1993 Secretary, Fuel Resources Development Co. ........................... January 27, 1994 Secretary, WestGas InterState, Inc. ................................. May 2, 1994 Secretary, e prime, inc. ............................................ January 30, 1995 Secretary, Young Gas Storage Company................................. June 27, 1995 Company Service: June, 1972 A. Clegg Crawford, Age 64 * Vice President, Engineering and Operations Support................... June 28, 1994 Company Service: May, 1989 Ross C. King, Age 55 Vice President, Gas and Electric Distribution........................ June 28, 1994 President, Cheyenne Light, Fuel and Power Company.................... July 15, 1994 Company Service: February, 1966 Earl E. McLaughlin, Jr., Age 56 Vice President, Retail Energy Services............................... June 28, 1994 Vice President, Cheyenne Light, Fuel and Power Company............... March 24, 1994 Company Service: August, 1960 Ralph Sargent III, Age 47 Vice President, Production and System Operations..................... June 28, 1994 Company Service: July, 1978 Marilyn E. Taylor, Age 54 Vice President, Human Resources...................................... June 28, 1994 Company Service: December, 1987
* On February 7, 1997, Mr. Crawford retired from the Company. Each of the above executive officers, except Mr. Brunetti and Ms. Smith, has been employed by the Company and/or its subsidiaries for more than five years in executive or management positions. Prior to election to the positions shown above and since January 1, 1991: Mr. Hock has been Chief Operating Officer and President; Mr. Brunetti has been Chief Operating Officer of the Company and President and Chief Executive Officer of Management Systems International from June 1991 through July 1994 and Executive Vice President of Florida Power & Light Company from 1987 through May 1991; 80 Mr. Kelly has been Vice President, Financial Services, Principal Accounting Officer and Senior Vice President, Finance and Administration; Ms. Smith has been Vice President and General Counsel for South Carolina Electric and Gas Company from May 1992 through December 1994 and Vice President, Regulatory Affairs and Purchasing from 1988 through May 1992; Mr. Crawford has been Vice President, Nuclear Operations and Vice President, Electric Production; Mr. King has been Manager, Denver Metro Region; Vice President, Regional Customer Operations and Vice President, Metropolitan Customer Operations; Mr. McLaughlin has been Vice President, Marketing, Customer Services and Support Services; Mr. Sargent has been Executive Assistant to Chairman, President and Chief Executive Officer and Vice President, Finance, Planning and Communications and Treasurer; Ms. Taylor has been Vice President, Human Resources and Vice President Administrative Services. There are no family relationships between executive officers or directors of the Company. There are no arrangements or understandings between the executive officers individually and any other person with reference to their being selected as officers. All executive officers are elected annually by the Board of Directors. Information concerning the directors of the registrant is contained under ELECTION OF DIRECTORS in the registrant's 1997 Proxy Statement, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is contained under COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS in the registrant's 1997 Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning the security ownership of the directors and officers of the registrant is contained under ELECTION OF DIRECTORS in the registrant's 1997 Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning relationships and related transactions of the directors and officers of the registrant is contained under CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS in the registrant's 1997 Proxy Statement, which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements, Financial Statement Schedules, and Exhibits. Page ---- 1. Financial Statements: Report of the Audit Committee.......................................... 33 Report of Management................................................... 34 81 Report of Independent Public Accountants............................... 35 Consolidated Balance Sheets, December 31, 1996 and 1995................ 36 Consolidated Statements of Income for each of the three years in the period ended December 31, 1996.......................... 38 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1996............. 39 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996.......................... 40 Notes to Consolidated Financial Statements............................. 41 2. Financial Statement Schedules: II Valuation and Qualifying Accounts and Reserves (Consolidated) for each of the three years in the period ended December 31, 1996............................................ 69 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto. Financial statements of several unconsolidated majority-owned subsidiaries are omitted since such subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. 3. Exhibits: Exhibits are listed in the Exhibit Index............................... 87 The Exhibits include the management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601 (10) (iii) of Regulation S-K. (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. A report on Form 8-K, dated May 21, 1996, was filed on May 22, 1996. The item reported was Item 5 - Other Events, which presented updated information on the settlement of environmental matters associated with the operations of the Hayden Steam Electric Generating Station. A report on Form 8-K, was dated and filed on February 24, 1997. The item reported was Item 5 - Other Events, which presented information on the Proposed Acquisition of Yorkshire Electricity by the Company and AEP. 82 EXPERTS The consolidated balance sheets of the Company and its subsidiaries as of December 31, 1996 and 1995, the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996, and the related financial statement schedule, appearing in this Annual Report on Form 10-K, have been audited by Arthur Andersen LLP, independent public accountants, and the selected financial data for each of the five years in the period ended December 31, 1996, appearing in Item 6 of this Annual Report on Form 10-K, other than the ratios and percentages therein, have been derived from the consolidated financial statements audited by Arthur Andersen LLP, as set forth in their report appearing elsewhere herein. The consolidated financial statements, the related financial statement schedule and the selected financial data appearing in Item 6, other than the ratios and percentages therein, which are included in this Annual Report on Form 10-K, are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. 83 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report included in this Form 10-K, into the Company's previously filed 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; 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; and the Company's Registration Statement (Form S-3, File No. 333-14727) pertaining to the shelf-registration of the Company's First Collateral Trust Bonds (being one or more series of secured medium-term notes) and to all references to our Firm included in this Form 10-K. ARTHUR ANDERSEN LLP Denver, Colorado February 24, 1997 EXHIBIT 24 POWER OF ATTORNEY Each director and/or officer of Public Service Company of Colorado whose signature appears herein hereby appoints W. H. Brunetti and R. C. Kelly, and each of them severally, as his or her attorney-in-fact to sign in his or her name and behalf, in any and all capacities stated herein, and to file with the Securities and Exchange Commission, any and all amendments to this Annual Report on Form 10-K. 84 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, PUBLIC SERVICE COMPANY OF COLORADO HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON THE 25TH DAY OF FEBRUARY, 1997. PUBLIC SERVICE COMPANY OF COLORADO By /s/ R. C. Kelly -------------------------------- R. C. KELLY SENIOR VICE PRESIDENT, FINANCE, TREASURER AND CHIEF FINANCIAL OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF PUBLIC SERVICE COMPANY OF COLORADO AND IN THE CAPACITIES AND ON THE DATE INDICATED. SIGNATURE TITLE DATE - -------------------------------------------------------------------------------- /s/ W. H. Brunetti - ------------------------------- Principal Executive February 25, 1997 W. H. Brunetti Officer and Director PRESIDENT AND CHIEF EXECUTIVE OFFICER /s/ R. C. Kelly - ------------------------------- Principal Financial February 25, 1997 R. C. Kelly Officer SENIOR VICE PRESIDENT, FINANCE, TREASURER AND CHIEF FINANCIAL OFFICER /s/ W. Wayne Brown - ------------------------------- Principal Accounting February 25, 1997 W. Wayne Brown Officer CONTROLLER AND CORPORATE SECRETARY 85 SIGNATURE TITLE DATE - -------------------------------------------------------------------------------- /s/ D. D. Hock - ------------------------------- Chairman of the Board February 25, 1997 D. D. Hock and Director /s/ Collis P. Chandler - ------------------------------- Director February 25, 1997 Collis P. Chandler /s/ Doris M. Drury - ------------------------------- Director February 25, 1997 Doris M. Drury /s/ Thomas T. Farley - ------------------------------- Director February 25, 1997 Thomas T. Farley /s/ Gayle L. Greer - ------------------------------- Director February 25, 1997 Gayle L. Greer /s/ A. Barry Hirschfeld - ------------------------------- Director February 25, 1997 A. Barry Hirschfeld /s/ George B. McKinley - ------------------------------- Director February 25, 1997 George B. McKinley /s/ Will F. Nicholson, Jr. - ------------------------------- Director February 25, 1997 Will F. Nicholson, Jr. /s/ J. Michael Powers - ------------------------------- Director February 25, 1997 J. Michael Powers /s/ Thomas E. Rodriguez - ------------------------------- Director February 25, 1997 Thomas E. Rodriguez /s/ Rodney E. Slifer - ------------------------------- Director February 25, 1997 Rodney E. Slifer /s/ W. Thomas Stephens - ------------------------------- Director February 25, 1997 W. Thomas Stephens /s/ Robert G. Tointon - ------------------------------- Director February 25, 1997 Robert G. Tointon 86 EXHIBIT INDEX 2(a)* Merger Agreement and Plan of Reorganization dated August 22, 1995 (Form 8-K dated August 22, 1995, File No. 1-3280 - Exhibit 2). 3(a)1* Restated Articles of Incorporation of the Registrant dated July 9, 1990 (Form S-3, File No. 33-54877 - Exhibit 3(a)). 3(a)2* Articles of Amendment of the Restated Articles of Incorporation of the Registrant dated May 11, 1994 (Form S-3, File No. 33-54877 - Exhibit 3(b)). 3(b)* By-laws dated November 30, 1992 (Form 10-K, 1993 - Exhibit 3(b)). 4(a)(1)* Indenture, dated as of December 1, 1939, providing for the issuance of First Mortgage Bonds (Form 10 for 1946- Exhibit (B-1)). 4(a)(2)* Indentures supplemental to Indenture dated as of December 1, 1939: PREVIOUS FILING: PREVIOUS FILING: FORM; DATE OR EXHIBIT FORM; DATE OR EXHIBIT DATED AS OF FILE NO. NO. DATED AS OF FILE NO. NO. ----------- -------- --- ----------- -------- --- Mar. 14, 1941 10, 1946 B-2 Apr. 25, 1969 8-K, Apr. 1969 1 May 14, 1941 10, 1946 B-3 Apr. 21, 1970 8-K, Apr. 1970 1 Apr. 28, 1942 10, 1946 B-4 Sept. 1, 1970 8-K, Sept. 1970 2 Apr. 14, 1943 10, 1946 B-5 Feb. 1, 1971 8-K, Feb. 1971 2 Apr. 27, 1944 10, 1946 B-6 Aug. 1, 1972 8-K, Aug. 1972 2 Apr. 18, 1945 10, 1946 B-7 June 1, 1973 8-K, June 1973 1 Apr. 23, 1946 10-K, 1946 B-8 Mar. 1, 1974 8-K, Apr. 1974 2 Apr. 9, 1947 10-K, 1946 B-9 Dec. 1, 1974 8-K, Dec. 1974 1 June 1, 1947 S-1, (2-7075) 7(b) Oct. 1, 1975 S-7, (2-60082) 2(b)(3) Apr. 1, 1948 S-1, (2-7671) 7(b)(1) Apr. 28, 1976 S-7, (2-60082) 2(b)(4) May 20, 1948 S-1, (2-7671) 7(b)(2) Apr. 28, 1977 S-7, (2-60082) 2(b)(5) Oct. 1, 1948 10-K, 1948 4 Nov. 1, 1977 S-7, (2-62415) 2(b)(3) Apr. 20, 1949 10-K, 1949 1 Apr. 28, 1978 S-7, (2-62415) 2(b)(4) Apr. 24, 1950 8-K, Apr. 1950 1 Oct. 1, 1978 10-K, 1978 D(1) Apr. 18, 1951 8-K, Apr. 1951 1 Oct. 1, 1979 S-7, (2-66484) 2(b)(3) Oct. 1, 1951 8-K, Nov. 1951 1 Mar. 1, 1980 10-K, 1980 4(c) Apr. 21, 1952 8-K, Apr. 1952 1 Apr. 28, 1981 S-16, (2-74923) 4(c) Dec. 1, 1952 S-9, (2-11120) 2(b)(9) Nov. 1, 1981 S-16, (2-74923) 4(d) Apr. 15, 1953 8-K, Apr. 1953 2 Dec. 1, 1981 10-K, 1981 4(c) Apr. 19, 1954 8-K, Apr. 1954 1 Apr. 29, 1982 10-K, 1982 4(c) Oct. 1, 1954 8-K, Oct. 1954 1 May 1, 1983 10-K, 1983 4(c) Apr. 18, 1955 8-K, Apr. 1955 1 Apr. 30, 1984 S-3, (2-95814) 4(c) Apr. 24, 1956 10-K, 1956 1 Mar. 1, 1985 10-K, 1985 4(c) May 1, 1957 S-9, (2-13260) 2(b)(15) Nov. 1, 1986 10-K, 1986 4(c) Apr. 10, 1958 8-K, Apr. 1958 1 May 1, 1987 10-K, 1987 4(c) May 1, 1959 8-K, May 1959 2 July 1, 1990 S-3, (33-37431) 4(c) Apr. 18, 1960 8-K, Apr. 1960 1 Dec. 1, 1990 10-K, 1990 4(c) Apr. 19, 1961 8-K, Apr. 1961 1 Mar. 1, 1992 10-K, 1992 4(d) Oct. 1, 1961 8-K, Oct. 1961 2 Apr. 1, 1993 10-Q, June 30, 1993 4(a) Mar. 1, 1962 8-K, Mar. 1962 3(a) June 1, 1993 10-Q, June 30, 1993 4(b) June 1, 1964 8-K, June 1964 1 Nov. 1, 1993 S-3, (33-51167) 4(a)(3) May 1, 1966 8-K, May 1966 2 Jan. 1, 1994 10-K, 1993 4(a)(3) July 1, 1967 8-K, July 1967 2 Sept. 2, 1994 8-K, Sept. 1994 4(a) July 1, 1968 8-K, July 1968 2 May 1, 1996 10Q, June 30, 1996 4(a)
