-----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, FvftDG5+VMrq/Tp88xGv+4qDNL6Ccx8v5XRkyNvWwD8MxE7vwVVPnerG3tCT03Lc 8zf/M/OosTbpT67Fcgu3pA== 0000927356-00-000314.txt : 20000224 0000927356-00-000314.hdr.sgml : 20000224 ACCESSION NUMBER: 0000927356-00-000314 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW CENTURY ENERGIES INC CENTRAL INDEX KEY: 0001004858 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 841334327 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12927 FILM NUMBER: 551630 BUSINESS ADDRESS: STREET 1: 1225 17TH ST CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3035717511 MAIL ADDRESS: STREET 1: 1225 17TH ST CITY: DENVER STATE: CO ZIP: 80202 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-K405 SEC ACT: SEC FILE NUMBER: 001-03280 FILM NUMBER: 551631 BUSINESS ADDRESS: STREET 1: 1225 17TH ST STE 900 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWESTERN PUBLIC SERVICE CO CENTRAL INDEX KEY: 0000092521 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 750575400 STATE OF INCORPORATION: NM FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-03789 FILM NUMBER: 551632 BUSINESS ADDRESS: STREET 1: SPS TOWER STREET 2: TYLER AT SIXTH ST CITY: AMARILLO STATE: TX ZIP: 79101 BUSINESS PHONE: 8063782121 MAIL ADDRESS: STREET 1: PO BOX 1261 CITY: AMARILLO STATE: TX ZIP: 79170 10-K405 1 FORM 10-K 405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ____________
Exact name of registrant as specified in its charter, State or other jurisdiction of incorporation or organization, Address of Commission principal executive offices and Registrant's Telephone Number, IRS Employer File Number including area code Identification No. - ----------- --------------------------------------------------------------- ------------------ 1-12927 NEW CENTURY ENERGIES, INC. 84-1334327 (a Delaware Corporation) 1225 17/th/ Street Denver, Colorado 80202 Telephone (303) 571-7511 1-3280 PUBLIC SERVICE COMPANY OF COLORADO 84-0296600 (a Colorado Corporation) 1225 17/th/ Street Denver, Colorado 80202 Telephone (303) 571-7511 1-3789 SOUTHWESTERN PUBLIC SERVICE COMPANY 75-0575400 (a New Mexico Corporation) Tyler at Sixth Amarillo, Texas 79101 Telephone (303) 571-7511
____________________ Public Service Company of Colorado and Southwestern Public Service Company meet the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore filing this Form 10-K with the reduced disclosure format specified in General Instruction I (2) to such Form 10-K. Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange Registrant Title of Each Class on Which Registered - ---------- ------------------- ------------------------ New Century Energies, Inc. Common Stock, $1 par value per share New York Public Service Company of Colorado 7.60% Trust Originated Preferred Securities New York Southwestern Public Service Company 7.85% Trust Preferred Securities, Series A New York Securities registered pursuant to Section 12(g) of Act: None
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of February 18, 2000, 116,146,129 shares of New Century Energies, Inc. Common Stock were outstanding. The aggregate market value of New Century Energies, Inc. Common Stock, $1.00 par value (the only class of voting stock), held by non-affiliates was $3,237,573,346 based on the last sale price of such stock on the New York Stock Exchange on February 18, 2000. New Century Energies, Inc. is the sole holder of the Common Stock of PSCo and SPS. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement of New Century Energies, Inc. to be filed in connection with its Annual Meeting of Shareholders, to be held May 10, 2000, are incorporated by reference into Part III hereof. TABLE OF CONTENTS
Page Definitions Number ------ Part I Item 1. Business............................................................. 1 Item 2. Properties........................................................... 28 Item 3. Legal Proceedings.................................................... 32 Item 4. Submission of Matters to a Vote of Securities Holders................ 32 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 32 Item 6. Selected Financial Data.............................................. 33 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 35 Item 7A Quantitative and Qualitative Disclosures About Market Risk........... 45 Item 8. Financial Statements and Supplementary Data.......................... 46 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................. 123 Part III Item 10. Directors and Executive Officers of the Registrants.................. 123 Item 11. Executive Compensation............................................... 129 Item 12. Security Ownership of Certain Beneficial Owners and Management....... 129 Item 13. Certain Relationships and Related Transactions....................... 129 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 129 Experts ..................................................................... 131 Consent of Independent Public Accountants ............................................ 132 Signatures ..................................................................... 134 Exhibit Index ..................................................................... 141
This combined Form 10-K is separately filed by New Century Energies, Inc., Public Service Company of Colorado and Southwestern Public Service Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each registrant makes representations only as to itself and makes no other representations whatsoever as to information relating to the other registrants. This report should be read in its entirety. No one section of the report deals with all aspects of the subject matter. FORWARD LOOKING INFORMATION The following discussions include "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Investors and prospective investors are cautioned that the forward-looking statements contained herein with respect to the revenues, earnings, capital expenditures, resolution and impact of litigation and regulatory matters, competitive performance, or other prospects for the business of New Century Energies, Inc., Public Service Company of Colorado and/or Southwestern Public Service Company or their affiliated companies, including any and all underlying assumptions and other statements that are other than statements of historical fact, may be influenced by factors that could cause actual outcomes and results to be materially different than projected. Such factors include, but are not limited to, the effects of weather, future economic conditions, the performance of generating units, fuel prices and availability, regulatory decisions and the effects of changes in state and federal laws, the pace of deregulation of domestic retail natural gas and electricity markets, the timing and extent of change in commodity prices for all forms of energy, capital spending requirements, the evolution of competition, earnings retention and dividend payout policies, changes in accounting standards, the consummation of the proposed merger with Northern States Power Company and/or other factors. From time to time, New Century Energies, Inc., Public Service Company of Colorado and Southwestern Public Service Company may publish or otherwise make available forward-looking statements. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of each company, are also expressly qualified by these cautionary statements. i PART I Item 1. Business The Company NCE, incorporated under the laws of Delaware in 1995, is a public utility holding company registered under PUHCA. On August 1, 1997, PSCo and SPS combined to form NCE, with PSCo and SPS becoming wholly-owned subsidiaries of NCE. The common shareholders of PSCo and SPS received one and 0.95 of one share, respectively, of NCE common stock, par value $1.00 per share, and became common shareholders of NCE. The PSCo/SPS Merger was accounted for as a pooling- of-interests, and the Consolidated Financial Statements and statistical data in this Form 10-K are presented as if this merger were consummated as of the beginning of the earliest period presented. The Company has no significant assets other than the stock of its subsidiaries. The revenues of NCE and its subsidiaries are derived substantially from the generation, purchase, transmission, distribution and sale of electricity and from the purchase, transportation, distribution and sale of natural gas. The utility subsidiaries serve approximately 1.6 million electric customers and approximately 1.1 million gas customers in their service territories which include portions of the states of Colorado, Texas, New Mexico, Wyoming, Kansas and Oklahoma. As of December 31, 1999, the Company owns all the outstanding common stock of PSCo, SPS, Cheyenne, WGI, NCS, and NC Enterprises. PSCo owns certain subsidiaries as described below. NC Enterprises, an intermediate holding company, owns the following subsidiaries: Quixx, UE, e prime, New Century Cadence, Planergy, NCI and NCE Communications, Inc. Subsidiaries added to NC Enterprises during 1999 include Natural Station Equipment LLC, New Century O&M Services, Inc. and New Century WYCO, Inc. Refer to the non-utility operations and foreign investments sections below for further discussion. Disclosure about business segments of NCE, PSCo and SPS and related information are set forth in Note 15. Business Segment Information in Item 8. Financial Statements And Supplementary Data. Proposed Merger with NSP On March 24, 1999, NCE and NSP entered into the NCE/NSP Merger Agreement providing for a strategic business combination of NCE and NSP. Pursuant to the NCE/NSP Merger Agreement, NCE will be merged with and into NSP. NSP will be the surviving corporation in the merger and the holding company for the combined assets and operations. NSP will be renamed Xcel Energy Inc. ("Xcel Energy"). Concurrently with the closing of the NCE/NSP Merger, NSP will contribute all of its utility assets, other than shares that it owns in subsidiaries, to a newly formed wholly-owned subsidiary. At the same time, the new subsidiary will assume all of NSP's liabilities associated with the assets that it receives in the contribution. If difficulties arise in obtaining the approvals and consents required to transfer NSP's utility assets to a new utility subsidiary, NCE and NSP may negotiate a mutually acceptable alternative. Subject to the terms of the NCE/NSP Merger Agreement, at the time of the NCE/NSP Merger, each share of NCE common stock, par value $1.00 per share ("NCE Common Stock") (other than certain shares to be canceled), together with any associated purchase rights, will be converted into the right to receive 1.55 shares of Xcel Energy common stock, par value $2.50 per share ("Xcel Energy Common Stock"). Cash will be paid in lieu of any fractional shares of Xcel Energy Common Stock which holders of NCE Common Stock would otherwise receive. Based on outstanding common stock of NCE and NSP at December 31, 1999, the NCE/NSP Merger would result in the common shareholders of NCE owning 54% of the common equity of Xcel Energy and the common shareholders of NSP owning 46% of the common equity of Xcel Energy. The NCE/NSP Merger is expected to be a tax- free stock-for-stock exchange for shareholders of both companies and to be accounted for as a pooling-of-interests. Consummation of the NCE/NSP Merger is subject to certain closing condition and various regulatory approvals. The NCE/NSP Merger is expected to be completed by mid-2000 (see Note 2 Proposed Merger with Northern States Power Company in Item 8. Financial Statements And Supplementary Data.) 1 Utility Operations PSCo was incorporated through merger of predecessors under the laws of the State of Colorado in 1924. PSCo is an operating utility engaged principally in the generation, purchase, transmission, distribution and sale of electricity and in the purchase, transportation, distribution and sale of natural gas. PSCo serves approximately 1.2 million electric customers and approximately 1.1 million gas customers in the state of Colorado. PSCo owns the following direct subsidiaries: 1480 Welton, Inc., a real estate company which owns certain real estate interests of PSCo; PSRI which owns and manages permanent life insurance policies on certain past and present employees, the benefits from which are to provide future funding for general corporate purposes; PSCCC, a finance company that finances certain of PSCo's current assets; Green and Clear Lakes Company which owns water rights and storage facilities for water used at PSCo's Georgetown Hydroelectric station; Colorado Natural Fuels, LLC which through a subsidiary, operates a network of 45 public and private access fueling sites for compressed natural gas as well as provides installation and servicing of on-site fueling facilities for fleets and provides natural gas vehicle repair and conversions; and Fuelco, a dissolved Colorado corporation, which was primarily involved in the exploration and production of oil and natural gas. PSCo also holds a controlling interest in several other relatively small ditch and water companies whose capital requirements are not significant. Effective March 31, 1998, PSCo sold its common stock investment in NCI to NC Enterprises in exchange for a 20-year promissory note. NCI was formed to hold PSCo's 50% interest in Yorkshire Power (a joint venture initially between NCI and a subsidiary of AEP) which purchased Yorkshire Electricity in April 1997 through Yorkshire Holdings plc. For a more detailed discussion refer to "Foreign Investments" below and Note 3. Investment in Yorkshire Power in Item 8. Financial Statements and Supplementary Data. SPS was incorporated in 1921 under the laws of the State of New Mexico. SPS is an operating utility engaged primarily in the generation, transmission, distribution and sale of electricity. SPS serves approximately 385,000 electric customers in portions of the states of Texas, New Mexico, Oklahoma and Kansas. The wholesale customers served by SPS comprise approximately 37% of total Kwh sales. For discussion of deregulation legislation and the unbundling of the electric utility business activities in Texas and New Mexico, refer to "Competition" below and Note 10 Regulatory Matters in Item 8. Financial Statements and Supplementary Data. Cheyenne was incorporated in 1900 under the laws of the State of Wyoming. Cheyenne is an operating utility engaged in the purchase, distribution and sale of electricity and natural gas primarily serving approximately 36,000 electric customers and 29,000 gas customers in and around Cheyenne, Wyoming. WGI was incorporated in 1990 under the laws of the State of Colorado. WGI is a natural gas transmission company engaged in transporting gas to Cheyenne, Wyoming via a thirteen mile connecting pipeline between Chalk Bluffs, Colorado and Cheyenne, Wyoming. Electric Utility Operations The Company's utility subsidiaries expect to use the following resources to meet their net dependable system capacity requirements: 1) the Company's electric generating stations (see Electric Generation Property in Item 2. Properties), 2) purchases from other utilities and from QFs, EWGs, IPPFs and power marketers, 3) renewables and demand-side management options and 4) phased expansion of generation at Fort St. Vrain. 2 Peak Load During 2000, net firm system peak demand and the net dependable system capacity for the Company's electric utility subsidiaries is projected to be as follows:
2000 Projected 2000 Projected Reserve Operating company Net Firm System Peak Net Dependable System Capacity* Margin ----------------- -------------------- ------------------------------- ------ PSCo 5,108 Mw 5,736 Mw 12% SPS 3,919 Mw 4,602 Mw 17% Cheyenne 150 Mw 150 Mw **
_____________ * Net dependable system capacity is the maximum net capacity available from both owned generating units and purchased power contracts to meet the net firm system peak demand. ** Reserve margin for Cheyenne is held by PacifiCorp. The net firm system peak demand for each of the last three years was as follows:
Net Firm System Peak Demand (Mw) 1997 1998 1999 ---- ---- ---- PSCo*....................... 4,487 4,771 4,854 SPS......................... 3,715 3,933 3,937 Cheyenne.................... 132 140 144
________________ * Excludes station housepower, nonfirm electric furnace load and controlled interruptible loads. In 1999, approximately 104 Mw of controlled interruptible loads were not interrupted at the time of the system peak. In 1998, approximately 138 Mw of controlled interruptible loads were interrupted at the time of the 1998 system peak. In 1997, the approximately 116 Mw of controlled interruptible loads were not interrupted at the time of the system peak. The net firm system peak demand for PSCo for the years 1997-1999 occurred in the summer. The net firm system peak demand for 1999, which occurred on July 7, 1999, was 4,854 Mw. At that time, the net dependable system capacity totaled 5,516 Mw (generating capacity of 3,641 Mw, together with firm purchases of 1,875 Mw), which represented a reserve margin of approximately 14%. The net firm system peak demand for SPS for the years 1997-1999 occurred in the summer. The net firm system peak demand for 1999, which occurred on July 30, 1999, was 3,937 Mw. At that time, the net dependable system capacity totaled approximately 4,850 Mw (including firm purchases), which represented a reserve margin of approximately 23%. Purchased Power The Company's electric utility subsidiaries have contractual arrangements with regional utilities as well as QFs, EWGs and other non-regulated energy suppliers in order to meet the energy needs of their customers. Capacity, typically measured in Kilowatts or Megawatts, is the measure of the rate at which a particular generating source produces electricity. Energy, typically measured in Kilowatt-hours or Megawatt-hours, is a measure of the amount of electricity produced from a particular generating source over a period of time. Purchase power contracts typically provide for a charge for the capacity from a particular generating source, together with a charge for the associated energy actually purchased from such generating source. 3 The Company's electric utility subsidiaries have contracted with the following sources for the firm purchase of capacity and energy at the time of the anticipated summer 2000 net firm system peak demand through the expiration of the contracts:
Mw Contracted for at the Time of the Anticipated Generating 2000 Net Firm Contract Company Source System Peak Demand Expiration - ------- -------- ------------------ -------------- PSCo Contracts: Basin Electric Power Cooperative Laramie River Station 175 2016 Agreements 1 and 2 (a) (b) Basin Electric Power Cooperative Laramie River Station 131 2004 Agreement 3 (a) (c) Black Hills Corporation Neil Simpson #2 Agreements (a) (d) Wyodak Station 30 2004 BIV Generation Company (a) (e) Brush 4 Facility 50 2007 CL Six Power Sales (a) (f) CL 6 Resource Portfolio 80 2002 Colorado Power Partners (a) (g) Brush 1 & 3 Facility 75 2005 Indeck-Colorado LLC (a) (h) Combustion Turbines adjacent to Arapahoe 71 2007 Indeck-Colorado LLC (a) (i) Combustion Turbines adjacent to Valmont 37 2007 Fulton Cogeneration Associates (a) (j) Manchief Station 214 2007 PacifiCorp (k) PacifiCorp Resource Pool 176 2011 Platte River Power Authority (a) (l) Craig Units 1 and 2; 102 2004 Rawhide Unit 1 Tri-State: 425 (m) Agreements 1, 2, 3 and 4 (a) (m) Laramie River Station Craig Station Agreement 5 (a) (m) Laramie River Station Craig Station Nucla Station Various Owners (a) QFs & other 481 Various dates ------- Subtotal - PSCo 2,047 SPS Contracts: Borger Energy Associates (n) Blackhawk Station 224 2024 JM Huber (o) Engineered Carbons 12 2005 ------- Subtotal - SPS 236 Cheyenne Contract: PacifiCorp (p) PacifiCorp System 150 2000 ------- 2,433 =======
_____________________ 4 (a) These contracts are contingent upon the availability of the units listed as the generating source. Based upon the terms of these agreements, if the capacity is available from these units, then PSCo is obligated to pay for capacity whether or not it takes any energy. However, PSCo has historically satisfied the minimum energy requirements associated with these agreements and anticipates doing so in the future. Additionally, if these units are unavailable, the supplying company has no obligation to furnish capacity or energy and the capacity charge to PSCo is reduced accordingly. (b) 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) PSCo and Basin Electric Power Cooperative entered into an agreement dated December 14, 1998. Under the terms of the agreement PSCo shall purchase up to 131 Mw of capacity for the 2000 summer season and up to 68 Mw of monthly capacity typically during shoulder months. The term of the agreement is for 5 years beginning April 1999. There is no demand component under the term of the agreement. (d) PSCo and Black Hills Corporation have entered into a short-term agreement to provide PSCo up to 30Mw of capacity from April 1, 2000 through September 30, 2000 and a second agreement to provide PSCo up to 30 Mw of capacity for the period May 1, 2001 through March 31, 2004. (e) PSCo and Colorado Energy Management (CEM) entered into an agreement dated April 7, 1999, which was subsequently assigned to BIV Generation Company from (BIV). Under the terms of the agreement BIV shall sell to PSCo 50 Mw of peaking capacity. The term of the agreement is for 7 years beginning May 1, 2000. (f) The agreement between PSCo and CL Six Power Sales offers PSCo 80 Mw of capacity during the summer season and 85 Mw during the winter season. The March 27, 1997 agreement shall terminate August 10, 2002. This agreement replaced an 81 Mw QF Power Purchase Agreement which was terminated April 1998. (g) Under the terms of an agreement dated March 30, 1999, PSCo agreed to purchase 75 Mw of peaking capacity from Colorado Power Partners beginning on the agreement's execution date and terminating October 31, 2005. This agreement replaced a 50 Mw QF contract. (h) PSCo and Indeck-Colorado LLC (Indeck) entered an agreement dated December 22, 1999. Under the terms of the agreement Indeck shall sell to PSCo up to 71.4 Mw of summer peaking capacity beginning May 1, 2000 through June 1, 2007. (i) PSCo and Indeck entered an agreement dated December 22, 1999. Under the terms of the agreement Indeck Colorado shall sell to PSCo up to 36.7 Mw of summer peaking capacity beginning May 1, 2000 through June 1, 2007. (j) PSCo and Fulton Cogeneration Associates (Fulton) entered into an agreement dated May 13, 1999. Under the terms of the agreement Fulton shall sell to PSCo up to 214 Mw of summer peaking capacity. The term of the agreement is for 7 years beginning May 1, 2000. (k) The current agreement with PacifiCorp expires October 31, 2022. However, the agreement provides PSCo the opportunity to exercise an irrevocable option to terminate the agreement on December 31, 2011, provided PSCo gives notice to PacifiCorp no later than March 1, 2002. (l) The amount of capacity to be made available from Platte River Power Authority during the term of the agreement for each summer and winter season is established in the Agreement. (m) PSCo has entered into five agreements with Tri-State. Agreements 1, 2 and 5 are contracts for 100 Mw each of capacity and expire in 2001, 2017 and 2011, respectively. Agreement 3 is a contract for 25 Mw of summer season capacity and 75 Mw of winter season capacity and expires in 2016. Agreement 4 is a contract for 100 Mw of year-round capacity. PSCo has exercised its options under Agreement 4, effectively terminating the agreement in 2003. (n) SPS entered into a 25 year agreement with Borger Energy Associated (BEA) in May 1997 for the purchase of capacity and energy. In June 1999, BEA began providing SPS with up to 224 Mw of capacity. The 25 year contract term extends through May 2024. However, SPS has an option to extend the term of the agreement for an additional 10 years beyond May 2024. (o) SPS entered into an agreement with JM Huber in August 1999 for the purchase of capacity and energy for the period August 1999 through December 2005. (p) The contract, which expires on December 31, 2000, provides for PacifiCorp to sell to Cheyenne the total electric capacity and energy requirements associated with the operation of Cheyenne's service area. Cheyenne will seek through a 5 solicitation process a new contract that will provide Cheyenne's total electric capacity and energy beginning on January 1, 2001. Cheyenne's Net Firm System Peak Demand occurs during the winter season. See Note 11. Commitments and Contingencies - Purchase Requirements in Item 8. Financial Statements and Supplementary Data for information regarding the Company's financial commitments under these contracts. See Interconnections in Item 2. Properties for a discussion of the Company's interconnections with these sources. A discussion of the Company's agreements with various regional transmission service providers is provided below under the heading Purchased Transmission Services. Based on present estimates, PSCo will purchase approximately 30% of its total electric system energy input for 2000. Based on the capacity associated with the purchase power contracts described above, approximately 40% of the total net dependable system capacity for the summer 2000 net firm system peak demand for PSCo will be provided by purchased power. Substantially all of the QF capacity purchased by PSCo, including approximately 4 Mw of additional capacity scheduled to come on line in the future, is being purchased under contracts entered into prior to January 1, 1988. The purchases of additional QF and other capacity are currently based on a competitive bidding process. PSCo and SPS also makes short-term and non-firm purchases to replace generation from company owned units which is unavailable due to maintenance and unplanned outages, to provide each utility's reserve obligation, 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. In recognition of the rapidly growing economy in Colorado and to meet these new energy needs, PSCo plans to seek through a solicitation process between 1,000 and 1,200 Mw's of resources with in-service dates beginning May 1, 2002. Based on current projections, PSCo expects that purchased capacity will continue to meet a significant portion of system requirements at least through 2016. Further discussion related to recovery of purchased capacity costs can be found in Note 10. Regulations and Rates - Cost Recovery Mechanisms in Item 8. Financial Statements and Supplemental Data. PSCo is a member of the Rocky Mountain Reserve Group ("RMRG"), a reserve sharing group. The RMRG is composed of members in the Rocky Mountain area, each of which owns and/or operates electric generation and/or transmission systems and are interconnected to one or more other member systems. The RMRG was conditionally accepted by the FERC in July 1998, and was granted final acceptance in January 1999. The objective of the RMRG is to provide capacity which is categorized as either immediately accessible or accessible within ten minutes. The capacity is used by RMRG members to cover unanticipated loss of generation as well as to provide a source of emergency assistance when there is a risk of not meeting firm load. As a result of its membership in the RMRG, PSCo can supply and protect its electric system with less aggregate operating reserve capacity than otherwise would be necessary. Additionally, 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. Purchased Transmission Services The Company's electric utility subsidiaries have contractual arrangements with the following regional transmission service providers in order to provide reliable delivery of power and energy to the subsidiaries' native load customers (retail and wholesale load obligations with terms of more than one year) at the time of the subsidiary's anticipated 2000 net firm system peak demand. These purchased transmission services may be needed as the sole means of providing service to a particular customer or group of customers which are not interconnected directly with the subsidiary's transmission system; as the means for delivering remote generation resources to the subsidiary's transmission system; or as supplemental transmitting capacity between points within the subsidiary's transmission system. Point-to-point transmission services typically include a charge for the specific amount of transmission capacity being contractually reserved, although some older agreements, or agreements with smaller non-jurisdictional providers, may base charges on the amount of metered energy delivered. Network transmission 6 services include a charge for the metered demand at the delivery point at the time of the provider's monthly transmission system peak, usually calculated as a 12 month rolling average.