87 4(a)(3) Supplemental Indenture dated as of November 1, 1996, establishing a series of First Mortgage Bonds under the Indenture dated as of December 31, 1939. 4(b)(1)* Indenture, dated as of October 1, 1993, providing for the issuance of First Collateral Trust Bonds (Form 10-Q, September 30, 1993 - Exhibit 4(a)). 4(b)(2)* Indentures supplemental to Indenture dated as of October 1, 1993: PREVIOUS FILING: FORM; DATE OR EXHIBIT DATED AS OF FILE NO. NO. ----------- -------- --- November 1, 1993 S-3, (33-51167) 4(b)(2) January 1, 1994 10-K, 1993 4(b)(3) September 2, 1994 8-K, Sept. 1994 4(b) May 1, 1996 10-Q, June 30, 1996 4(b) 4(b)(3) Supplemental Indenture No. 5, dated as of November 1, 1996 establishing a series of Secured Medium-Term Notes under the Indenture dated as of October 1, 1993. 4(c)(1)* Rights Agreement dated as of February 26, 1991, between the Registrant and Mellon Bank, N.A. (Form 8-A, filed on March 1, 1991 - Exhibit 1). 4(c)(2)* Amendment to the Rights Agreement dated August 22, 1995 (Form 8-K dated August 22, 1995, File No. 1-3280 - Exhibit 99(b)). 10(a)(1)* Settlement Agreement dated February 9, 1996 between the Company and the United States Department of Energy (10-K, 195 - Exhibit 10(a)(1)). 10(a)(2)* Settlement Agreement dated June 27, 1979 between the Registrant and General Atomic Company (Form S-7, File No. 2-66484 - Exhibit 5(a)(1)). 10(a)(3)* Services Agreement executed June 27, 1979 and effective as of January 1, 1979 between the Registrant and General Atomic Company (Form S-7, File No. 2-66484 - Exhibit 5(a)(3)). 10(c)(1)* Amended and Restated Coal Supply Agreement entered into October 1, 1984 but made effective as of January 1, 1976 between the Registrant and Amax Inc. on behalf of its division, Amax Coal Company (10-K, 1984 - Exhibit 10(c)(1)). 10(c)(2)* First Amendment to Amended and Restated Coal Supply Agreement entered into May 27, 1988 but made effective January 1, 1988 between the Registrant and Amax Coal Company (10-K, 1988 -Exhibit 10(c)(2).** 10(e)(1)*+ Supplemental Executive Retirement Plan for Key Management Employees, as amended and restated March 26, 1991 (10-K, 1991 - Exhibit 10(e)(2)). 10(e)(2)*+ Omnibus Incentive Plan, as amended on January 1, 1996 (10-K, 1995 - Exhibit 10(e)(2)). 10(e)(3)*+ Executive Savings Plan (10-K, 1991 - Exhibit 10(e)(5)). 10(e)(4)*+ Form of Key Executive Severance Agreement, as amended on August 22, and November 27, 1995. (10-K, 1995 - Exhibit 10(3)(4)). 88 10(f)(1)*+ Form of Director's Agreement (10-K, 1987 - Exhibit 10(f)(1)). 10(f)(2)*+ Form of Officer's Agreement (10-K, 1987 - Exhibit 10(f)(2)). 10(g)(1)*+ Employment Agreement dated April 8, 1994 between the Company and Mr. Delwin D. Hock (10-Q, March 31, 1994 - Exhibit 10). 10(g)(2)*+ Employment Agreement dated July 18, 1994 between the Company and Mr. Wayne H. Brunetti(10-Q, September 30, 1994 - Exhibit 10). 10(g)(3)*+ Employment Agreement dated December 5, 1994 between the Company and Ms. Patricia T. Smith (10-K, 1994 - Exhibit 10(g)(3)). 10(g)(4)*+ Employment Agreement dated March 1, 1994 between the Company and Mr. A. Clegg Crawford (10K, 1995 - Exhibit 10(g)(4)). 10(g)(5)*+ Amendment to Employment Agreement dated August 22, 1995 between the Company and Mr. Delwin D. Hock. (10-K, 1995 - Exhibit 10(g)(5)). 10(g)(6)*+ Amendment to Employment Agreement dated August 22, 1995 between the Company and Mr. Wayne H. Brunetti. (10-K, 1995 - Exhibit 10(g)(6)). 10(g)(7)*+ Amendment to Employment Agreement dated August 22, 1995 between the Company and Ms. Patricia T. Smith. (10-K, 1995 - Exhibit 10(g)(7)). 12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges is set forth at page 70 herein. 12(b) Computation of Ratio of Consolidated Earnings to Consolidated Combined Fixed Charges and Preferred Stock Dividends is set forth at page 71 herein. 21 Subsidiaries 23 Consent of Arthur Andersen LLP is set forth at page 84 herein. 24 Power of Attorney is set forth at page 84 herein. 27 Financial Data Schedule UT 99 NCE Unaudited Pro Forma Financial Information is set forth at pages 72-77 herein. - ----------------- * Previously filed as indicated and incorporated herein by reference. ** Confidential Treatment. + Management contracts of compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601(10)(iii) of Regulation S-K. 89 EX-4.(A)(3) 2 EX 4(A)(3) EXHIBIT 4(a)(3) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ SUPPLEMENTAL INDENTURE DATED AS OF NOVEMBER 1, 1996 ____________________________ PUBLIC SERVICE COMPANY OF COLORADO TO FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, AS TRUSTEE ____________________________ Creating an Issue of First Mortgage Bonds, Collateral Series D ____________________________ (Supplemental to Indenture dated as of December 1, 1939, as amended) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ SUPPLEMENTAL INDENTURE, dated as of November 1, 1996, between PUBLIC SERVICE COMPANY OF COLORADO, a corporation organized and existing under the laws of the State of Colorado (the "Company"), party of the first part, and FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, a national banking association, as successor trustee (the "Trustee") to Morgan Guaranty Trust Company of New York (formerly Guaranty Trust Company of New York), party of the second part. WHEREAS, the Company heretofore executed and delivered to the Trustee its Indenture, dated as of December 1, 1939 (the "Principal Indenture"), to secure its First Mortgage Bonds from time to time issued thereunder; and WHEREAS, the Company has heretofore executed and delivered to the Trustee the Supplemental Indentures referred to in Schedule A hereto for certain purposes, including the creation of series of bonds, the subjection to the lien of the Principal Indenture of property acquired after the execution and delivery thereof, the amendment of certain provisions of the Principal Indenture and the appointment of the successor Trustee; and WHEREAS, the Principal Indenture as supplemented and amended by all Supplemental Indentures heretofore executed by the Company and the Trustee is hereinafter referred to as the "Indenture," and, unless the context requires otherwise, references herein to Articles and Sections of the Indenture shall be to Articles and Sections of the Principal Indenture as so amended; and WHEREAS, the Company proposes to create a new series of First Mortgage Bonds to be designated as First Mortgage Bonds, Collateral Series D (the "Collateral Series D Bonds"), to be issued and delivered from time to time to the trustee under the 1993 Mortgage (as hereinafter defined) as the basis for the authentication and delivery under the 1993 Mortgage of a series of securities constituting medium-term notes, all as hereinafter provided, and to vary in certain respects the covenants and provisions contained in Article V of the Indenture, to the extent that such covenants and provisions apply to the Collateral Series D Bonds; and WHEREAS, the Company, pursuant to the provisions of the Indenture, has, by appropriate corporate action, duly resolved and determined to execute this Supplemental Indenture for the purpose of providing for the creation of the Collateral Series D Bonds and of specifying the form, provisions and particulars thereof, as in the Indenture provided or permitted and of giving to the Collateral Series D Bonds the protection and security of the Indenture; and WHEREAS, the Company has acquired the additional property hereinafter described, and the Company desires that such additional property so acquired be specifically subjected to the lien of the Indenture; and WHEREAS, the Company represents that all acts and proceedings required by law and by the charter and by-laws of the Company, including all action requisite on the part of its shareholders, directors and officers, necessary to make the Collateral Series D Bonds, when executed by the Company, authenticated and delivered by the Trustee and duly issued, the valid, binding and legal obligations of the Company, and to constitute the Principal Indenture and all indentures supplemental thereto, including this Supplemental Indenture, valid, binding and legal instruments for the security of the bonds of all series, including the Collateral Series D Bonds, in accordance with the terms of such bonds and such instruments, have been done, performed and fulfilled, and the execution and delivery hereof have been in all respects duly authorized; NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: That Public Service Company of Colorado, the Company named in the Indenture, in consideration of the premises and of One Dollar to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, and in pursuance of the direction and authority of the Board of Directors of the Company given at a meeting thereof duly called and held, and in order to create the Collateral Series D Bonds and to specify the form, terms and provisions thereof, and to make definite and certain the lien of the Indenture upon the premises hereinafter described and to subject said premises directly to the lien of the Indenture, and to secure the payment of the principal of and premium, if any, and interest, if any, on all bonds from time to time outstanding under the Indenture, including the Collateral Series D Bonds, according to the terms of said bonds, and to secure the performance and observance of all of the covenants and conditions contained in the Indenture, has executed and delivered this Supplemental Indenture and has granted, bargained, sold, warranted, aliened, remised, released, conveyed, assigned, transferred, mortgaged, pledged, set over and confirmed, and by these presents does grant, bargain, sell, warrant, alien, remise, release, convey, assign, transfer, mortgage, pledge, set over and confirm unto First Trust of New York, National Association, as Trustee, and its successor or successors in the trust and its and their assigns forever, the property described in Schedule B hereto (which is described in such manner as to fall within and under the headings or parts or classifications set forth in the Granting Clauses of the Principal Indenture); TO HAVE AND TO HOLD the same and all and singular the properties, rights, privileges and franchises described in the Principal Indenture and in the several Supplemental Indentures hereinabove referred to and in this Supplemental Indenture and owned by the Company on the date of the execution and delivery hereof (other than property of a character expressly excepted from the lien of the Indenture as therein set forth) unto the Trustee and its successor or successors and assigns forever; SUBJECT, HOWEVER, to permitted encumbrances as defined in the Indenture; IN TRUST, NEVERTHELESS, upon the terms and trusts set forth in the Indenture, for the equal and proportionate benefit and security of all present and future holders of the bonds and coupons issued and to be issued under the Indenture, including the Collateral Series D Bonds, without preference, priority or distinction as to lien (except as any sinking, amortization, improvement or other fund established in accordance with the provisions of the Indenture or any indenture supplemental thereto may afford additional security for the bonds of any particular series) of any of said bonds over any others thereof by reason of series, priority in the time of the issue or