Mw Contracted for at the Time of the Anticipated 2000 Net Firm Contract Service Provider Type of Service System Peak Demand Expiration - ---------------- --------------- ------------------ ---------- PSCo Contracts: Mountain Parks Electric (a) Point-to-Point 30 Indefinite Platte River Power Authority (b) (d) Point-to-Point 36 2004 Platte River Power Authority (c) Network 32 2013 Tri-State (d) Point-to-Point 50 2032 Western Area Power Administration Point-to-Point 50 2002 Colo. River Storage Project (b) (d) Western Area Power Administration Point-to-Point 57 2010 Rocky Mountain Region (d) (e) Western Area Power Administration Point-to-Point 27 2002 Rocky Mountain Region (b) (d) (f) Other Agreements Point-to-Point 36 Various Dates --- Subtotal - PSCo 318 SPS Contracts: Public Service Co. of Oklahoma (g) Point-to-Point 45 2002 Southwest Power Pool (g) Point-to-Point 100 2001 --- Subtotal - SPS 145 Cheyenne Contract: Western Area Power Administration Network 143 2002 --- Rocky Mountain Region (h) 606 ===
____________ (a) Service used to serve a PSCo retail industrial customer, by agreement within Mountain Parks Electric service territory. PSCo is committed to pay a minimum facilities charge each month plus a small charge for all energy delivered over a specified level each month. There is no fixed capacity reservation. Service will continue as long as PSCo continues to serve this industrial customer. (b) Service used to supplement the PSCo transmission system to transmit power from generating resources located in western Colorado to loads in eastern Colorado. (c) Service used to serve PSCo retail loads which are interconnected only with the Platte River Power Authority transmission system. (d) PSCo is committed to pay for this reserved capacity whether or not it utilizes the transmission service. 7 (e) Service used to serve PSCo retail loads which are interconnected only with the Western Area Power Administration ("WAPA") transmission system. (f) Service purchased only during the summer months of June through September. (g) Service used to serve an SPS wholesale customer not interconnected with the SPS transmission system. SPS is committed to pay for this reserved capacity whether or not it utilizes the transmission service. (h) Service is used to import Cheyenne's power supply requirements from PacifiCorp, as contracted. Currently, WAPA is the only transmission service provider that interconnects directly with Cheyenne's transmission system. Refer to Item 2. Properties - Electric Transmission Property for a discussion of SPS's activities with the SPP and the WSPP. Electric Fuel Supply The following tables present the delivered cost per million Btu of each category of fuel consumed by the system for electric generation during the years indicated, the percentage of total fuel requirements represented by each category of fuel and the weighted average cost of all fuels during such years:
PSCo generating plants: Weighted Average Coal* Gas All Fuels** ----- --- ----------- Cost $ % Cost $ % Cost $ --------- ---------- -------- 1999.......... 0.90 92 2.52 8 1.04 1998.......... 0.93 95 2.46 5 1.00 1997.......... 0.99 98 3.03 2 1.03
* The average cost per ton of coal for years 1997 through 1999, including freight, shown above was $18.96, $17.41, and $17.07, respectively. ** Insignificant purchases of oil are included.
SPS generating plants: Weighted Average Coal* Gas All Fuels** ----- --- ----------- Cost $ % Cost $ % Cost $ --------- ---------- ------- 1999.......... 1.41 70 2.38 30 1.70 1998.......... 1.60 67 2.19 33 1.80 1997.......... 1.84 69 2.55 31 2.06
* The average cost per ton of coal for years 1997 through 1999, including freight and other components, shown above was $31.97, $28.57, and $24.56 respectively. ** Insignificant purchases of oil, steam and hot nitrogen are included. Coal PSCo's primary fuel for its steam electric generating stations is low- sulfur western coal. PSCo's coal requirements are purchased primarily under seven long-term contracts with suppliers operating in Colorado and Wyoming. The percentage of PSCo's 2000 coal requirements supplied under these long-term contracts varies from plant to plant as detailed herein. During the year ended December 31, 1999, PSCo's coal requirements for existing plants were approximately 10 million tons, a substantial portion of which was supplied pursuant to long-term supply contracts. Coal supply inventories at December 31, 1999, were approximately 55 days usage, based on the average burn rate for all of PSCo's coal-fired plants. Coal supply inventories at December 31, 1998 were 8 approximately 40 days usage. The increase in 1999 was planned in coordination with PSCo's Y2K Programs contingency plan.
December 31, 1999 Ending Inventory -------------------- Tons Days ---- ---- Arapahoe 30,237 12 Cameo 57,613 64 Cherokee 279,209 44 Comanche 474,793 48 Craig-PSCo 34,307 35 Hayden-PSCo 110,915 43 Pawnee 429,473 62 Valmont 97,141 58
PSCo operates one mine-mouth generating station, the Hayden Station and has partial ownership in a second mine-mouth generating station, the Craig Station in Colorado. PSCo is the operating agent at the Hayden station. All of Hayden station's generating requirements are supplied under a long-term agreement with the nearby Peabody affiliated Seneca mine. PSCo is a partial owner in Craig Station. Over 75% of PSCo's Craig Station coal requirements are supplied under two long-term agreements with Kennecott Energy's Colowyo Coal Company and the nearby Trapper Mining, Inc. mine. Any remaining Craig Station requirements for PSCo are supplied via spot coal purchases. PSCo has secured over 90% of Cameo Station's coal requirements for 2000 through 2002 via a contract with the nearby Lodestar Energy Inc.'s McClane Canyon mine. Any remaining requirements may be purchased from the market. PSCo has contracted for long-term coal supplies with Twentymile Coal Company's Foidel Creek Mine and Mountain Coal Company's West Elk Mines located in Colorado to supply approximately 70% of the Cherokee and Valmont Stations' projected requirements through 2000. PSCo has sold the majority of its calendar 2000 coal supply from the West Elk mine and replaced it with Foidel Creek mine spot coal supply purchases from FLT Trading and Twentymile Coal Company. In addition, PSCo has contracted with Kennecott Energy's affiliate, Colowyo Coal Company for approximately 25% of Cherokee's and Valmont's projected 2000 coal needs. PSCo has long-term coal supply agreements with RAG Coal West Inc.'s Belle Ayr and Eagle Butte mines located in the Powder River Basin in Wyoming for the Pawnee and Comanche Stations' projected requirements. Under the long-term agreements, the supplier to meet the contract quantity obligations has dedicated specific coal reserves at the contractually defined mine(s). In addition, PSCo has a coal supply agreement with Triten Coal Company's North Rochelle mine and Peabody Coal Company's North Antelope/Rochelle Complex mine to supply approximately 80% of Arapahoe Station's projected requirements for 2000. Any remaining Arapahoe Station requirements will be procured via spot purchases. Coal is transported by rail, primarily from mines located in Colorado, for PSCo's Cherokee and Valmont Stations. Additionally, coal is transported by rail, from mines located in Wyoming for PSCo's Arapahoe, Pawnee and Comanche Stations. Powder River Basin ("PRB") coal supplies for PSCo's Arapahoe, Pawnee and Comanche stations are transported by the Burlington Northern Santa Fe Railway Company under two contracts which have remaining terms of five years for Arapahoe and one year for the other two plants. The one way distance for each of these PRB coal hauls varies due to different origin mines and destination plants but approximates 413 miles on average for the Arapahoe haul, 575 miles on average for the Comanche haul and 368 miles on average for the Pawnee haul. Transportation charges for these Powder River Basin coal supplies comprise more than 55% of the total cost of the coal delivered to these stations. 9 Colorado origin coal supplies for PSCo's Cherokee and Valmont stations are transported by the Union Pacific Railroad Company to Cherokee and by a joint haul of the Union Pacific Railroad Company and Burlington Northern Santa Fe Railway Company to Valmont under two contracts which have remaining terms of three years and one year, respectively. The one way distance for each of these Colorado hauls varies due to several origin mines spread over various regions of the state, but based on current contracted coal supplies the average haul distance is expected to be approximately 250 to 300 miles. Transportation charges for these Colorado origin coal supplies make up more than 32% of the delivered cost of the coal to the Cherokee and Valmont stations. SPS purchases all of its coal requirements for Harrington and Tolk electric generating stations from TUCO, in the form of crushed, ready-to-pulverize coal delivered by coal-handling facilities owned by Wheelabrator Coal Services Co. to the Company's boiler bunkers located within SPS's coal-fueled stations where it is processed for burning. For the Harrington station, the SPS/TUCO coal supply contract expires December 31, 2016 and the TUCO/Wheelabrator coal handling agreement expires July 1, 2004. For the Tolk station, the SPS/TUCO coal supply contract expires December 31, 2016 and the TUCO/Wheelabrator coal handling agreement expires June 1, 2005. The coal is transported for TUCO by rail, primarily from mines located in Wyoming, to TUCO's stockpiles, which are adjacent to SPS's coal-burning generation stations. At December 31, 1999, TUCO's coal inventories at the Harrington and Tolk sites were 679,199 tons and 706,851 tons (approximately 55 and 58 days supply), respectively. TUCO has executed a long-term coal supply agreement with Kennecott Energy Company affiliated companies to supply approximately 55% of Harrington's projected requirements through 2001 from the Antelope mine located in the Powder River Basin. In addition, TUCO has contracted for approximately 45% of Harrington's 2000 projected requirements with Kennecott's Cordero Rojo Complex mine located in the Powder River Basin. TUCO has long term contracts with Thunder Basin Coal Company, an affiliate of Arch Coal Company, for supply of coal in sufficient quantities to meet the primary needs of the SPS's Tolk Station. Specific coal reserves in the Powder River Basin in Wyoming have been dedicated by Thunder Basin to meet the contract quantities. The Powder River Basin coal supplies for both stations are transported for TUCO by the Burlington Northern Santa Fe Railway Company to Harrington Station near Amarillo, Texas a distance of approximately 900 miles, and to Tolk Station near Muleshoe, Texas, a distance of approximately 1,032 miles. Transportation charges for these Powder River Basin coal supplies make up more than 45% of the total cost of the coal delivered to the boiler. See Note 11. Commitments and Contingencies - Purchase Requirements in Item 8. Financial Statements and Supplementary Data for information regarding financial commitments under the coal supply and coal transportation contracts. Natural Gas and Fuel Oil PSCo uses both firm and interruptible natural gas and standby oil in combustion turbines and certain boilers. Natural gas supplies for PSCo's power plants are procured under short and intermediate term contracts on a competitive basis to provide an adequate supply of fuel. SPS has a number of short and intermediate contracts with natural gas suppliers operating in gas fields with long life expectancies in or near its service area. SPS also utilizes firm and interruptible transportation to minimize fuel costs during volatile market conditions and to provide reliability of supply. SPS maintains sufficient gas supplies under short and intermediate term contracts to meet all power plant requirements; however, due to flexible contract terms, approximately 45% of SPS's gas requirements during 1999 were purchased under spot agreements. Natural Gas Utility Operations During the period 1995-1999, PSCo and Cheyenne have experienced growth in the number of residential and commercial customers ranging from 2.7% to 3.5% annually. The growth of residential and commercial sales has been strong due to favorable economic conditions in Colorado and Wyoming, although sales growth over the past two years have been negatively impacted by warmer than normal winter weather conditions. PSCo and Cheyenne offer transportation services to their large commercial and industrial customers, allowing these customers to purchase gas directly from their suppliers. The per-unit fee charged for transportation services, while significantly less than the per-unit fee charged for the sale of gas to a similar customer, provides an operating 10 margin approximately equivalent to the margin earned on gas sold. Therefore, increases in such activities will not have as great an impact on gas revenues as increases in deliveries from the sale of gas, but will have a positive impact on operating margin. During 1999, transportation services revenues were $38.0 million compared to $35.0 million in 1998 and $32.6 million in 1997. Natural Gas Supply and Storage PSCo and Cheyenne have attempted to maintain low cost, reliable natural gas supplies by optimizing a balance of long-term and short-term gas purchases, firm transportation and gas storage contracts. During 1999, PSCo and Cheyenne purchased 136.9 million dekatherms from approximately 45 suppliers. In 1999, the average delivered cost per Dth for PSCo and Cheyenne was $2.84 compared to $2.63 per Dth in 1998 and $2.96 per Dth in 1997 (see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations). Purchased gas costs are recovered from customers through gas cost adjustment mechanisms. PSCo and Cheyenne have completed substantially all of their obligations related to gas supply transportation and storage contracts which resulted from FERC Order 636. PSCo and Cheyenne have entered into new contracts with CIG and others for firm transportation and gas storage services. Adequate supplies of natural gas are currently available for delivery within the Rocky Mountain region. PSCo and Cheyenne continually evaluate the natural gas markets and procure supplies, as needed, to meet current and anticipated customer demand. Regulation and Rates Regulation General The NCE system is subject to the jurisdiction of the SEC under PUHCA. The rules and regulations under PUHCA generally limit the operations of a registered holding company to a single integrated public utility system, plus additional energy-related businesses. PUHCA rules require that transactions between affiliated companies in a registered holding company system be performed at cost, with limited exceptions. PSCo PSCo is subject to the jurisdiction of the CPUC with respect to its facilities, rates, accounts, services and issuance of securities. The CPUC consists of three full-time members appointed by the Governor and approved by the Colorado Senate. Only two members may be from the same political party. PSCo is subject to the jurisdiction of the DOE through the FERC with respect to its wholesale electric operations and accounting practices and policies. PSCo has received authorization from the FERC to act as a power marketer. Also, PSCo holds a FERC certificate that allows it to transport natural gas in interstate commerce pursuant to the provisions of the Natural Gas Act, the Natural Gas Policy Act of 1978 and FERC Order Nos. 436 and 500 without PSCo becoming subject to full FERC jurisdiction. SPS The PUCT has jurisdiction over SPS's Texas operations as an electric utility and original and appellate jurisdiction over its retail rates and services. The Texas municipalities exercise original jurisdiction over rates within their respective city limits. The NMPRC has jurisdiction over the issuance of securities and accounting and the NMPRC, as well as, the Oklahoma Corporation Commission and the Kansas Corporation Commission have jurisdiction with respect to retail rates and services in their respective states. The FERC has jurisdiction over SPS's rates for sales of electricity for resale. SPS has received authorization from the FERC to act as a power marketer. 11 Cheyenne Cheyenne is subject to the jurisdiction of the WPSC with respect to its facilities, rates, accounts, services and issuance of securities. The WPSC consists of three full-time members appointed by the Governor and approved by the Wyoming Legislature. Only two members may be from the same political party. Other WGI and TOP are subject to FERC jurisdiction. WGI and TOP each hold a FERC certificate, which allows them to transport natural gas in interstate commerce pursuant to the provisions of the Natural Gas Act. e prime has authorization from the FERC to act as a power marketer. Cost Recovery Mechanisms PSCo At December 31, 1999, PSCo had four adjustment clauses: the ICA, the GCA, the DSMCA and the QFCCA. These adjustment clauses allow certain costs to be passed through to retail customers. PSCo is required to file applications with the CPUC for approval of adjustment mechanisms in advance of the proposed effective dates. The applications must be acted upon before becoming effective. The ICA allows for an equal sharing of certain fuel and energy cost increases and decreases among customers and shareholders. PSCo, through its GCA, is allowed to recover the difference between its actual costs of purchased gas and the amount of these costs recovered under its base rates. The GCA rate is revised annually on October 1 and otherwise as needed, to coincide with changes in purchased gas costs. Purchased gas costs and revenues received to recover such gas costs are compared on a monthly basis and differences are deferred. The QFCCA provides for recovery of purchased capacity costs from certain QF projects, not otherwise reflected in base electric rates. PSCo, in a collaborative process with public interest groups, consumers and industry has developed DSM programs (programs designed to reduce peak electricity demand, shift on-peak demand to off-peak hours and provide for more efficient operation of the electric generation system), including incentive and cost recovery mechanisms. The DSMCA clause currently permits PSCo to recover DSM costs over five years while non-labor incremental expenses, and carrying costs associated with deferred DSM costs are recovered on an annual basis. PSCo also has implemented a Low-Income Energy Assistance Program. The costs of this energy conservation and weatherization program for low-income customers are recoverable through the DSMCA. SPS Fuel and purchased power costs are recoverable in Texas through a fixed fuel factor which is part of SPS's rates. If it appears that the factor will materially over-recover or under-recover these costs, the factor may be revised upon application by SPS or action by the PUCT. The rule requires refunding and surcharging under/over-recovery amounts, including interest, when they exceed 4% of the utility's annual fuel and purchased power costs, as allowed by the PUCT, if this condition is expected to continue. Under the PUCT's regulations, SPS is required to file an application for the PUCT to retrospectively review at least every three years the operations of SPS's electric generation and fuel management activities. In June 1998, SPS filed its reconciliation for the generation and fuel management activities totaling approximately $690 million for the three year period ended December 31, 1997. For this same period, SPS had approximately $21.4 million in under-recovered fuel costs associated with the Texas retail jurisdiction. SPS has entered into a settlement agreement with the General Counsel of the PUCT, which, if approved, would provide for the recovery of substantially all fuel costs. The final outcome of this fuel reconciliation proceeding is pending. Various parties in the proceedings are contesting the settlement agreement. Hearings were held in October 1999. It is anticipated that a decision will be issued during the first quarter of 2000. 12 The NMPRC regulations provide for a fuel and purchased power cost adjustment clause and a fixed annual fuel factor for SPS's New Mexico retail jurisdiction. SPS revises its fixed fuel factor annually to recover projected fuel and purchase power costs as well as any over/under fuel cost balance for the current year. New Mexico's over/under calculation, plus interest, is similar to the Texas fixed fuel factor calculation. SPS is required to petition for a change in the fixed fuel factor if the over/under recovery balance reaches $5 million. In addition, on an annual basis SPS files an application for the NMPRC to review the utility's electric generation and fuel management activities. In all other jurisdictions, SPS currently recovers substantially all increases and refunds substantially all decreases in fuel and purchased power costs pursuant to monthly adjustment clauses. Cheyenne Purchased power and gas costs are recoverable in Wyoming. Cheyenne is required to file applications with the WPSC for approval of adjustment mechanisms in advance of the proposed effective date. Total purchased power costs to be collected through the ECA (and base rates) are projected to increase by approximately $1.1 million from 1999 to 2000. See Note 10. Regulatory Matters in Item 8. Financial Statements and Supplementary Data for additional discussion on the PSCo, SPS and Cheyenne cost recovery mechanisms. Environmental Matters Certain of the Company's subsidiary facilities are regulated by federal and state environmental agencies. These agencies have jurisdiction over air emissions, water quality, wastewater discharges, solid wastes and hazardous substances. Various Company activities require registrations, permits, licenses, inspections and approvals from these agencies. The Company has received all necessary authorizations for the construction and continued operation of its generation, transmission and distribution systems. Company facilities have been designed and constructed to operate in compliance with applicable environmental standards. The Company and its subsidiaries continue to strive to achieve compliance with all environmental regulations currently applicable to its operations. However, it is not possible at this time to determine when or to what extent additional facilities or modifications of existing or planned facilities will be required as a result of changes to environmental regulations, interpretations or enforcement policies or, generally, what effect future laws or regulations may have upon the Company's operations. See Note 11. Commitments and Contingencies - - Environmental Issues in Item 8. Financial Statements and Supplementary Data for additional discussion. At December 31, 1999, the estimated 2000, 2001 and 2002 expenditures for environmental air and water emission control facilities were $19.3 million, $28.1 million and $32.8 million, respectively (see Item 7. Management's Discussion and analysis of Financial Condition and Results of Operations). Construction Program Discussion of the construction programs for each registrant is provided within their respective Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Competition The Company supports a fair and orderly transition to a competitive environment and believes that any restructuring plans should provide the Company with an opportunity to recover its costs for prudently incurred utility investments and contractual commitments that may be uneconomic in the future. Overall, the Company believes that the prices its utility subsidiaries charge for electricity and the quality and reliability of their service currently place them in a position to compete effectively in the energy market. Electric restructuring legislation was passed in Texas and New Mexico during 1999, as discussed below. Retail competition and the unbundling of regulated energy service could have a significant financial impact on the Company and its subsidiaries resulting 13 from an impairment of assets, a loss of retail customers, lower profit margins and increased costs of capital (see Note 1. Summary of Significant Accounting Policies and Note 10. Regulatory Matters in Item 8. Financial Statements and Supplementary Data). At this time, the Company and its utility subsidiaries cannot predict when they will be subject to changes in legislation or regulation, nor can they predict the impacts of such changes on their financial position, results of operations or cash flows (see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations). Retail Electric Business Today, the retail electric business faces increasing competition as industrial and large commercial customers have some ability to own or operate facilities to generate their own electric energy requirements. In addition, customers may have the option of substituting fuels, such as natural gas for heating, cooling and manufacturing purposes rather than electric energy, or the option of relocating their facilities to a lower cost environment. While each of the Company's utility subsidiaries face these challenges, these subsidiaries believe their rates are competitive with currently available alternatives. The Company's utility subsidiaries are taking actions to lower operating costs and are working with their customers to analyze the feasibility of various options, including energy efficiency, load management and cogeneration in order to better position the Company's utility subsidiaries to more effectively operate in a competitive environment. State Regulatory and Legislative Environments - Electric Business Below is a discussion on the regulatory and legislative initiatives currently being addressed in each of the Company's retail jurisdictions related to the electric business. Colorado - Colorado law permits the CPUC to authorize rates negotiated with -------- individual electric and gas customers who have threatened to discontinue using the services of PSCo, so long as the CPUC finds that such authorization: 1) in the case of electric rates, will not adversely affect PSCo's remaining customers and 2) in the case of gas rates, will not affect PSCo's remaining customers as adversely as would the alternative. During 1998, an electric restructuring bill was passed which established a 29 member advisory panel to conduct an evaluation of the potential benefits and possible regulatory structure of the retail electric industry. NCE had one representative appointed to this panel. In October 1999, the panel finalized its findings which concluded that Colorado should not open its electric markets to outside competition, by a vote of 17 against restructuring, 11 in favor of restructuring and 1 outstanding. The panel issued its findings to the General Assembly and the Governor in November 1999. Texas - On June 18, 1999, an electric utility restructuring act ("SB-7") ----- was passed in Texas, which allows for retail competition, for most areas of the state, beginning January 1, 2002. The legislation requires, among other things, a rate freeze for all customers, effective September 1, 1999 until January 1, 2002 together with an annual earnings test; a 6% rate reduction for those residential and small commercial customers who choose not to switch suppliers at the start of retail competition; the unbundling of business activities, costs and rates relating to generation, transmission and distribution and retail services; reductions in NOx and SO2 emissions and the recovery of stranded costs. The PUCT can delay the date for retail competition if a power region is unable to offer fair competition and reliable service during pilot projects which begin for all utilities on June 1, 2001 for 5% of the utility's combined load of all customer classes. SB-7 specifically addresses competition in the Texas Panhandle, where SPS operates, recognizing that certain transmission constraints exist within the region that require full retail customer choice to develop on a more structured schedule than the rest of the state. SPS must file a transition to competition plan with the PUCT by December 1, 2000. SPS, with no estimated net stranded costs, must direct any excess earnings indicated in the annual earnings tests during the period January 1, 1999 through December 31, 2001 to improvements in transmission and distribution facilities, to capital expenditures to improve air quality or to accelerate the amortization of regulatory assets (subject to PUCT approval). 