negotiation thereof, or otherwise howsoever, except as provided in Section 2 of Article IV of the Indenture. -2- ARTICLE ONE CREATION AND DESCRIPTION OF THE COLLATERAL SERIES D BONDS SECTION 1. A new series of bonds to be issued from time to time under and secured by the Indenture is hereby created, the bonds of such new series to be designated First Mortgage Bonds, Collateral Series D. The Collateral Series D Bonds shall be limited to an aggregate principal amount of Two Hundred Fifty Million dollars ($250,000,000), excluding any Collateral Series D Bonds which may be authenticated and exchanged for or in lieu of or in substitution for or on transfer of other Collateral Series D Bonds pursuant to any provisions of the Indenture. The Collateral Series D Bonds shall not bear interest and each Collateral Series D Bond shall (a) be issued in such principal amount, (b) mature on such date not less than nine months nor more than thirty years from its Original Issue Date (as hereinafter defined), and (c) have such other terms and conditions as shall not be inconsistent with the provisions of the Indenture, all as shall be specified by the Company in a certificate, executed by the President, any Vice President, the Treasurer or any Assistant Treasurer of the Company, delivered to the Trustee relating to such Collateral Series D Bond and referring to this Supplemental Indenture (each such certificate being deemed to constitute a part of this Supplemental Indenture and being hereinafter sometimes called an "Issuance Certificate"), such specification by such an officer of the Company in an Issuance Certificate having been heretofore authorized in a resolution of the Board of Directors of the Company. The principal of each Collateral Series D Bond shall be payable, upon presentation thereof, at the office or agency of the Company in the city in which the principal corporate trust office of the 1993 Mortgage Trustee (as hereinafter defined) is located, in any coin or currency of the United States of America which at the time of payment shall be legal tender for the payment of public and private debts. The Collateral Series D Bonds shall be issued and delivered from time to time by the Company to First Trust of New York, National Association, as successor trustee under the Indenture, dated as of October 1, 1993, as supplemented (the "1993 Mortgage"), of the Company to such trustee (the "1993 Mortgage Trustee"), as the basis for the authentication and delivery under the 1993 Mortgage of a series of securities. As provided in the 1993 Mortgage, the Collateral Series D Bonds will be registered in the name of the 1993 Mortgage Trustee or its nominee and will be owned and held by the 1993 Mortgage Trustee, subject to the provisions of the 1993 Mortgage, for the benefit of the holders of all securities from time to time outstanding under the 1993 Mortgage, and the Company shall have no interest therein. Any payment by the Company under the 1993 Mortgage of the principal of any securities which shall have been authenticated and delivered under the 1993 Mortgage on the basis of the issuance and delivery to the 1993 Mortgage Trustee of Collateral Series D Bonds (other than by the application of the proceeds of a payment in respect of such Collateral Series D Bonds) shall, to the extent thereof, be deemed to satisfy and discharge the obligation of the Company, if any, to make a payment of principal of such Collateral Series D Bonds which is then due. The Trustee may conclusively presume that the obligation of the Company to pay the principal of any Collateral Series D Bonds as the same shall become due and payable shall -3- have been fully satisfied and discharged unless and until it shall have received a written notice from the 1993 Mortgage Trustee, signed by an authorized officer thereof, stating that the principal of specified Collateral Series D Bonds has become due and payable and has not been fully paid, and specifying the amount of funds required to make such payment. Each Collateral Series D Bond shall be dated as of the date of its authentication. The Collateral Series D Bonds shall be issued as fully registered bonds only, in denominations of $1,000 and integral multiples thereof. The Collateral Series D Bonds shall be registerable and exchangeable at the office or agency of the Company in the city in which the principal corporate trust office of the 1993 Mortgage Trustee is located, in the manner and upon the terms set forth in Section 5 of Article II of the Indenture; provided, however, that the Collateral Series D Bonds shall not be transferrable except to a successor trustee under the 1993 Mortgage. No service charge shall be made for any exchange or transfer of any Collateral Series D Bond. If and to the extent necessary to eliminate any apparent inconsistency between any provision of this Supplemental Indenture and any provision of the Indenture all Collateral Series D Bonds having the same Original Issue Date, Stated Maturity, interest rate, and other terms and conditions shall be deemed to be a separate series of bonds, and such Original Issue Date, Stated Maturity, interest rate, if any, and other terms and conditions shall be deemed to be a part of the designation of such series. As used herein, the term "Original Issue Date" shall mean, with respect to any Collateral Series D Bond, the date of authentication and delivery hereunder of such Collateral Series D Bond, or, in the case of any particular Collateral Series D Bond which has been authenticated and delivered upon the registration of transfer or exchange of, or in substitution for, another Collateral Series D Bond, the date of the original authentication and delivery hereunder of the first Collateral Series D Bond authenticated and delivered hereunder representing all or a portion of the same obligation as that evidenced by such particular Collateral Series D Bond; the term "Stated Maturity" shall mean, with respect to any Collateral Series D Bond, the date on which the principal of such Collateral Series D Bond is stated to be due and payable (without regard to any provision for acceleration, redemption or similar provisions); and the term "Maturity" shall mean, with respect to any Collateral Series D Bond, the date on which the principal of such Collateral Series D Bond becomes due and payable, whether at Stated Maturity, by declaration of acceleration, upon call for redemption or otherwise. SECTION 2. The text of the Collateral Series D Bonds shall be substantially in the form attached hereto as Exhibit A. SECTION 3. The Collateral Series D Bonds may be executed by the Company and delivered to the Trustee and, upon compliance with all applicable provisions and requirements of the Indenture in respect thereof, shall be authenticated by the Trustee and delivered (without awaiting the filing or recording of this Supplemental Indenture), from time to time, in accordance with the written order or orders of the Company. -4- ARTICLE TWO REDEMPTION OF THE COLLATERAL SERIES D BONDS SECTION 1. No Collateral Series D Bond shall be subject to any sinking fund or other mandatory redemption (whether at the option of the holder thereof or otherwise) unless otherwise specified in the Issuance Certificate relating to such Collateral Series D Bond. Each Collateral Series D Bond shall be redeemable at the option of the Company in whole at any time, or in part from time to time, prior to Stated Maturity, at a redemption price equal to 100% of the principal amount thereof to be redeemed. SECTION 2. The provisions of Sections 3, 4, 5, 6 and 7 of Article V of the Indenture shall be applicable to the Collateral Series D Bonds, except that (a) no publication of notice of redemption of the Collateral Series D Bonds shall be required and (b) if less than all the Collateral Series D Bonds are to be redeemed, the Collateral Series D Bonds to be redeemed shall be selected from the maturities, and in the principal amounts, designated to the Trustee by the Company, and except as such provisions may otherwise be inconsistent with the provisions of this Article Two. SECTION 3. The holder of each and every Collateral Series D Bond issued hereunder hereby agrees to accept payment thereof prior to Stated Maturity on the terms and conditions provided for in this Article Two. ARTICLE THREE ACKNOWLEDGMENT OF RIGHT TO VOTE OR CONSENT WITH RESPECT TO CERTAIN AMENDMENTS TO INDENTURE The Company hereby acknowledges the right of the holders of the Collateral Series D Bonds to vote or consent with respect to any or all of the modifications to the Indenture referred to in Article Three of the Supplemental Indenture, dated as of March 1, 1980, irrespective of the fact that the Bonds of the Second 1987 Series are no longer outstanding; PROVIDED, HOWEVER, that such acknowledgment shall not impair (a) the right of the Company to make such modifications without the consent or other action of the holders of the Bonds of the 2020 Series or the bonds of any other series subsequently created under the Indenture with respect to which the Company has expressly reserved such right or (b) the right of the Company to reserve the right to make such modifications without the consent or other action of the holders of bonds of one or more, or any or all, series created subsequent to the creation of the Collateral Series D Bonds. -5- ARTICLE FOUR THE TRUSTEE The Trustee accepts the trusts created by this Supplemental Indenture upon the terms and conditions set forth in the Indenture and this Supplemental Indenture. The recitals in this Supplemental Indenture are made by the Company only and not by the Trustee. Each and every term and condition contained in Article XII of the Indenture shall apply to this Supplemental Indenture with the same force and effect as if the same were herein set forth in full, with such omissions, variations and modifications thereof as may be appropriate to make the same conform to this Supplemental Indenture. ARTICLE FIVE MISCELLANEOUS PROVISIONS SECTION 1. Subject to the variations contained in Article Two of this Supplemental Indenture, the Indenture is in all respects ratified and confirmed and the Principal Indenture, this Supplemental Indenture and all other indentures supplemental to the Principal Indenture shall be read, taken and construed as one and the same instrument. Neither the execution of this Supplemental Indenture nor anything herein contained shall be construed to impair the lien of the Indenture on any of the properties subject thereto, and such lien shall remain in full force and effect as security for all bonds now outstanding or hereafter issued under the Indenture. All covenants and provisions of the Indenture shall continue in full force and effect and this Supplemental Indenture shall form part of the Indenture. SECTION 2. If the date for making any payment or the last date for performance of any act or the exercising of any right, as provided in this Supplemental Indenture, shall not be a Business Day (as defined in the 1993 Mortgage), such payment may be made or act performed or right exercised on the next succeeding Business Day with the same force and effect as if done on the nominal date provided in this Supplemental Indenture. SECTION 3. The terms defined in the Indenture shall, for all purposes of this Supplemental Indenture, have the meaning specified in the Indenture except as set forth in Section 4 of this Article or otherwise set forth in this Supplemental Indenture or unless the context clearly indicates some other meaning to be intended. SECTION 4. Any term defined in Section 303 of the Trust Indenture Act of 1939, as amended, and not otherwise defined in the Indenture shall, with respect to this Supplemental Indenture and the Collateral Series D Bonds, have the meaning assigned to such term in Section 303 as in force on the date of the execution of this Supplemental Indenture. -6- SECTION 5. This Supplemental Indenture may be executed in any number of counterparts, and all of said counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. IN WITNESS WHEREOF, Public Service Company of Colorado, party hereto of the first part, has caused its corporate name to be hereunto affixed, and this instrument to be signed by its President or any Vice President, and its corporate seal to be hereunto affixed and attested by its Secretary or an Assistant Secretary for and in its behalf; and First Trust of New York, National Association, the party hereto of the second part, in evidence of its acceptance of the trust hereby created, has caused its corporate name to be hereunto affixed, and this instrument to be signed and its corporate seal to be affixed by one of its Vice Presidents and attested by one of its Assistant Secretaries, for and in its behalf, all as of the day and year first above written. PUBLIC SERVICE COMPANY OF COLORADO By: /s/ R. C. KELLY ------------------------------------ R. C. Kelly Senior Vice President, Treasurer, and Chief Financial Officer ATTEST: /s/ W. WAYNE BROWN ---------------------------- W. Wayne Brown Secretary FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, AS TRUSTEE By: /s/ CATHERINE F. DONOHUE ------------------------------------ Catherine F. Donohue Vice President ATTEST: /s/ ALFIA MONASTRA --------------------------- Alfia Monastra Assistant Secretary -7- STATE OF COLORADO ) ) ss.: CITY AND COUNTY OF DENVER ) On this 8th day of November, 1996, before me, Jo Lynn R. Rife, a duly authorized Notary Public in and for said City and County in the State aforesaid, personally appeared R. C. Kelly and W. Wayne Brown, to me known to be a Senior Vice President and the Secretary, respectively, of PUBLIC SERVICE COMPANY OF COLORADO, a corporation organized and existing under the laws of the State of Colorado, one of the corporations that executed the within and foregoing instrument; and the said R. C. Kelly and W. Wayne Brown, severally, acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument and that the seal affixed thereto is the corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. /s/ JO LYNN R. RIFE --------------------------------------- Jo Lynn R. Rife Notary Public, State of Colorado Commission Expires April 27, 1998 -8- STATE OF NEW YORK ) ) ss.: CITY AND COUNTY OF NEW YORK ) On this 8th day of November, 1996, before me, Joanne E. Ilse, a duly authorized Notary Public in and for said City and County in the State aforesaid, personally appeared Catherine F. Donohue and Alfia Monastra, to me known to be a Vice President and an Assistant Secretary, respectively, of FIRST TRUST OF NEW YORK, National Association, a national banking association, one of the corporations that executed the within and foregoing instrument; and the said Catherine F. Donohue and Alfia Monastra, severally, acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument and that the seal affixed thereto is the corporate seal of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. /s/ JOANNE E. ILSE -------------------------------------- Joanne E. Ilse Notary Public, State of New York Commission Expires October 4, 1997 -9- EXHIBIT A FORM OF COLLATERAL SERIES D BOND THIS BOND IS NOT TRANSFERABLE EXCEPT TO A SUCCESSOR TRUSTEE UNDER THE INDENTURE, DATED AS OF OCTOBER 1, 1993, AS SUPPLEMENTED, BETWEEN PUBLIC SERVICE COMPANY OF COLORADO AND FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, AS SUCCESSOR TRUSTEE THEREUNDER. PUBLIC SERVICE COMPANY OF COLORADO FIRST MORTGAGE BOND, COLLATERAL SERIES D REGISTERED REGISTERED NO.................. $......... ORIGINAL ISSUE DATE: STATED MATURITY: OTHER/ADDITIONAL PROVISIONS: ADDENDUM ATTACHED [ ] YES [ ] NO FOR VALUE RECEIVED, PUBLIC SERVICE COMPANY OF COLORADO, a corporation organized and existing under the laws of the State of Colorado (hereinafter sometimes called the "Company"), promises to pay to First Trust of New York, National Association, as successor trustee (the "1993 Mortgage Trustee") under the Indenture, dated as of October 1, 1993 (the "1993 Mortgage"), of the Company, or registered assigns, Dollars on the Stated Maturity specified above (unless this bond shall then be deemed to have been paid in accordance with the provisions of the Indenture referred to below) at the office or agency of the Company in the city in which the principal corporate trust office of the 1993 Mortgage Trustee is located. This bond shall not bear interest. The principal of this bond shall be payable in any coin or currency of the United States of America which at the time of payment shall be legal tender for the payment of public and private debts. Any payment by the Company under the 1993 Mortgage of the principal of securities which shall have been authenticated and delivered under the 1993 Mortgage on the basis of A-1 the issuance and delivery to the 1993 Mortgage Trustee of this bond (the "1993 Mortgage Securities") (other than by the application of the proceeds of a payment in respect of this bond) shall, to the extent thereof, be deemed to satisfy and discharge the obligation of the Company, if any, to make a payment of principal of this bond which is then due. If an Addendum is attached hereto or "Other/Additional Provisions" apply to this bond, this bond shall be subject to the terms set forth in such Addendum or such "Other/Additional Provisions". This bond is one of an issue of bonds of the Company, issued and to be issued in one or more series under and equally and ratably secured (except as any sinking, amortization, improvement or other fund, established in accordance with the provisions of the indenture hereinafter mentioned, may afford additional security for the bonds of any particular series) by a certain indenture, dated as of December 1, 1939, made by the Company to First Trust of New York, National Association, as successor trustee (hereinafter called the "Trustee"), to Morgan Guaranty Trust Company of New York (formerly Guaranty Trust Company of New York), as amended and supplemented by several indentures supplemental thereto, including the Supplemental Indenture dated as of November 1, 1996 (said Indenture as amended and supplemented by said indentures supplemental thereto being hereinafter called the "Indenture"), to which Indenture reference is hereby made for a description of the property mortgaged, the nature and extent of the security, the rights and limitations of rights of the Company, the Trustee, and the holders of said bonds, under the Indenture, and the terms and conditions upon which said bonds are secured, to all of the provisions of which Indenture and of all indentures supplemental thereto in respect of such security, including the provisions of the Indenture permitting the issue of bonds of any series for property which, under the restrictions and limitations therein specified, may be subject to liens prior to the lien of the Indenture, the holder, by accepting this bond, assents. To the extent permitted by and as provided in the Indenture, the rights and obligations of the Company and of the holders of said bonds (including those pertaining to any sinking or other fund) may be changed and modified, with the consent of the Company, by the holders of at least 75% in aggregate principal amount of the bonds then outstanding (excluding bonds disqualified from voting by reason of the Company's interest therein as provided in the Indenture); PROVIDED, HOWEVER, that without the consent of the holder hereof no such modification or alteration shall be made which will extend the time of payment of the principal of this bond or reduce the principal amount hereof or effect any other modification of the terms of payment of such principal or will reduce the percentage of bonds required for the aforesaid actions under the Indenture. The Company has reserved the right to amend the Indenture without any consent or other action by holders of any series of bonds created after October 31, 1975 (including this series) so as to change 75% in the foregoing sentence to 60% and to change certain procedures relating to bondholders' meetings. This bond is one of a series of bonds designated as the First Mortgage Bonds, Collateral Series D, of the Company. Unless otherwise specified in an Addendum attached hereto, this bond shall not be subject to any sinking fund or other mandatory redemption (whether at the option of the holder hereof or otherwise). This bond shall be redeemable at the option of the Company in whole at any time, or in part from time to time, prior to the Stated Maturity specified above, at a redemption price equal to 100% of the principal amount thereof to be redeemed. A-2 The principal of this bond may be declared or may become due before the Stated Maturity specified above, on the conditions, in the manner and at the times set forth in the Indenture, upon the happening of an event of default as therein provided. This bond is not transferable except to a successor trustee under the 1993 Mortgage, any such transfer to be made at the office or agency of the Company in the city in which the principal corporate trust office of the 1993 Mortgage Trustee is located, upon surrender and cancellation of this bond, and thereupon a new bond of this series of a like principal amount and having the same Original Issue Date, Stated Maturity and other terms and conditions, will be issued to the transferee in exchange therefor, as provided in the Indenture. The Company, the Trustee, any paying agent and any registrar may deem and treat the person in whose name this bond is registered as the absolute owner hereof for the purpose of receiving payment and for all other purposes. This bond, alone or with other bonds of this series, may in like manner be exchanged at such office or agency for one or more new bonds of this series of the same aggregate principal amount, and having the same Original Issue Date, Stated Maturity, and other terms and conditions, all as provided in the Indenture. No service charge shall be made to any holder of any bond of this series for any exchange or transfer of bonds. No recourse under or upon any covenant or obligation of the Indenture, or of any bonds thereby secured, or for any claim based thereon, or otherwise in any manner in respect thereof, shall be had against any incorporator, subscriber to the capital stock, shareholder, officer or director, as such, of the Company, whether former, present or future, either directly, or indirectly through the Company or the Trustee, by the enforcement of any subscription to capital stock, assessment or otherwise, or by any legal or equitable proceeding by virtue of any statute or otherwise (including, without limiting the generality of the foregoing, any proceeding to enforce any claimed liability of shareholders of the Company based upon any theory of disregarding the corporate entity of the Company or upon any theory that the Company was acting as the agent or instrumentality of the shareholders), any and all such liability of incorporators, shareholders, subscribers, officers and directors, as such, being released by the holder hereof, by the acceptance of this bond, and being likewise waived and released by the terms of the Indenture under which this bond is issued. This bond shall not be valid or become obligatory for any purpose until the certificate of authentication endorsed hereon shall have been signed by First Trust of New York, National Association, or its successor, as Trustee under the Indenture. A-3 IN WITNESS WHEREOF, Public Service Company of Colorado has caused this bond to be signed in its name by the facsimile signature of a Senior Vice President and its corporate seal to be imprinted hereon and attested by the facsimile signature of its Secretary. Dated: PUBLIC SERVICE COMPANY OF COLORADO By: ----------------------------------- Senior Vice President ATTEST: ---------------------------- Secretary CERTIFICATE OF AUTHENTICATION This is one of the securities of the series designated therein referred to in the within-mentioned Supplemental Indenture. Dated: FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, AS TRUSTEE By: ----------------------------------- Authorized Officer A-4 SCHEDULE A SUPPLEMENTAL INDENTURES DATE OF PRINCIPAL SUPPLEMENTAL PRINCIPAL AMOUNT INDENTURE SERIES OF BONDS AMOUNT ISSUED OUTSTANDING - ------------ --------------- ------------- ----------- March 14, 1941 None -- -- May 14, 1941 None -- -- April 28, 1942 None -- -- April 14, 1943 None -- -- April 27, 1944 None -- -- April 18, 1945 None -- -- April 23, 1946 None -- -- April 9, 1947 None -- -- June 1, 1947* 2-7/8% Series due 1977 $40,000,000 None April 1, 1948 None -- -- May 20, 1948 None -- -- October 1, 1948 3-1/8% Series due 1978 10,000,000 None April 20, 1949 None -- -- April 24, 1950 None -- -- April 18, 1951 None -- -- October 1, 1951 3-1/4% Series due 1981 15,000,000 None April 21, 1952 None -- -- December 1, 1952 None -- -- April 15, 1953 None -- -- April 19, 1954 None -- -- October 1, 1954* 3-1/8% Series due 1984 20,000,000 None April 18, 1955 None -- -- April 24, 1956 None -- -- May 1, 1957* 4-3/8% Series due 1987 30,000,000 None April 10, 1958 None -- -- May 1, 1959 4-5/8% Series due 1989 20,000,000 None April 18, 1960 None -- --