14 Additionally, the Texas legislation requires that no generation company can own and control more than 20% of the installed capacity located in or capable of delivering electricity to a power region. Utilities owning more than 400 Mw must auction entitlements to at least 15% of the utility's installed generation capacity used for providing electric services to Texas retail customers. The capacity entitlement auctions are to continue for 5 years or until 40% of the utility's residential and small commercial customers served prior to the start date of competition are served by non-affiliated companies. The legislation includes several possible remedies to market power abuses. These provisions are not immediately applicable to SPS due to the existing transmission constraints and market power issues in the Panhandle region. As required by SB-7, SPS filed a business separation plan, on January 10, 2000, for the unbundling of business activities relating to 1) power generation, 2) transmission and distribution and 3) retail electric provider services. In its filing, SPS proposed a functional separation into these business units effective January 1, 2002 and a complete legal separation by January 1, 2007 in an effort to minimize the costs of restructuring. All competitive energy services will be separate by September 1, 2000 and on or before the start of retail competition, NCE will establish a customer care company, which will provide customer services for all of its operating activities. Finally, SPS has signed a letter of intent to transfer functional control of its electric transmission system to the Midwest Independent System Operator, Inc. ("MISO"), a regional transmission organization that will operate the transmission system of multiple owners in the central Unites States. Also, included in this filing was SPS's proposed code of conduct and compliance manual. In general, SPS is committing to separate into distinct businesses and to operate in an arm's length manner so that the transactions between affiliated entities and regulated entities do not confer any unduly competitive advantages on NCE's businesses as compared to non-affiliates. Hearings on the separation plan are scheduled to take place during the first quarter of 2000. SPS is required to file a rate case on April 1, 2000 to set the rates for the transmission and distribution services, which are to be unbundled and implemented on January 1, 2002. The Company intends to request recovery of all the jurisdictional costs associated with this restructuring and is continuing to evaluate the effect of these filings on SPS. In connection with the NCE/NSP Merger approval proceedings, the Company filed supplemental testimony with the PUCT in October 1999 outlining its plan to address the various provisions of SB-7. In general, the plan presented by the Company provides for the transfer of ownership or control of 595 Mw of generating capacity (either through capacity entitlement auction or divesting) to other competitors and the addition of transmission lines to import an additional 400 Mw from other geographic regions. The major components of this plan, that were not discussed above in the business separation plan filing, include the following: . auction entitlements (409 Mw or 15 percent of installed generation capacity) to capacity owned and controlled by SPS, that is dedicated to serving Texas retail customers, by January 1, 2002. SPS would continue to own and operate the capacity, but competitors would have the right to dispatch the power. . divest 186 Mw of SPS-area generating capacity by January 1, 2002 in order to further reduce market dominance, . implement a pilot program for retail access for at least 5 percent of its Texas retail load in June 2001 and to expand the pilot program to 20% of customer load in 2002. The SPS plan is designed to address the market power issues related to the deregulation legislation and would promote further competition before the end of 2006 by allowing only competitors to build new plants in the region between now and then, by adding even more transmission lines, and possibly by further divesting some generation. Hearings on the NCE/NSP Merger are scheduled to begin in March 2000 and the final order is expected in the second quarter of 2000. New Mexico - On April 8, 1999, New Mexico enacted the Electric Utility ---------- Restructuring Act of 1999, which allows customer choice for residential, small commercial and educational customers beginning January 1, 2001. All remaining customers will be allowed customer choice on January 1, 2002. Customers of a municipal utility and customers of a distribution cooperative utility will be afforded choice only if the respective utility elects to participate. The legislation provides for recovery of no less than 50% of stranded costs quantified by the 15 NMPRC. Transition costs must be approved by the NMPRC prior to being recovered through a non-by-passable wires charge, which must be included in a transition plan filing. All public electric utilities operating in New Mexico must initially file a transition plan with the NMPRC by June 1, 2000. Before January 1, 2001, SPS must separate its utility operations into at least two segments: a) energy generation services and b) transmission and distribution (including retail operations) services either by the creation of separate affiliates that may be owned by a common holding company or by the sale of assets to one or more third parties. A regulated company will be prohibited from providing unregulated services. In January 2000, SPS petitioned and received approval from the NMPRC to postpone filing its transition plan until June 1, 2000. Additionally, SPS requested that the NMPRC postpone the beginning of customer choice for certain retail customers until June 1, 2001 and postpone the completion of SPS's corporate separation until January 1, 2002. The NMPRC has directed that New Mexico utilities and interested parties to comment on the SPS's postponement of customer choice for certain customers and corporate separation within 60 days. Wyoming - There were no electric industry restructuring legislation ------- proposals introduced in the Legislature during 1999. A joint committee of the Wyoming legislature held a series of hearings on restructuring in June of 1997. On September 15, 1997, a report entitled the "Study of the Potential Economic Impacts of Electric Restructuring on the State of Wyoming," prepared for the WPSC by an external consultant was made public. The report analyzed four different restructuring scenarios and concluded overall that restructuring would have only a small impact on rates. No action with respect to electric restructuring is anticipated in 2000. Kansas - In December 1997, the Task Force On Retail Wheeling presented its ------ ----------------------------- final report to the 1998 Kansas Legislature. The report culminated a study that was authorized by House Bill 2600 and was signed by the Governor on April 26, 1996. In general, this legislation imposed a three-year freeze on retail electric wheeling. In August 1999, the Kansas Corporation Commission opened a docket to investigate the adequacy of generation capacity of Kansas utilities. The Commission order included such things as the staff continually monitoring the generation capacity situation in Kansas, the filing of information on a regular basis of the utility to meets its responsibility to provide electric service to retail customers, and the opening of a new docket to consider conservation appeals. Oklahoma - The Electric Restructuring Act of 1997 was signed by the -------- Governor of Oklahoma on April 25, 1997. This legislation directs a series of studies which will define the orderly transition to consumer choice of electric energy supplier by July 1, 2002. During 1998 and 1999, the Oklahoma Corporation Commission began such studies and held research meetings focusing on several restructuring issues. Results and recommendations derived from the studies and meetings will direct further legislative action that may be necessary in order for the Electric Restructuring Act of 1997 to be fully implemented. An independent system operator ("ISO") study report, prepared by the Oklahoma Corporation Commission, was issued in January 1998. The Oklahoma Corporation Commission Taxation Issues study and a Technical Issues study on the effects of an ISO were concluded on December 31, 1998. The Electric Restructuring Act was modified during 1998 to clarify terms used in the original bill, as well as advancing timelines for studies of the Joint Electric Utility Task Force in order to meet the stated implementation date. In December 1998, this Task Force began the formation of groups, which will examine numerous restructuring issues. A report was issued in November 1999, and the year 2000 legislative session will consider the Task Force's findings as it considers issues related to implementing customer choice in 2002. Wholesale Electric The wholesale electric business faces increasing competition in the supply of bulk power due to provisions of the EPAct and Federal and state initiatives with respect to providing open access to utility transmission systems. Under current FERC rules, utilities are required to provide wholesale open-access transmission services consistent with what is provided for in their own operations and to unbundle wholesale merchant and transmission operations. The Company's utility subsidiaries are operating under a joint tariff in compliance with these rules. To date, these provisions have not had a material impact on the operations of the Company's utility subsidiaries. 16 On December 20, 1999, the FERC issued Order 2000 ("FERC Order 2000"), which amends its regulation under the Federal Power Act to advance the formation of Regional Transmission Organizations ("RTOs"). This regulation requires that each public utility that owns, operates, or controls facilities for the transmission of electric energy in interstate commerce take certain steps and make certain filings with respect to forming and participating in an RTO. FERC Order 2000 codifies minimum characteristics and functions that a transmission entity must satisfy in order to be considered a RTO. Also, FERC Order 2000 requires that each electric utility file by October 15, 2000 and that RTOs be operational by December 15, 2001. The Company is evaluating the impact of this order on NCE's wholesale electric business. In 1999, the Company's consolidated firm and non-firm wholesale revenues totaled approximately $451 million or 18% of total electric revenues. Natural Gas Changes in regulatory policies and market forces have shifted the industry from traditional bundled gas sales service to an unbundled transportation and market based commodity service. Following the unbundling of interstate pipeline delivery services by the FERC in 1993, PSCo has participated fully in state regulatory and legislative efforts to develop a framework for extending unbundling down to the residential and small commercial level. The goal of unbundling is to offer customers choice of gas suppliers. PSCo supported a gas unbundling bill, passed by the Colorado legislature in 1999, that provides the CPUC the authority and responsibility to approve voluntary unbundling plans submitted by Colorado gas utilities in the future. PSCo has not filed a plan to open its natural gas supply business to competition and continues to evaluate its business opportunities for doing so. The natural gas delivery or transportation business has remained competitive as industrial and large commercial customers have the ability to "by-pass" the local gas utility through the construction of interconnections directly with, and the purchase of gas directly from, interstate pipelines, thereby avoiding the delivery charges added by the local gas utility. PSCo and Cheyenne have and will continue to aggressively pursue the retention of all of these customers on their systems. PSCo and Cheyenne extend and operate their distribution systems primarily by virtue of non-exclusive franchises granted by the various cities and towns. Their respective state commissions approve such franchise agreements. Because the franchises are non-exclusive, PSCo and Cheyenne can be faced with the threat of intrusion into their gas territory by third parties. PSCo holds territorial certificates for a portion of their gas service territory giving them the exclusive right to extend their distribution system and provide natural gas sales and transportation service. However, for the majority of their gas service territory, no such territorial certificates exist. PSCo has filed with the CPUC an application to certificate its gas service territory along the front range of Colorado. PSCo is pursuing settlement negotiations and expects a resolution during 2000. Franchises PSCo held nonexclusive franchises to provide electric or gas service or both services in approximately 119 incorporated cities and towns at December 31, 1999. These franchises consist of 68 combined gas and electric service franchises, 27 electric service franchises and 24 gas service franchises. In 2000, PSCo expects to re-negotiate four of the franchise agreements, which will be expiring. PSCo's gas, electric and steam franchise with the City of Denver, Colorado will expire in 2006. PSCo supplies electric or gas service or both services in about 114 unincorporated communities. SPS held franchises to provide electric service in approximately 104 cities and towns at December 31, 1999. In 2000, SPS expects to re-negotiate twelve of the franchise agreements, which will be expiring. 