I-1 DATE OF PRINCIPAL SUPPLEMENTAL PRINCIPAL AMOUNT INDENTURE SERIES OF BONDS AMOUNT ISSUED OUTSTANDING - ------------ --------------- ------------- ----------- April 19, 1961 None -- -- October 1, 1961 4-1/2% Series due 1991 30,000,000 None March 1, 1962 4-5/8% Series due 1992 8,800,000 None June 1, 1964 4-1/2% Series due 1994 35,000,000 None May 1, 1966 5-3/8% Series due 1996 35,000,000 None July 1, 1967* 5-7/8% Series due 1997 35,000,000 35,000,000 July 1, 1968* 6-3/4% Series due 1998 25,000,000 25,000,000 April 25, 1969 None -- -- April 21, 1970 None -- -- September 1, 1970 8-3/4% Series due 2000 35,000,000 None February 1, 1971 7-1/4% Series due 2001 40,000,000 None August 1, 1972 7-1/2% Series due 2002 50,000,000 None June 1, 1973 7-5/8% Series due 2003 50,000,000 None March 1, 1974 Pollution Control Series A 24,000,000 22,500,000 December 1, 1974 Pollution Control Series B 50,000,000 None October 1, 1975 9-3/8% Series due 2005 50,000,000 None April 28, 1976 None -- -- April 28, 1977 None -- -- November 1, 1977* 8-1/4% Series due 2007 50,000,000 None April 28, 1978 None -- -- October 1, 1978 9-1/4% Series due 2008 50,000,000 None October 1, 1979* Pollution Control Series C 50,000,000 None March 1, 1980* 15% Series due 1987 50,000,000 None April 28, 1981 None -- -- November 1, 1981* Pollution Control Series D 27,380,000 None December 1, 1981* 16-1/4% Series due 2011 50,000,000 None April 29, 1982 None -- -- May 1, 1983* Pollution Control Series E 42,000,000 None April 30, 1984 None -- -- March 1, 1985* 13% Series due 2015 50,000,000 None
I-2 DATE OF PRINCIPAL SUPPLEMENTAL PRINCIPAL AMOUNT INDENTURE SERIES OF BONDS AMOUNT ISSUED OUTSTANDING - ------------ --------------- ------------- ----------- November 1, 1986* Pollution Control Series F 27,250,000 27,250,000 May 1, 1987* 8.95% Series due 1992 75,000,000 None July 1, 1990* 9-7/8% Series due 2020 75,000,000 75,000,000 December 1, 1990* Secured Medium-Term Notes, 191,500,000** 108,500,000 Series A March 1, 1992* 8-1/8% Series due 2004 and 100,000,000 100,000,000 8-3/4% Series due 2022 150,000,000 150,000,000 April 1, 1993* Pollution Control Series G 79,500,000 79,500,000 June 1, 1993* Pollution Control Series H 50,000,000 50,000,000 November 1, 1993* Collateral Series A 134,500,000 134,500,000 January 1, 1994* Collateral Series B due 2001 102,667,000 102,667,000 Collateral Series B due 2024 110,000,000 110,000,000 September 2, 1994 (appointment of None None successor trustee) May 1, 1996* Collateral Series C due 2006 125,000,000 125,000,000
- ------------------- * Contains amendatory provisions ** $200,000,000 authorized I-3 SCHEDULE B PROPERTY DESCRIPTION PART FIRST (Plants) The following electric generating plants, gas generating plants, gas holders, steam plant, ice plant, pressure pipe lines, gravity pipe lines, reservoir sites, power sites, gas regulating stations, substations and other properties of the Company, including all dams, power houses, transmission lines, buildings, forebays, reservoirs, races, raceways, pipes, head works, structures and works, and the lands of the Company on which the same are situated, and all the Company's lands, easements, rights, rights-of-way, water rights, rights to the use of water, including all of the Company's right, title and interest in and to any and all decrees therefor, flowage rights, flooding rights, permits, franchises, consents, privileges, licenses, poles, towers, wires, switch racks, insulators, pipes, machinery, engines, boilers, gas benches, condensers and scrubbers, exhausters, blowers and pumps, motors, gas boosters, air condensers, water pumps, governors, purifiers, tar separators, washers, automobiles, trucks, office furniture and fixtures, regulators, meters, tools, appliances, equipment, appurtenances and supplies forming a part of or appertaining to said plants, holders, sites, stations or other properties, or any of them, or used or enjoyed, or capable of being used or enjoyed in conjunction or connection therewith, all situated in the State of Colorado and the counties thereof, more particularly described as follows: ADAMS COUNTY 1. SKYLAKE RANCH METER STATION A TRACT OF LAND BEING A PORTION OF THE SOUTHWEST ONE-QUARTER OF SECTION 5, TOWNSHIP 2 SOUTH, RANGE 67 WEST OF THE SIXTH PRINCIPAL MERIDIAN, COUNTY OF ADAMS, STATE OF COLORADO, BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS: BASIS OF BEARINGS: THE NORTH LINE OF THE SOUTHWEST ONE-QUARTER OF SAID SECTION 5 BEING CONSIDERED TO BEAR N89 DEGREES 46'24"E. COMMENCING AT THE WEST ONE-QUARTER CORNER OF SAID SECTION 5; THENCE 65 DEGREES 15'14"E A DISTANCE OF 2076.09 FEET TO A POINT ON THE SOUTHERLY LINE OF A 50.00- FOOT WIDE COLORADO-WYOMING GAS COMPANY EASEMENT AS DESCRIBED IN BOOK 430 AT PAGE 446 IN THE ADAMS COUNTY RECORDS; THENCE S57 DEGREES 43'31"E AND ALONG THE SOUTHERLY LINE OF SAID 50.00-FOOT COLORADO-WYOMING GAS COMPANY II-1 EASEMENT A DISTANCE OF 125.00 FEET TO A POINT ON THE NORTHWESTERLY LINE OF A 75.00-FOOT WIDE PUBLIC SERVICE COMPANY UTILITY EASEMENT AS DESCRIBED IN BOOK 999 AT PAGE 261 IN THE ADAMS COUNTY RECORDS; THENCE S47 DEGREES 15'58"W AND ALONG THE NORTHWESTERLY LINE OF SAID 75.00-FOOT WIDE PUBLIC SERVICE COMPANY EASEMENT A DISTANCE OF 75.00 FEET; THENCE N57 DEGREES 43'31"W A DISTANCE OF 125.00 FEET; THENCE N47 DEGREES 15'58"E A DISTANCE OF 75.00 FEET TO THE POINT OF BEGINNING, CONTAINING 9,055 SQUARE FEET OR 0.208 ACRES. II-2 EX-4.(B)(3) 3 EX 4(B)(3) EXHIBIT 4(b) (3) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ PUBLIC SERVICE COMPANY OF COLORADO TO FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, AS TRUSTEE _____________________ SUPPLEMENTAL INDENTURE NO. 5 Dated as of November 1, 1996 Supplemental to the Indenture dated as of October 1, 1993 _____________________ Establishing the Securities of Series No. 4 designated Secured Medium-Term Notes, Series B - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ SUPPLEMENTAL INDENTURE NO. 5, dated as of November 1, 1996, between PUBLIC SERVICE COMPANY OF COLORADO, a corporation duly organized and existing under the laws of the State of Colorado (hereinafter sometimes called the "Company"), and FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, a national banking association (hereinafter sometimes called the "Trustee"), as successor trustee to Morgan Guaranty Trust Company of New York under the Indenture, dated as of October 1, 1993 (hereinafter called the "Original Indenture"), as previously supplemented and as further supplemented by this Supplemental Indenture No. 5. The Original Indenture and any and all indentures and other instruments supplemental thereto are hereinafter sometimes collectively called the "Indenture". RECITALS OF THE COMPANY The Original Indenture was authorized, executed and delivered by the Company to provide for the issuance from time to time of its Securities (such term and all other capitalized terms used herein without definition having the meanings assigned to them in the Original Indenture), to be issued in one or more series as contemplated therein, and to provide security for the payment of the principal of and premium, if any, and interest, if any, on the Securities. The Company has heretofore executed and delivered to the Trustee the Supplemental Indentures referred to in Schedule A hereto for the purpose of establishing various series of bonds and of appointing the successor trustee. The Company desires to establish a series of Securities to be designated "Secured Medium-Term Notes, Series B", being a series of First Collateral Trust Bonds, such series of Securities to be hereinafter sometimes called "Series No. 4". The Company has duly authorized the execution and delivery of this Supplemental Indenture No. 5 to establish the Securities of Series No. 4 and has duly authorized the issuance of such Securities; and all acts necessary to make this Supplemental Indenture No. 5 a valid agreement of the Company, and to make the Securities of Series No. 4 valid obligations of the Company, have been performed. GRANTING CLAUSES NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE NO. 5 WITNESSETH, that, in consideration of the premises and of the purchase of the Securities by the Holders thereof, and in order to secure the payment of the principal of and premium, if any, and interest, if any, on all Securities from time to time Outstanding and the performance of the covenants contained therein and in the Indenture and to declare the terms and conditions on which such Securities are secured, the Company hereby grants, bargains, sells, releases, conveys, assigns, transfers, mortgages, pledges, sets over and confirms to the Trustee, and grants to the Trustee a security interest in, the following: GRANTING CLAUSE FIRST All right, title and interest of the Company, as of the date of the execution and delivery of this Supplemental Indenture No. 5, in and to property (other than Excepted Property), real, personal and mixed and wherever situated, in any case used or to be used in or in connection with the Electric Utility Business (whether or not such use is the sole use of such property), including without limitation (a) all lands, easements, servitudes, licenses, permits, rights of way and other rights and interests in or relating to real property used or to be used in or in connection with the Electric Utility Business or relating to the occupancy or use of such real property, subject however, to the exceptions and exclusions set forth in clause (a) of Granting Clause First of the Original Indenture; (b) all plants, generators, turbines, engines, boilers, fuel handling and transportation facilities, air and water pollution control and sewage and solid waste disposal facilities and other machinery and facilities for the generation of electric energy; (c) all switchyards, lines, towers, substations, transformers and other machinery and facilities for the transmission of electric energy; (d) all lines, poles, conduits, conductors, meters, regulators and other machinery and facilities for the distribution of electric energy; (e) all buildings, offices, warehouses and other structures used or to be used in or in connection with the Electric Utility Business; (f) all pipes, cables, insulators, ducts, tools, computers and other data processing and/or storage equipment and other equipment, apparatus and facilities used or to be used in or in connection with the Electric Utility Business; (g) any or all of the foregoing properties in the process of construction; and (h) all other property, of whatever kind and nature, ancillary to or otherwise used or to be used in conjunction with any or all of the foregoing or otherwise, directly or indirectly, in furtherance of the Electric Utility Business; GRANTING CLAUSE SECOND Subject to the applicable exceptions permitted by Section 810(c), Section 1303 and Section 1305 of the Original Indenture, all property (other than Excepted Property) of the kind and nature described in Granting Clause First which may be hereafter acquired by the Company, it being the intention of the Company that all such property acquired by the Company after the date of the execution and delivery of this Supplemental Indenture No. 5 shall be as fully embraced within and subjected to the Lien hereof as if such property were owned by the Company as of the date of the execution and delivery of this Supplemental Indenture No. 5; GRANTING CLAUSE FOURTH All other property of whatever kind and nature subjected or required to be subjected to the Lien of the Indenture by any of the provisions thereof; EXCEPTED PROPERTY Expressly excepting and excluding, however, from the Lien and operation of the Indenture all Excepted Property of the Company, whether now owned or hereafter acquired; TO HAVE AND TO HOLD all such property, real, personal and mixed, unto the Trustee, its successors in trust and their assigns forever; SUBJECT, HOWEVER, to (a) Liens existing at the date of the execution and delivery of the Original Indenture (including, but not limited to, the Lien of the PSCO 1939 Mortgage), (b) as to property acquired by the Company after the date of the execution and delivery of the Original Indenture, Liens existing or placed thereon at the time of the acquisition thereof (including, but not limited to, the Lien of any Class A Mortgage and purchase money Liens), (c) Retained Interests and (d) any other Permitted Liens, it being understood that, with respect to any property which was at the date of execution and delivery of the Original Indenture or thereafter became or hereafter becomes 2 subject to the Lien of any Class A Mortgage, the Lien of the Indenture shall at all times be junior, subject and subordinate to the Lien of such Class A Mortgage; IN TRUST, NEVERTHELESS, for the equal and proportionate benefit and security of the Holders from time to time of all Outstanding Securities without any priority of any such Security over any other such Security; PROVIDED, HOWEVER, that the right, title and interest of the Trustee in and to the Mortgaged Property shall cease, terminate and become void in accordance with, and subject to the conditions set forth in, Article Nine of the Original Indenture, and if, thereafter, the principal of and premium, if any, and interest, if any, on the Securities shall have been paid to the Holders thereof, or shall have been paid to the Company pursuant to Section 603 of the Original Indenture, then and in that case the Indenture shall terminate, and the Trustee shall execute and deliver to the Company such instruments as the Company shall require to evidence such termination; otherwise the Indenture, and the estate and rights thereby granted, shall be and remain in full force and effect; and THE PARTIES HEREBY FURTHER COVENANT AND AGREE as follows: ARTICLE ONE SECURITIES OF SERIES NO. 4 There are hereby established the Securities of Series No. 4, which shall have the terms and characteristics set forth below (the lettered subdivisions set forth below corresponding to the lettered subdivisions of Section 301 of the Original Indenture): (a) the title of the Securities of such series shall be "Secured Medium-Term Notes, Series B", being a series of First Collateral Trust Bonds; provided, however, that, at any time after the PSCO 1939 Mortgage shall have been satisfied and discharged, the Company shall have the right, without any consent or other action by the Holders of such Securities, to change such title in such manner as shall be deemed by the Company to be appropriate to reflect such satisfaction and discharge, such change to be evidenced in an Officer's Certificate; (b) there shall be no limit upon the aggregate principal amount of the Securities of Series No. 4 which may be authenticated and delivered under the Indenture. The Securities of Series No. 4 shall be initially authenticated and delivered from time to time in the aggregate principal amount of up to $250,000,000; (c) interest on the Securities of Series No. 4 shall be payable to the Persons in whose names such Securities are registered at the close of business on the Regular Record Date for such interest, except as otherwise expressly provided in the form of such Security attached as Exhibit A hereto; (d) the principal of each Security of Series No. 4 shall be payable on such date as is specified in the Officer's Certificate applicable to such Security; (e) an Officer's Certificate with respect to each Security of Series No. 4 shall specify the rate at which such Security of Series No. 4 shall bear interest, the date from which interest shall accrue, the Interest Payment Dates if other than February 1 3 and August 1 of each year and the Regular Record Dates with respect to the Interest Payment Dates if other than January 15 and July 15; (f) the Corporate Trust Office of First Trust of New York, National Association, in New York, New York shall be the place at which (i) the principal of, premium, if any, and interest, if any, on the Securities of Series No. 4 shall be payable, (ii) registration of transfer of such Securities may be effected, (iii) exchanges of such Securities may be effected and (iv) notices and demands to or upon the Company in respect of such Securities and the Indenture may be served; and First Trust of New York, National Association, shall be the Security Registrar for the Securities; provided, however, that the Company reserves the right to change, by one or more Officer's Certificates, any such place or the Security Registrar; and provided, further, that the Company reserves the right to designate, by one or more Officer's Certificates, its principal office in Denver, Colorado as any such place or itself as the Security Registrar; (g) each Security of Series No. 4 shall be redeemable only if and to the extent specified in the Officer's Certificate applicable to such Security of Series No. 4; (h) not applicable to any Security of Series No. 4, except to the extent specified in the Officer's Certificate applicable to a particular Security of Series No. 4; (i) the Securities of Series No. 4 shall be issuable in denominations of $100,000 and any greater amount which is an integral multiple of $1,000; (j) not applicable; (k) not applicable; (l) not applicable; (m) not applicable; (n) not applicable to any Security of Series No. 4, except to the extent specified in the Officer's Certificate applicable to a particular Security of Series No. 4; (o) not applicable; (p) not applicable; (q) each Security of Series No. 4 is to be initially registered in the name of Cede & Co., as nominee for The Depository Trust Company (the "Depositary"). The Securities of Series No. 4 shall not be transferable or exchangeable, nor shall any purported transfer be registered, except as follows: (i) a Security of Series No. 4 may be transferred in whole, and appropriate registration of transfer effected, if such transfer is by such nominee to the Depositary, or by the Depositary to another nominee thereof, or by any nominee of the Depositary to any other nominee thereof, or by the Depositary or any nominee thereof to any successor securities depositary or any nominee thereof; and 4 (ii) a Security of Series No. 4 may be exchanged for certificated notes registered in the respective names of the beneficial holders thereof, and thereafter shall be transferable without restriction, if: (A) The Depositary, or any successor securities depositary, shall have notified the Company and the Trustee that it is unwilling or unable to continue to act as securities depositary with respect to such Security of Series No. 4 or the Company becomes aware that the Depositary has ceased to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and, in any such case, the Trustee shall not have been notified by the Company within ninety (90) days of the identity of a successor securities depositary with respect to such Security of Series No. 4; (B) The Company shall have delivered to the Trustee a Company Order to the effect that such Security of Series No. 4 shall be so exchangeable on and after a date specified therein; or (C)(1) an Event of Default shall have occurred and be continuing, (2) the Trustee shall have given notice of such Event of Default pursuant to Section 1102 of the Original Indenture and (3) there shall have been delivered to the Company and the Trustee an Opinion of Counsel to the effect that the interests of the beneficial owners of such Security of Series No. 4 in respect thereof will be materially impaired unless such owners become Holders of certificated notes. (r) not applicable; (s) no service charge shall be made for the registration of transfer or exchange of any Securities of Series No. 4 provided, however, that the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection with any such exchange or transfer; (t) not applicable; (u) (i) If the Company shall have caused the Company's indebtedness in respect of any Security of Series No. 4 to have been satisfied and discharged prior to the Maturity of such Security of Series No. 4, as provided in Section 901 of the Original Indenture, the Company shall, promptly after the date of such satisfaction and discharge, give a notice to each Person who was a Holder of any such Security of Series No. 4 on such date stating (A)(1) the aggregate principal amount of such Security of Series No. 4 and (2) the aggregate amount of any money (other than amounts, if any, deposited in respect of accrued interest on such Security of Series No. 4) and the aggregate principal amount of, the rate or rates of interest on, and the aggregate fair market value of, any Eligible Obligations deposited pursuant to Section 901 of the Original Indenture with respect to such Security of Series No. 4 and (B) that the Company will provide (and the Company shall promptly so provide) to such Person, or any beneficial owner of such Security of Series No. 4 holding through such Person (upon written request to the Company sent to an address specified in such notice), such other information as such Person or beneficial owner, as the case may be, reasonably may request in order to enable it to determine the federal income tax 5 consequences to it resulting from the satisfaction and discharge of the Company's indebtedness in respect of such Security of Series No. 4. Thereafter, the Company shall, within forty-five (45) days after the end of each calendar year, give to each Person who at any time during such calendar year was a Holder of such Security of Series No. 4 a notice containing (X) such information as may be necessary to enable such Person to report its income, gain or loss for federal income tax purposes with respect to such Security of Series No. 4 or the assets held on deposit in respect thereof during such calendar year or the portion thereof during which such Person was a Holder of such Security of Series No. 4, as the case may be (such information to be set forth for such calendar year as a whole and for each month during such year) and (Y) a statement to the effect that the Company will provide (and the Company shall promptly so provide) to such Person, or any beneficial owner of such Security of Series No. 4 holding through such Person (upon written request to the Company sent to an address specified in such notice), such other information as such Person or beneficial owner, as the case may be, reasonably may request in order to enable it to determine its income, gain or loss for federal income tax purposes with respect to such Security of Series No. 4 or such assets for such year or portion thereof, as the case may be. The obligation of the Company to provide or cause to be provided information for purposes of income tax reporting by any Person as described in the first two sentences of this paragraph shall be deemed to have been satisfied to the extent that the Company has provided or caused to be provided substantially comparable information pursuant to any requirements of the Internal Revenue Code of 1986, as amended from time to time (the "Code"), and United States Treasury regulations thereunder. (ii) Notwithstanding the provisions of subparagraph (i) above, the Company shall not be required to give any notice specified in such subparagraph or to otherwise furnish any of the information contemplated therein if the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holder of such Security of Series No. 4 will not recognize income, gain or loss for federal income tax purposes as a result of the satisfaction and discharge of the Company's indebtedness in respect of such Security of Series No. 4 and such Holder will be subject to federal income taxation on the same amounts and in the same manner and at the same times as if such satisfaction and discharge had not occurred. (iii) Anything in this clause (u) to the contrary notwithstanding, the Company shall not be required to give any notice specified in subparagraph (i) or to otherwise furnish the information contemplated therein or to deliver any Opinion of Counsel contemplated by subparagraph (ii) if the Company shall have caused the applicable Security of Series No. 4 to be deemed to have been paid for purposes of the Indenture, as provided in Section 901 of the Original Indenture, but shall not have effected the satisfaction and discharge of its indebtedness in respect of such Security of Series No. 4 pursuant to such Section. (v) each Security of Series No. 4 shall be substantially in the form attached as Exhibit A hereto and shall have such further terms as are set forth in such form. 6 ARTICLE TWO MISCELLANEOUS PROVISIONS This Supplemental Indenture No. 5 is a supplement to the Original Indenture. As previously supplemented and further supplemented by this Supplemental Indenture No. 5, the Original Indenture is in all respects ratified, approved and confirmed, and the Original Indenture, all previous supplements thereto and this Supplemental Indenture No. 5 shall together constitute one and the same instrument. 7 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture No. 5 to be duly executed as of the day and year first above written. PUBLIC SERVICE COMPANY OF COLORADO By: /s/ R. C. KELLY ------------------------------------- R. C. Kelly Senior Vice President, Treasurer, and Chief Financial Officer FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, Trustee By: /s/ CATHERINE F. DONOHUE ------------------------------------- Catherine F. Donohue Vice President 8 STATE OF COLORADO ) ) ss.: CITY AND COUNTY OF DENVER ) On the 8th day of November, 1996, before me personally came R. C. Kelly, to me known, who, being by me duly sworn, did depose and say that he is a Senior Vice President of Public Service Company of Colorado, one of the corporations described in and which executed the foregoing instrument; and that he signed his name thereto by authority of the Board of Directors of said corporation. /s/ JO LYNN R. RIFE --------------------------------------- Jo Lynn R. Rife Notary Public, State of Colorado Commission Expires April 27, 1998 9 STATE OF NEW YORK ) ) ss.: CITY AND COUNTY OF NEW YORK ) On the 8th day of November, 1996, before me personally came Catherine F. Donohue, to me known, who, being by me duly sworn, did depose and say that she is a Vice President of First Trust of New York, National Association, the national banking association described in and which executed the foregoing instrument; and that she signed her name thereto by authority of the Board of Directors of said national banking association. /s/ JOANNE E. ILSE -------------------------------------- Joanne E. Ilse Notary Public, State of New York Commission Expires October 4, 1997 10 EXHIBIT A FORM OF SECURITY (See legend at the end of this Security for restrictions on transfer and change of form) PUBLIC SERVICE COMPANY OF COLORADO Secured Medium-Term Note, Series B (being a First Collateral Trust Bond) Original Issue Date: Regular Record Dates: Interest Rate: Initial Redemption Date: Default Rate: Initial Redemption Percentage: Stated Maturity: Annual Redemption Percentage Reduction Interest Payment Dates: Optional Repayment Dates: Addendum Attached [ ] Yes Other/Additional Provisions: [ ] No This Note is not a Discount Security within the meaning of the within-mentioned Indenture. ----------------------------------------- Principal Amount Registered No. $ CUSIP PUBLIC SERVICE COMPANY OF COLORADO, a corporation duly organized and existing under the laws of the State of Colorado (herein called the "Company," which term includes any successor corporation under the Indenture referred to below), for value received, hereby promises to pay to , or registered assigns, the principal sum of Dollars on the Stated Maturity specified above (or any Redemption Date or Repayment Date as defined below), and to pay interest thereon from the Original Issue Date specified above or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually in arrears on the Interest Payment Dates specified above in each year, commencing with the Interest Payment Date next succeeding the Original Issue Date specified above, and at Maturity, at the Interest Rate per annum A-1 specified above, computed on the basis of a 360-day year consisting of twelve 30-day months, until the principal hereof is paid or duly provided for and, to the extent that payment of such interest shall be legally enforceable, at the Default Rate per annum specified above on any overdue payment of principal, premium, if any, and/or interest. The interest so payable, and paid or duly provided for, on any Interest Payment Date shall, as provided in such Indenture, be paid to the Person in whose name this Note (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date specified above (whether or not a Business Day) next preceding such Interest Payment Date except that if the Original Issue Date of this Note is after a Regular Record Date specified above and before the corresponding Interest Payment Date, the first payment of interest on this Note shall be made to the Person in whose name this Note (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date with respect to the next succeeding Interest Payment Date. Notwithstanding the foregoing, interest payable at Maturity shall be paid to the Person to whom principal shall be paid. Except as otherwise provided in said Indenture, any such interest not so paid or duly provided for shall forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Note (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice of which shall be given to Holders of Securities of this series not less than 15 days prior to such Special Record Date, or paid in such other manner as permitted by the Indenture. Notwithstanding the foregoing, if an Addendum is attached hereto or "Other/Additional Provisions" apply to this Note as specified on the face hereof, this Note shall be subject to the terms set forth in such Addendum or such "Other/Additional Provisions". Payment of the principal of and premium, if any, on this Note and interest hereon at Maturity shall be made upon presentation of this Note (and with respect to any applicable repayment of this Note, a duly completed election form as contemplated below) at the Corporate Trust Office of First Trust of New York, National Association, in New York, New York or at such other office or agency as may be designated for such purpose by the Company from time to time. Payment of interest on this Note (other than interest at Maturity) shall be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Note Register, except that if such Person shall be a securities depositary, such payment may be made by such other means in lieu of check as shall be agreed upon by the Company, the Trustee and such Person. Payment of the principal of and premium, if any, and interest on this Note, as aforesaid, shall be made in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. This Note is one of a duly authorized issue of securities of the Company (herein called the "Notes"), issued and issuable in one or more series under and equally secured by an Indenture, dated as of October 1, 1993 (such Indenture as originally executed and delivered and as supplemented or amended from time to time thereafter, together with any constituent instruments establishing the terms of particular Securities, being herein called the "Indenture"), between the Company and First Trust of New York, National Association, as successor trustee (herein called the "Trustee," which term includes any further successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the property mortgaged, pledged and held in trust, the nature and extent of the security and the respective rights, limitations of rights, duties and immunities of the Company, the Trustee and the Holders of the Securities thereunder and of the terms and conditions upon which the Securities are, and are to be, authenticated and delivered and secured. The acceptance of this Note shall be deemed to constitute the consent and agreement by the Holder hereof to all of the terms and provisions of the Indenture. This Note is one of the series designated above. A-2 If any Interest Payment Date, any Redemption Date or the Stated Maturity shall not be a Business Day (as hereinafter defined), payment of the amounts due on this Note on such date may be made on the next succeeding Business Day; and, if such payment is made or duly provided for on such Business Day, no interest shall accrue on such amounts for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity, as the case may be, to such Business Day. Unless otherwise specified in an Addendum attached hereto, this Note shall not be subject to any sinking fund or other mandatory redemption and, unless otherwise specified on the face hereof in accordance with the provisions of the following four paragraphs, this Note is not subject to optional redemption or repayment prior to the Stated Maturity hereof. This Note is subject to redemption at the option of the Company at any time on or after the Initial Redemption Date, if any, specified on the face hereof, as a whole at any time or from time to time in part, in increments of $1,000 (provided that any remaining principal amount hereof shall be at least $100,000), at the Redemption Price (as defined below), plus unpaid accrued interest hereon to the date fixed for redemption (each, a "Redemption Date"). The "Redemption Price" shall initially be the Initial Redemption Percentage specified on the face hereof multiplied by the unpaid principal amount of this Note to be redeemed. The Initial Redemption Percentage shall decline at each anniversary of the Initial Redemption Date by the Annual Redemption Percentage, if any, specified on the face hereof until the Redemption Price is 100% of the unpaid principal amount to be redeemed. Notice of redemption shall be given by mail to the Holder of this Note, not less than 30 days nor more than 60 days prior to the date fixed for redemption, all as provided in the Indenture. As provided in the Indenture, notice of redemption at the election of the Company as aforesaid may state that such redemption shall be conditional upon the receipt by the Paying Agent or Agents for this Note, on or prior to the date fixed for such redemption, of money sufficient to pay the principal of and premium, if any, and interest, on this Note; a notice of redemption so conditioned shall be of no force or effect if such money is not so received and, in such event, the Company shall not be required to redeem this Note. In the event of redemption of this Note in part only, a new Note or Notes of this series, of like tenor, for the unredeemed portion hereof and otherwise having the same terms as this Note will be issued in the name of the Holder hereof upon the cancellation hereof. This Note will be subject to repayment by the Company at the option of the Holder hereof on the Optional Repayment Date(s), if any, specified on the face hereof, in whole or in part in increments of $1,000 (provided that any remaining principal amount hereof shall be at least $100,000), at a repayment price equal to 100% of the unpaid principal amount to be repaid, plus unpaid interest accrued hereon to the date fixed for repayment (each a "Repayment Date"). For this Note to be repaid, this Note must be received not more than 60 nor less than 30 calendar days prior to the Repayment Date, together with the form hereon entitled "Option to Elect Repayment" duly completed, by the Trustee at its Corporate Trust Office in New York, New York or such other office or agency as may be designated by the Company from time to time. Exercise of such repayment option by the Holder hereof will be irrevocable. In the event of repayment of this Note in part only, a new Note or Notes of like tenor for the unrepaid portion hereof and otherwise having the same terms as this Note will be issued in the name of the Holder hereof upon the cancellation hereof. If an Event of Default shall occur and be continuing, the principal of this Note may be declared due and payable in the manner and with the effect provided in the Indenture. A-3 The Indenture permits, with certain exceptions as therein provided, the Trustee to enter into one or more supplemental indentures for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, the Indenture with the consent of the Holders of not less than a majority in aggregate principal amount of the Securities of all series then Outstanding under the Indenture, considered as one class; provided, however, that if there shall be Securities of more than one series Outstanding under the Indenture and if a proposed supplemental indenture shall directly affect the