17 Foreign Investments Yorkshire Power Yorkshire Power is a joint venture equally owned by NCI and a subsidiary of AEP which acquired indirectly all of the outstanding ordinary shares of Yorkshire Electricity, a U.K. regional electricity company effective April 1, 1997 for approximately $362 million. Effective March 31, 1998, PSCo sold NCI to NC Enterprises, a NCE subsidiary. Yorkshire Electricity's main businesses are the distribution and supply of electricity and the supply of gas. Its service territory is one of the region's largest with approximately 2 million customers. In August 1999, the Office of Gas and Electricity Markets ("Ofgem"), the body appointed by the U.K. government to regulate the gas and electricity industries in the U.K., published draft price proposals for the U.K.'s regional electricity distribution businesses that would be effective for the five-year period beginning April 1, 2000 and provide for price reductions of 15% to 20% in Yorkshire Power's distribution revenues. In October 1999, Ofgem issued an update to its August proposals which provided for a 15% reduction in Yorkshire Power's distribution revenues and a further 8% transfer of costs to Yorkshire Power's electricity supply business. Additionally, in October 1999, Ofgem issued draft electricity supply price proposals. The proposals provided for a supply price cap for domestic U.K. consumers, which would apply for two years from April 2000 until March 2002 and would not apply to small industrial and commercial customers, where the market was sufficiently competitive. These supply proposals for Yorkshire Power provided for a real price reduction of approximately 10.7% on the standard domestic tariff and a nominal price freeze from April 2001 ending in March 2002. In December 1999, Ofgem published its final price proposals on both the distribution and the supply businesses. The final proposals for Yorkshire Power's distribution business were substantially the same as the prior Ofgem proposals. The final proposal for Yorkshire Power's supply business differ principally from the prior proposal in that Ofgem's final proposal provided for a real price reduction of 3.6%, as compared to 10.7% in the October 1999 proposal. On December 20, 1999, Yorkshire Power indicated its intention to accept the final proposals. Yorkshire Power believes that the supply prices established in the competitive market may require Yorkshire to charge supply prices for customers it wishes to retain who are subject to supply price controls which are lower than the maximum prices established by Ofgem. If Yorkshire Power charges such lower prices, the result will be a further reduction in supply revenues beyond that mandated by Ofgem. In response to Ofgem's final proposals and the increasing competition in the supply business, Yorkshire Power's management announced on January 18, 2000 the adoption of an aggressive program of reducing controllable costs. Significant features of this program include reductions in capital expenditures, staff reductions, outsourcing of certain functions and consolidations of facilities. Yorkshire Power intends to aggressively pursue this cost reduction program and is evaluating additional cost reduction measures to further mitigate the impact of the future final distribution and supply price reductions. Should Yorkshire Power be unable to reduce costs or grow revenues to the extent required to offset the effect of the price proposals, the Company's equity earnings from its investment in Yorkshire Power will be reduced, which could be significant, in comparison to its current level of earnings. Additionally, earnings continue to be impacted by the changes in the pricing and purchase of bulk electric power. Future earnings during the first and fourth quarter of 2000 are expected to exceed the second and third quarter earnings. In the second quarter of 1998, Yorkshire Power recognized an impairment of its investment in Ionica, a wireless telecommunications company. The impairment, reflecting a write down to fair market value, was offset, in part, by an unrelated tax adjustment. These two items reduced NCI's equity earnings by approximately $16 million. The investment in Ionica was subsequently sold with no further adverse financial impact. Also in the fourth quarter of 1998, Yorkshire Power recognized a gain on the sale of its generation assets and this gain increased NCI's equity in earnings by approximately $21 million. 18 In July 1997, the U.K. government enacted a windfall tax on certain privatized business entities, payable in two installments with the first in December 1997 and the second in December 1998. The windfall tax was a retroactive adjustment to the privatization value based on post-privatization profits during the 1992 to 1995 period. During the third quarter of 1997, Yorkshire Power recorded an extraordinary charge of approximately $221 million (135 million pounds sterling) for this windfall tax. The Company's share of this tax was approximately $110.6 million. See Note 3. Investment in Yorkshire Power in Item 8. Financial Statements and Supplementary Data for summary financial information on Yorkshire Power. Other foreign investments The Company owns other foreign investments through various non-regulated subsidiaries; however, at this time, these investments are not significant to the Company's financial position, results of operations or cash flows. Service Company NCS, a wholly-owned subsidiary of NCE, was incorporated in 1997 under the laws of the State of Delaware. NCS is the service company for the NCE system and provides a variety of administrative, management, engineering, construction, environmental and support services. NCS provides its services to the NCE system at cost, pursuant to regulations promulgated under PUCHA by the SEC. Non-Utility Operations NC Enterprises, a wholly-owned subsidiary of NCE, was incorporated in 1997 under the laws of the State of Delaware. NC Enterprises was incorporated to serve as an intermediate holding company for non-utility subsidiaries and foreign operations of NCE. The table below summarizes NC Enterprise's net investment in each of its subsidiaries and total assets as of December 31, 1999 and the operating revenues of each subsidiary, including equity earnings of unconsolidated subsidiaries for the year ended December 31, 1999, followed by a discussion of the operations of the subsidiaries.
Operating Revenues and Equity Total Net Earnings Assets Investment -------- ------ ---------- (in millions) New Century International, Inc. $ 45.0 $ 388.5 $ 397.1 Quixx Corporation 4.5 92.1 74.2 Utility Engineering Corporation 154.5 81.8 48.9 e prime, inc. 92.8 93.8 23.1 Natural Fuels Corporation 6.3 - - The Planergy Group, Inc. 17.9 55.4 10.4 New Century Cadence, Inc. (1.8) 0.8 0.6 NCE Communications, Inc. 5.8 12.1 10.8 Natural Station Equipment LLC - 3.9 0.1 New Century WYCO, Inc. 0.2 16.6 16.5
New Century International, Inc.: NCI was formed in 1997 to hold a 50% interest in Yorkshire Power. For a more detailed discussion refer to "Foreign Investments" above. Quixx: Quixx was incorporated in 1985 under the laws of the State of ----- Texas. Quixx's primary business is investing in and developing cogeneration and energy-related projects. Quixx also holds water rights and certain 19 other non-utility assets. Quixx also finances the sale of heat pumps. Quixx currently has the following wholly-owned subsidiaries, most of which hold interests in various energy-related limited partnerships: Quixx Mustang Station, Inc., a wholly-owned subsidiary of Quixx, was created to hold Quixx's 0.5%, general partnership interest in Denver City Energy Associates, L.P., a partnership which owns a 50% interest in Mustang Station, a 488 Mw combined cycle generating facility which is scheduled for completion in early 2000. Quixx also holds a 49.5% limited partnership interest in Denver City Energy Associates, L.P., through Quixx Resources, Inc. a wholly-owned subsidiary of Quixx. Quixxlin Corp, a wholly-owned subsidiary of Quixx, holds a 0.5% general partnership interest in Quixx Linden, L.P., which owns a 23 Mw natural gas fired cogeneration facility in Linden, New Jersey. This facility commenced cogeneration operations in October 1999. It is estimated that final completion of this facility will be in early 2000. Quixx also directly holds a 49.5% limited partnership interest in Quixx Linden, L.P. Quixx Borger Cogen, Inc., a wholly-owned subsidiary of Quixx, holds a 0.45% general partnership interest in Borger Energy Associates, L.P., which owns Blackhawk Station, a cogeneration plant located at the Phillips Petroleum Refinery Complex near Borger, Texas. Quixx Resources, Inc., a wholly-owned subsidiary of Quixx, holds a 44.55% limited partnership interest in this same partnership. This facility commenced Phase I electric operations in October 1998 and commenced Phase II cogeneration operations in June 1999. Quixx WPP94, Inc., a wholly-owned subsidiary of Quixx, holds a 0.33% general partnership interest in Windpower Partners, 1994 L.P. Windpower Partners, 1994 L.P. owns a 35 Mw wind generation facility in Culberson County, Texas. Quixx also directly holds a 24.67% limited partnership interest in Windpower Partners, 1994 L.P. Quixx Louisville, L.L.C., a wholly-owned subsidiary of Quixx, owns a facility consisting of two gas-fired boilers providing steam to a DuPont plant in Louisville, Kentucky. Quixx Power Services, Inc., a wholly-owned subsidiary of Quixx, operates and maintains certain cogeneration facilities. Quixx Resources, Inc., a wholly-owned subsidiary of Quixx, holds a 44.55% limited partnership interest in Borger Energy Associates, L.P., a 49.5% limited partnership interest in Denver City Energy Associates, L.P., and a 99% limited partnership interest in Quixx WRR, L.P. Quixx WRR, L.P., a wholly-owned subsidiary of Quixx, holds Quixx's water rights located in Roberts, Gray, Hutchinson and Carson Counties, Texas. Quixx holds a 1% general partnership interest and, through Quixx Resources, Inc., a 99% limited partnership interest in Quixx WRR, L.P. Quixx Carolina, Inc., a wholly-owned subsidiary of Quixx, holds a 1% general partnership interest in Carolina Energy Limited Partnership, a waste-to- energy cogeneration facility. Quixx also holds a 32.33% limited partnership interest in this same partnership. In June 1997, Quixx wrote off its investment of approximately $13.64 million in the Carolina Energy Limited Partnership (see Note 3. Acquisitions and Divestitures in Item 8. Financial Statements and Supplementary Data). Quixx Mountain Holdings, LLC, a wholly-owned subsidiary of Quixx, holds a 50% interest in Front Range Energy Associates, LLC, which was incorporated to develop a gas-fired combustion turbine generation facility near Ft. Lupton, Colorado. Utility Engineering: UE was incorporated in 1985 under the laws of the ------------------- State of Texas. UE is engaged in engineering, design, construction management and other miscellaneous services. UE currently has two wholly-owned subsidiaries - Universal Utility Services Company and Precision Resource Company. Universal Utility Services Company provides cooling tower maintenance and repair, certain other industrial plant improvement 20 services, and engineered maintenance of high voltage plant electric equipment. Precision Resource Company provides contract professional and technical resources for customers in the energy industrial sectors. e prime: e prime was incorporated in 1995 under the laws of the State of ------- Colorado. e prime provides energy related products and services which include, but are not limited to, energy marketing and trading and energy consulting. In March of 1996, e prime received authorization from the FERC to act as a power marketer. In September 1996, e prime acquired TOG, a gas marketing company, with headquarters in Houston and an office in Boston. e prime and TOG merged their operations. In July 1999, e prime sold TOG, including all retail gas marketing contracts serving customers in the northeast region of the United States. Additionally, e prime currently owns the following subsidiaries (subsidiaries formed, but inactive have been excluded): TOP is a small pipeline company which connects two major interstate pipelines. YGSC owns a 47.5% general partnership interest in Young Storage which owns and operates an underground