rights of the Holders of Securities of one or more, but less than all, of such series, then the consent only of the Holders of a majority in aggregate principal amount of the Outstanding Securities of all series so directly affected, considered as one class, shall be required; and provided, further, that if the Securities of any series shall have been issued in more than one Tranche and if the proposed supplemental indenture shall directly affect the rights of the Holders of Securities of one or more, but less than all, of such Tranches, then the consent only of the Holders of a majority in aggregate principal amount of the Outstanding Securities of all Tranches so directly affected, considered as one class, shall be required; and provided, further, that the Indenture permits the Trustee to enter into one or more supplemental indentures for limited purposes without the consent of any Holders of Securities. The Indenture also contains provisions permitting the Holders of a majority in principal amount of the Securities then Outstanding, on behalf of the Holders of all Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. As provided in the Indenture and subject to certain limitations therein set forth, this Note or any portion of the principal amount hereof will be deemed to have been paid for all purposes of the Indenture and to be no longer Outstanding thereunder, and, at the election of the Company, the Company's entire indebtedness in respect thereof will be satisfied and discharged, if there has been irrevocably deposited with the Trustee or any Paying Agent (other than the Company), in trust, money in an amount which will be sufficient and/or Eligible Obligations, the principal of and interest on which when due, without regard to any reinvestment thereof, will provide moneys which, together with moneys so deposited, will be sufficient, to pay when due the principal of and premium, if any, and interest on this Note when due. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note is registrable in the Security Register, upon surrender of this Note for registration of transfer at the Corporate Trust Office of First Trust of New York, National Association, in New York, New York or such other office or agency as may be designated by the Company from time to time, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series of authorized denominations and of like tenor and aggregate principal amount, will be issued to the designated transferee or transferees. The Notes are issuable only as registered Notes, without coupons, and in denominations of $100,000 and in any greater amount in integral multiples of $1,000. As provided in the Indenture and subject to certain limitations therein set forth, the Notes are exchangeable for a like aggregate principal amount of Notes of the same series and Tranche, of any authorized denominations, as requested by the Holder surrendering the same, and of like tenor upon surrender of the Note or Notes to be exchanged at the Corporate Trust Office of First Trust of New York, National Association, in New York, New York or such other office or agency as may be designated by the Company from time to time. A-4 The Company shall not be required to execute or provide for the registration of transfer of or the exchange of this Note during a period of 15 days immediately preceding the date notice is given calling this Note or any part hereof for redemption, except with respect to the unredeemed portion of any Note being redeemed in part. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the absolute owner hereof for all purposes, whether or not this Note be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. The Indenture and this Note shall be governed by and construed in accordance with the laws of the State of New York. As used herein "Business Day" means any day, other than a Saturday or Sunday, which is not a day on which banking institutions or trust companies in The City of New York, New York or other city in which is located any office or agency maintained for the payment of the principal of, or premium, if any, or interest on this Note, are generally authorized or required by law, regulation or executive order to remain closed. All other terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. As provided in the Indenture, no recourse shall be had for the payment of the principal of, premium, if any, or interest on any Securities, or any part thereof, or for any claim based thereon or otherwise in respect thereof, or of the indebtedness represented thereby, or upon any obligation, covenant or agreement under the Indenture, against, and no personal liability whatsoever shall attach to, or be incurred by, any incorporator, shareholder, officer or director, as such, past, present or future of the Company or of any predecessor or successor corporation (either directly or through the Company or a predecessor or successor corporation), whether by virtue of any constitutional provision, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly agreed and understood that the Indenture and all the Securities are solely corporate obligations and that any such personal liability is hereby expressly waived and released as a condition of, and as part of the consideration for, the execution of the Indenture and the issuance of the Securities. Unless the certificate of authentication hereon has been executed by the Trustee or an Authenticating Agent by manual signature, this Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. A-5 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal to be hereunto affixed and attested. PUBLIC SERVICE COMPANY OF COLORADO By: ----------------------------------- Senior Vice President Attest: - ------------------------ Secretary CERTIFICATE OF AUTHENTICATION This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. Dated: ___________________ FIRST TRUST OF NEW YORK, OR FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION NATIONAL ASSOCIATION, AS TRUSTEE AS TRUSTEE By: BY: [ ], ------------------------ AS AUTHENTICATING AGENT Authorized Officer By: -------------------------- Authorized Officer UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THIS NOTE MAY NOT BE TRANSFERRED OR EXCHANGED, NOR MAY ANY PURPORTED TRANSFER BE REGISTERED, EXCEPT (i) THIS NOTE MAY BE TRANSFERRED IN WHOLE, AND APPROPRIATE REGISTRATION OF TRANSFER EFFECTED, IF SUCH TRANSFER IS BY CEDE & CO., AS NOMINEE FOR THE DEPOSITORY TRUST COMPANY (THE "DEPOSITARY"), TO THE DEPOSITARY, OR BY THE DEPOSITARY TO ANOTHER NOMINEE THEREOF, OR BY ANY NOMINEE OF THE DEPOSITARY TO ANY OTHER NOMINEE THEREOF, OR BY THE DEPOSITARY OR ANY NOMINEE THEREOF TO ANY SUCCESSOR SECURITIES DEPOSITARY OR ANY NOMINEE THEREOF; AND (ii) THIS NOTE MAY BE EXCHANGED FOR DEFINITIVE NOTES REGISTERED IN THE RESPECTIVE NAMES OF THE BENEFICIAL HOLDERS HEREOF, AND THEREAFTER SHALL BE TRANSFERABLE WITHOUT RESTRICTIONS IF: (A) THE DEPOSITARY, OR ANY SUCCESSOR SECURITIES DEPOSITARY, SHALL HAVE NOTIFIED THE COMPANY AND THE TRUSTEE THAT IT IS UNWILLING OR UNABLE TO CONTINUE TO ACT AS SECURITIES DEPOSITARY WITH RESPECT TO THIS NOTE OR THE COMPANY BECOMES AWARE THAT THE DEPOSITARY HAS CEASED TO BE A CLEARING AGENCY REGISTERED UNDER THE SECURITIES EXCHANGE ACT OF 1934, A-6 AS AMENDED, AND IN ANY SUCH CASE THE TRUSTEE SHALL NOT HAVE BEEN NOTIFIED BY THE COMPANY WITHIN NINETY (90) DAYS OF THE IDENTITY OF A SUCCESSOR SECURITIES DEPOSITARY WITH RESPECT TO THIS NOTE; (B) THE COMPANY SHALL HAVE DELIVERED TO THE TRUSTEE AN OFFICER'S CERTIFICATE TO THE EFFECT THAT THIS NOTE SHALL BE SO EXCHANGEABLE ON AND AFTER A DATE SPECIFIED THEREIN; OR (C)(1) AN EVENT OF DEFAULT SHALL HAVE OCCURRED AND BE CONTINUING, (2) THE TRUSTEE SHALL HAVE GIVEN NOTICE OF SUCH EVENT OF DEFAULT PURSUANT TO SECTION 1102 OF THE INDENTURE AND (3) THERE SHALL HAVE BEEN DELIVERED TO THE COMPANY AND THE TRUSTEE AN OPINION OF COUNSEL TO THE EFFECT THAT THE INTERESTS OF THE BENEFICIAL OWNERS OF THIS NOTE IN RESPECT THEREOF WILL BE MATERIALLY IMPAIRED UNLESS SUCH OWNERS BECOME HOLDERS OF DEFINITIVE NOTES. ____________________ FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto - -------------------------------------------------------------------------------- [please insert social security or other identifying number of assignee] - -------------------------------------------------------------------------------- [please print or typewrite name and address of assignee] - -------------------------------------------------------------------------------- the within Note of PUBLIC SERVICE COMPANY OF COLORADO and does hereby irrevocably constitute and appoint ________________________________________ , Attorney, to transfer said Note on the books of the within-mentioned Company, with full power of substitution in the premises. Dated: ------------------------ ____________________ Notice: The signature to this assignment must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatsoever. A-7 OPTION TO ELECT REPAYMENT The undersigned hereby irrevocably request(s) and instruct(s) the Company to repay this Note (or portion hereof specified below) pursuant to its terms at a price equal to 100% of the principal amount to be repaid, together with unpaid interest accrued hereon to the Repayment Date, to the undersigned, at ______________________________________________________________ (Please print or typewrite name and address of the undersigned) For this Note to be repaid, the Trustee must receive at its Corporate Trust Office in New York, New York not more than 60 nor less than 30 calendar days prior to the Repayment Date, this Note with this "Option to Elect Repayment" form duly completed. If less than the entire principal amount of this Note is to be repaid, specify the portion hereof (which shall be increments of $1,000 (provided that any remaining principal amount hereof shall be at least $100,000)) which the Holder elects to have repaid and specify the denomination or denominations (which shall be a minimum of $100,000) of the Notes to be issued to the Holder for the portion of this Note not being repaid (in the absence of any such specification, one such Note will be issued for the portion not being repaid). Principal Amount to be Repaid: $ ---------- -------------------------------------------- Date: NOTICE: The signature(s) on this Option to --------------------- Elect Repayment must correspond with the name(s) as written upon the face of this Note in every particular, without alteration or enlargement or any change whatsoever. A-8 SCHEDULE A SUPPLEMENTAL INDENTURES DATE OF PRINCIPAL SUPPLEMENTAL PRINCIPAL AMOUNT INDENTURE SERIES OF BONDS AMOUNT ISSUED OUTSTANDING - ------------ --------------- ------------- ----------- November 1, 1993 Series No. 1 $134,500,000 $134,500,000 January 1, 1994 Series No. 2 due 2001 and $102,667,000 $102,667,000 Series No. 2 due 2024 $110,000,000 $110,000,000 September 2, 1994 Appointment of None None Successor Trustee May 1, 1996 Series No. 3 due 2006 $125,000,000 $125,000,000
I-1 EX-21 4 EX 21 EXHIBIT 21 SUBSIDIARIES OF PUBLIC SERVICE COMPANY OF COLORADO AS OF DECEMBER 31, 1996 STATE OF SUBSIDIARY INCORPORATION ---------- ------------- 1. Cheyenne Light, Fuel and Power Company Wyoming 2. e prime, inc. Colorado 3. Young Gas Storage Company (wholly-owned subsidiary of e prime) Delaware 4. Texas-Ohio Gas, Inc. (wholly-owned subsidiary of e prime) Texas 5. Texas-Ohio Pipeline, Inc. (wholly-owned subsidiary of e prime) Texas 6. Fuel Resources Development Co. (a dissolved corporation) Colorado 7. Green and Clear Lakes Company New York 8. Natural Fuels Corporation Colorado 9. New Century Energies, Inc. Delaware 10. PS Colorado Credit Corporation Colorado 11. PSR Investments, Inc. Colorado 12. 1480 Welton, Inc. Colorado 13. WestGas InterState, Inc. Colorado The names of several majority-owned subsidiaries are omitted since such subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of December 31, 1996. EX-27 5 EX 27
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 DEC-31-1996 PER-BOOK 3,598,895 46,550 547,157 380,046 0 4,572,648 324,094 724,353 389,841 1,438,288 39,913 140,008 1,259,528 18,375 0 226,350 155,030 2,576 49,154 9,585 1,292,580 4,572,648 2,171,386 96,331 336,100 1,812,902 358,484 (18,258) 340,226 149,880 190,346 11,848 178,498 135,111 92,205 327,614 2.780 2.780
-----END PRIVACY-ENHANCED MESSAGE-----