gas storage facility in northeastern Colorado. e prime also holds a 50% ownership interest in Johnstown Cogeneration, a limited liability company. Natural Fuels Corporation: Natural Fuels Corporation was incorporated in -------------------------- 1990 under the laws of the State of Colorado. Natural Fuel's primary activities included the sale of compressed natural gas as a transportation fuel to retail markets, converted vehicles for natural gas usage, constructed fueling facilities, and sold miscellaneous fueling facility equipment. Natural Fuels was restructured effective December 31, 1999, as further discussed. Natural Fuels formed two newly organized limited liability companies: Natural Fuels Company LLC ("NATCO") and Natural Station Equipment LLC ("STATCO"). Natural Fuel's interest in STATCO was transferred to NC Enterprises. NC Enterprises then transferred 100% of the common stock of Natural Fuels to NCE by means of a declaration of a dividend of the shares of Natural Fuels. NCE then made a capital contribution of such shares to PSCo. Finally, PSCo merged Natural Fuels into a newly formed limited liability company, Colorado Natural Fuels, LLC, with NATCO as a subsidiary. The Planergy Group, Inc.: The Planergy Group, Inc. (Planergy), which was ------------------------ acquired April 1, 1998 (formerly known as Falcon Seaboard Energy Services, Inc.), was incorporated in 1990 under the laws of the State of Texas. Planergy provides energy management, consulting and demand side management services to commercial, industrial, utility and municipal customers. Planergy currently has two principal wholly-owned subsidiaries, Planergy, Inc., and Planergy Services, Inc. Planergy Inc. provides energy-efficiency management, conservation programs and mass-market services. Planergy Services, Inc. specializes in industrial energy audits, and conservation reliability projects. It focuses on energy services for industrial and large commercial customers. New Century Cadence Inc.: New Century Cadence, Inc. was incorporated in ------------------------ 1997 under the laws of the State of Colorado. New Century Cadence was created to hold a 1/3 interest in Cadence Network, LLC, an energy-related company which provides energy management and consulting services, as well as brokering and marketing of energy commodities. Cadence Network LLC is equally owned by New Century Cadence, Cinergy-Cadence, Inc. (a subsidiary of Cinergy, Inc.) and Progress Holdings, Inc. (a subsidiary of Florida Progress Holdings, Inc.). New Century Centrus, Inc.: New Century Centrus, Inc. was incorporated in -------------------- 1998 under the laws of the State of Colorado. New Century Centrus was created in 1998 to hold a 1/3 interest in Centrus, LLP, which provided certain telecommunication services. Centrus LLP was dissolved in 1999 following a decision to exit this business. NCE Communications, Inc.: NCE Communications, Inc. was formed in 1998 ------------------------- under the laws of the State of Colorado. NCE Communications holds a 50% ownership interest in Northern Colorado Telecommunications LLC which plans to provide long-distance services, private-line services and Internet services to businesses in the Denver, Colorado Metro area. 21 Natural Station Equipment LLC: STATCO was formed in 1999 under the laws of ----------------------------- the State of Delaware in connection with a corporate restructuring of Natural Fuels discussed above. STATCO assembles, packages and sells equipment (large compressors, heavy steel storage vessels, and fuel dispensers) to the national and international natural gas industry for their construction and operation of natural gas fueling stations. New Century WYCO, Inc.: New Century WYCO owns a 50% interest in WYCO ---------------------- Development LLC ("WYCO"). The purpose of WYCO is to acquire, own and lease natural gas transportation facilities. New Century O&M Services, Inc.: New Century O&M Services, Inc. was ------------------------------ incorporated in 1999 to provide unregulated O&M services for gas and electric distribution systems owned by others in the future. Employees The number of employees in the NCE system at December 31, 1999, is presented in the table below. Of the employees listed below, approximately 2,760, or 45%, are covered under collective bargaining agreements. For further information, see Note 11. Commitments and Contingencies - Union Contracts in Item 8. Financial Statements and Supplementary Data. NCE System Employees -------------------- PSCo 2,928 SPS 1,273 NCS 1,415 Cheyenne 94 NC Enterprise's subsidiaries 481 ----- Total 6,191 =====
22 Consolidated Electric Operating Statistics (NCE)
Year Ended December 31, ------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Energy Generated, Received & Sold (Thousands of Kwh): Net Generated: Steam, Fossil......................................... 33,357,817 33,960,532 33,278,721 Combustion Turbine.................................... 8,673,609 8,211,645 6,595,055 Pumped Storage........................................ 254,457 222,175 193,834 Hydro................................................. 191,873 206,287 224,898 ----------- ----------- ----------- Total Net Generation................................ 42,477,756 42,600,639 40,292,508 Energy Used for Pumping............................... 403,941 343,393 300,649 ----------- ----------- ----------- Total Net System Input.............................. 42,073,815 42,257,246 39,991,859 Purchased Power and Net Interchange.................. 13,110,911 15,480,881 12,147,954 ----------- ----------- ----------- Total System Input.................................. 55,184,726 57,738,127 52,139,813 Used by Company....................................... 66,359 75,303 77,734 Other (1)............................................. 2,967,754 3,071,196 3,049,541 ----------- ----------- ----------- Total Energy Available for Sale..................... 52,150,613 54,591,628 49,012,538 =========== =========== =========== Electric Sales (Thousands of Kwh) (2): Residential........................................... 10,234,871 10,136,581 9,730,390 Commercial............................................ 14,995,111 14,135,012 13,223,936 Industrial............................................ 12,493,846 13,530,830 13,789,814 Public Authorities.................................... 757,795 840,611 773,656 Wholesale............................................. 13,668,990 15,948,594 11,494,742 ----------- ----------- ----------- Total Energy Sold................................... 52,150,613 54,591,628 49,012,538 =========== =========== =========== Power Marketing and Trading (Thousands of Kwh)......... 14,908,008 2,916,676 1,210,048 =========== =========== =========== Number of Customers at End of Period (2): Residential........................................... 1,333,110 1,313,075 1,285,307 Commercial............................................ 207,087 190,812 185,911 Industrial............................................ 500 12,956 12,888 Public Authorities.................................... 89,698 83,775 81,994 Wholesale............................................. 107 317 279 ----------- ----------- ----------- Total Customers.................................... 1,630,502 1,600,935 1,566,379 =========== =========== =========== Electric Revenues (Thousands of Dollars) (2): Residential........................................... $ 712,995 $ 720,841 $ 692,886 Commercial............................................ 815,431 774,521 735,636 Industrial............................................ 430,459 524,645 532,276 Public Authorities.................................... 57,925 63,249 58,235 Wholesale............................................. 450,990 532,431 412,088 Other Electric Revenues............................... 59,541 8,370 20,300 ----------- ----------- ----------- Total Electric Revenues............................. $ 2,527,341 $ 2,624,057 $ 2,451,421 =========== =========== =========== Average Annual Kwh Sales per Residential Customer...... 7,747 7,818 7,613 Average Annual Revenue per Residential Customer........ $539.66 $555.94 $542.12 Average Residential Revenue per Kwh.................... 6.97c 7.11c 7.12c Average Commercial Revenue per Kwh..................... 5.44c 5.48c 5.56c Average Industrial Revenue per Kwh (2)................. 3.45c 3.88c 3.86c Average Wholesale Revenue per Kwh...................... 3.30c 3.34c 3.59c _________________________
(1) Primarily includes net distribution and transmission line losses. (2) Comparison of energy sales, customers and electric revenues by customer class for the periods presented are impacted by: 1) a change in criteria for counting customers resulting from SPS's implementation of a new customer information system during 1999 and a reclassification for SPS to include only large commercial and industrial customers (less 1,000 Kw demand) within the industrial category, to be consistent with PSCo and recommended utility industry guidelines. 23 Consolidated Electric Operating Statistics (PSCo)
Year Ended December 31, ----------------------------------------- 1999 1998 1997(1) ------------ ----------- -------------- Energy Generated, Received & Sold (Thousands of Kwh): Net Generated: Steam, Fossil......................................... 17,989,148 17,939,109 17,586,343 Combustion Turbine.................................... 1,675,667 636,455 154,019 Pumped Storage........................................ 254,457 222,175 193,834 Hydro................................................. 191,873 206,287 224,898 ----------- ----------- ----------- Total Net Generation................................ 20,111,145 19,004,026 18,159,094 Energy Used for Pumping............................... 403,941 343,393 300,649 ----------- ----------- ----------- Total Net System Input.............................. 19,707,204 18,660,633 17,858,445 Purchased Power and Net Interchange.................. 10,152,399 13,544,768 10,810,446 ----------- ----------- ----------- Total System Input.................................. 29,859,603 32,205,401 28,668,891 Used by Company....................................... 40,296 45,857 45,492 Other (2)............................................. 1,281,642 1,707,914 1,659,347 ----------- ----------- ----------- Total Energy Available for Sale..................... 28,537,665 30,451,630 26,964,052 =========== =========== =========== Electric Sales (Thousands of Kwh): Residential........................................... 7,052,920 6,760,764 6,662,679 Commercial............................................ 11,436,253 10,778,116 10,109,615 Industrial............................................ 4,611,645 4,831,965 5,511,722 Public Authorities.................................... 232,491 206,985 189,141 Wholesale (3)......................................... 5,204,356 7,873,800 4,490,895 ----------- ----------- ----------- Total Energy Sold................................... 28,537,665 30,451,630 26,964,052 =========== =========== =========== Power Marketing and Trading (Thousands of Kwh) (1&3)... 12,792,874 - 660,089 =========== =========== =========== Number of Customers at End of Period: Residential........................................... 994,318 970,217 947,017 Commercial............................................ 130,663 127,386 123,839 Industrial............................................ 309 325 330 Public Authorities.................................... 84,675 82,764 81,023 Wholesale............................................. 54 50 33 ----------- ----------- ----------- Total Customers.................................... 1,210,019 1,180,742 1,152,242 =========== =========== =========== Electric Revenues (Thousands of Dollars): Residential........................................... $ 529,463 $ 514,235 $ 503,727 Commercial............................................ 618,637 592,045 563,439 Industrial............................................ 196,231 207,885 228,925 Public Authorities.................................... 31,022 29,546 26,778 Wholesale (3)......................................... 188,608 250,555 145,561 Other Electric Revenues (4)........................... (2,909) 41,307 6,631 ----------- ----------- ----------- Total Electric Revenues............................. $ 1,561,052 $ 1,635,573 $ 1,475,061 =========== =========== =========== Average Annual Kwh Sales per Residential Customer...... 7,185 7,071 6,875 Average Annual Revenue per Residential Customer........ $539.39 $537.80 $519.08 Average Residential Revenue per Kwh.................... 7.51c 7.61c 7.56c Average Commercial Revenue per Kwh..................... 5.41c 5.49c 5.57c Average Industrial Revenue per Kwh..................... 4.26c 4.30c 4.15c Average Wholesale - Regulated Revenue per Kwh.......... 3.62c 3.18c 3.24c _________________________
(1) Includes information related to Cheyenne and e prime through July 31, 1997. These subsidiaries were transferred to NCE, effective August 1, 1997, in connection with the PSCo/SPS Merger. (2) Primarily includes net distribution and transmission line losses. (3) In 1999, PSCo established power marketing and energy trading activities separate from its wholesale non-trading activities. Revenues and purchased energy costs associated with trading activities are presented net in electric revenues in accordance with EITF 98-10. (4) Other electric revenues is negative in 1999 due primarily to a higher provision for rate refunds and a decrease in unbilled revenues. 24 Electric Operating Statistics (SPS)
Year Ended December 31, -------------------------------------- 1999 1998 1997 ----------- ------------ ----------- Energy Generated, Received & Sold (Thousands of Kwh): Net Generated: Steam, Fossil......................................... 15,368,669 16,021,423 15,692,378 Combustion Turbine.................................... 6,997,942 7,575,190 6,441,036 ----------- ----------- ----------- Total Net Generation................................ 22,366,611 23,596,613 22,133,414 Purchased Power and Net Interchange.................... 2,065,868 1,055,254 969,952 ----------- ----------- ----------- Total System Input.................................. 24,432,479 24,651,867 23,103,366 Used by Company....................................... 25,242 28,606 31,862 Other (3)............................................. 1,663,226 1,331,285 1,372,456 ----------- ----------- ----------- Total Energy Available for Sale....................... 22,744,011 23,291,976 21,699,048 =========== =========== =========== Electric Sales (Thousands of Kwh) (2): Residential........................................... 2,972,077 3,169,433 2,986,815 Commercial............................................ 3,238,421 3,051,258 2,990,488 Industrial............................................ 7,547,528 8,367,012 8,135,280 Public Authorities.................................... 521,351 629,478 582,618 Wholesale............................................. 8,464,634 8,074,795 7,003,847 ----------- ----------- ----------- Total Energy Sold................................... 22,744,011 23,291,976 21,699,048 =========== =========== =========== Number of Customers at End of Period (2): Residential........................................... 308,162 312,539 308,439 Commercial............................................ 71,392 58,535 57,298 Industrial............................................ 185 12,622 12,549 Public Authorities.................................... 4,834 824 785 Wholesale............................................. 53 267 246 ----------- ----------- ----------- Total Customers.................................... 384,626 384,787 379,317 =========== =========== =========== Electric Revenues (Thousands of Dollars) (2): Residential........................................... $ 170,512 $ 194,535 $ 184,372 Commercial............................................ 181,563 168,731 166,572 Industrial............................................ 222,259 305,987 298,754 Public Authorities.................................... 26,398 33,207 31,249 Wholesale............................................. 262,381 281,877 266,527 Other Electric Revenues (1)........................... 62,824 (33,150) 12,881 ----------- ----------- ----------- Total Electric Revenues............................. $ 925,937 $ 951,187 $ 960,355 =========== =========== =========== Average Kwh Sales per Residential Customer............. 9,613 10,212 9,669 Average Revenue per Residential Customer............... $ 551.51 $626.80 $596.85 Average Residential Revenue per Kwh.................... 5.74c 6.14c 6.17c Average Commercial Revenue per Kwh..................... 5.61c 5.53c 5.57c Average Industrial Revenue per Kwh..................... 2.94c 3.66c 3.67c Average Wholesale Revenue per Kwh...................... 3.10c 3.49c 3.81c
- ------------------------- (1) Other electric revenues is negative in 1998 primarily due to the recognition of lower deferred fuel revenues resulting from cost reductions for fuel used in generation. (2) Comparison of energy sales, customers and electric revenues by customer class for the periods presented is impacted by: 1) a change in criteria for counting customers resulting from the implementation of a new customer information system during 1999 and 2) effective August 1, 1999, a reclassification to include only large commercial and industrial customers (less 1,000 Kw demand) within the industrial category, to be consistent with PSCo and recommended utility industry guidelines. (3) Primarily includes net distribution and transmission line losses. 25 Consolidated Gas Operating Statistics (NCE)
Year Ended December 31, ----------------------- 1999 1998 1997 ----------- ---------- ---------- Natural Gas Purchased and Sold (Thousands of Dth): Purchased for Utility Operations................... 139,459 141,887 151,687 Company Use........................................ 983 887 1,213 Other (1).......................................... 10,475 13,938 17,236 ---------- ---------- ---------- Total Gas Sold................................... 128,001 127,062 133,238 ========== ========== ========== Gas Deliveries (Thousands of Dth): Residential........................................ 86,598 84,710 87,386 Commercial......................................... 41,403 42,352 47,471 ---------- ---------- ---------- Total Gas Sold.................................. 128,001 127,062 134,857 Transportation..................................... 111,518 107,423 93,271 Other Gas Deliveries............................... - - 73 ---------- ---------- ---------- Total Deliveries................................. 239,519 234,485 228,201 ========== ========== ========== Non-regulated Gas Marketing and Trading (2)........ 230,695 70,599 59,629 ========== ========== ========== Number of Customers at End of Period: Residential........................................ 992,763 958,693 928,134 Commercial......................................... 95,198 93,549 91,937 Non-regulated Gas Marketing and Trading (2)........ 1,236 2,043 2,190 ---------- ---------- ---------- Total............................................ 1,089,197 1,054,285 1,022,261 Transportation and Other........................... 3,089 2,738 2,215 ---------- ---------- ---------- Total Customers.................................. 1,092,286 1,057,023 1,024,476 ========== ========== ========== Gas Revenues (Thousands of Dollars): Residential........................................ $ 455,299 $ 434,503 $ 410,406 Commercial......................................... 183,076 182,506 186,248 Non-regulated Gas Marketing and Trading (2)....... 89,122 120,936 136,551 Transportation..................................... 37,988 34,990 32,646 Other Gas Revenues................................. (542) 8,636 14,772 ---------- ---------- ---------- Total Gas Revenues.............................. $ 764,943 $ 781,571 $ 780,623 ========== ========== ========== Average Annual Dth Sales per Residential Customer... 88.85 89.99 95.51 Average Annual Revenue per Residential Customer..... $ 467.15 $ 461.60 $ 448.55 Average Revenue per Dekatherm: Residential........................................ $ 5.258 $ 5.129 $ 4.696 Commercial......................................... $ 4.421 $ 4.309 $ 3.923 Transportation..................................... $ 0.342 $ 0.326 $ 0.350
_________________________ (1) Primarily includes distribution and transmission line losses in net changes to gas in storage. (2) In accordance with EITF 98-10, revenues and cost of gas associated with trading activities are presented net in gas revenues. 26 Consolidated Gas Operating Statistics (PSCo)
Year Ended December 31, ----------------------- 1999 1998 1997(2) ---------- ---------- ----------- Natural Gas Purchased and Sold (Thousands of Dth): Purchased for Utility Operations................... 134,868 137,402 150,163 Company Use........................................ 980 873 1,211 Other (1).......................................... 10,550 14,099 15,461 ---------- ---------- ----------- Total Gas Sold................................... 123,338 122,430 133,491 ========== ========== =========== Gas Deliveries (Thousands of Dth): Residential........................................ 84,115 82,239 86,634 Commercial......................................... 39,223 40,191 46,857 ---------- ---------- ----------- Total Gas Sold.................................. 123,338 122,430 133,491 Transportation..................................... 93,069 90,746 86,831 Other Gas Deliveries............................... - - 73 ---------- ---------- ----------- Total Deliveries................................. 216,407 213,176 220,395 ========== ========== =========== Non-regulated Gas Marketing and Trading............ - - 35,189 ========== ========== =========== Number of Customers at End of Period: Residential........................................ 966,515 932,829 902,759 Commercial......................................... 92,515 90,858 89,229 ---------- ---------- ----------- Total............................................ 1,059,030 1,023,687 991,988 Transportation and Other........................... 3,083 2,731 2,205 ---------- ---------- ----------- Total Customers.................................. 1,062,113 1,026,418 994,193 ========== ========== =========== Gas Revenues (Thousands of Dollars): Residential........................................ $ 444,209 $ 423,875 $407,004 Commercial......................................... 175,484 175,291 184,192 Non-regulated Gas Marketing and Trading(2)......... - - 81,116 Transportation..................................... 37,502 34,472 32,465 Other Gas Revenues................................. 627 6,426 10,157 ---------- ---------- ----------- Total Gas Revenues.............................. $ 657,822 $ 640,064 $714,934 ========== ========== =========== Average Annual Dth Sales per Residential Customer... 88.67 89.81 94.70 Average Annual Revenue per Residential Customer..... $ 468.26 $ 462.90 $ 441.91 Average Revenue per Dekatherm: Residential........................................ $ 5.281 $ 5.154 $ 4.698 Commercial......................................... $ 4.474 $ 4.361 $ 3.931 Transportation..................................... $ 0.403 $ 0.380 $ 0.374
- ------------------------- (1) Primarily includes distribution and transmission line losses and net changes to gas in storage. (2) Includes information related to Cheyenne, WGI, Natural Fuels and e prime through July 31, 1997. These subsidiaries were transferred to NCE, effective August 31, 1997, in connection with the PSCo/SPS Merger. In accordance with EITF 98-10, revenues and cost of gas associated with trading activities are presented net in gas revenues. 27 Item 2. Properties PSCo Electric Generation Property The PSCo electric generating stations expected to be available at the time of the anticipated 2000 net firm system peak demand during the summer season are as follows:
Net Dependable Capacity Installed (Mw) Gross at Time of Anticipated Major Name of Station Capacity 2000 Net Firm System Fuel and Location (Mw) Peak Demand* Source --------------- ------------- ------------ ------ Steam: Arapahoe - Denver, CO................................. 262.00 246.00 Coal Cameo - near Grand Junction, CO....................... 77.00 72.70 Coal Cherokee - Denver, CO................................. 779.00 717.00 Coal Comanche - near Pueblo, CO............................ 725.00 660.00 Coal Craig - near Craig, CO................................ 86.90 (a) 83.20 Coal Hayden - near Hayden, CO.............................. 259.10 (b) 237.00 Coal Pawnee - near Brush, CO............................... 530.00 505.00 Coal Valmont - near Boulder, CO (Unit 5)................... 196.00 186.00 Coal Zuni - Denver, CO..................................... 115.00 86.00 Gas/Oil ------------- ------------ Total................................................ 3,030.00 2,792.90 Fort St. Vrain Combustion Turbines near Platteville, CO.. 514.00 464.60 (f) Gas Combustion turbines (6 units-various locations).......... 209.00 159.00 (g) Gas Hydro (14 units-various locations) (c)................... 53.35 36.55 (d) Hydro Cabin Creek Pumped Storage near Georgetown, CO........... 324.00 (e) 210.00 Hydro Cherokee Diesel generators (2 units)..................... 6.00 6.00 Diesel ------------- ------------ Total................................................ 4,136.35 3,669.05 ============= ============
* A measure of the unit capability at the time of the system peak load less any 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. (f) This represents the net dependable capacity during the summer peak. The net dependable capacity during the winter peak is 507.6 Mw. (g) This represents the net dependable capacity during the summer peak. The net dependable capacity during the winter peak is 209 Mw. 28 SPS Electric Generation Property The SPS electric generating stations expected to be available at the time of the anticipated 2000 net firm system peak demand during the summer season are as follows:
Net Dependable Capacity Installed (Mw) Gross at Time of Anticipated Major Name of Station Capacity 2000 Net Firm System Fuel and Location (Mw) Peak Demand* Source --------------- ------------- ------------ ------ Steam: Harrington - near Amarillo, TX......... 1,137.00 1,066.00 Coal Tolk - near Muleshoe, TX............... 1,130.00 1,080.00 Coal Jones - near Lubbock, TX............... 512.00 486.00 Gas Plant X - near Earth, TX............... 463.00 442.00 Gas Nichols - near Amarillo, TX............ 479.00 457.00 Gas Cunningham - near Hobbs, NM............ 281.00 267.00 Gas Maddox - near Hobbs, NM................ 123.00 118.00 Gas CZ-2 - near Pampa, TX.................. 26.00 26.00 Purch. steam Moore County - near Sunray, TX......... 51.00 48.00 Gas -------- -------- Total................................. 4,202.00 3,990.00 Gas Turbine: Carlsbad - near Carlsbad, NM........... 16.00 13.00 Gas CZ-1 - near Pampa, TX.................. 13.00 13.00 Hot nitrogen Maddox - near Hobbs, NM................ 76.00 66.00 Gas Riverview - near Borger, TX............ 25.00 23.00 Gas Cunningham - near Hobbs, NM............ 244.00 220.00 Gas -------- -------- Total................................. 374.00 335.00 Diesel Engine (1 unit) - Tucumcari, NM.. 15.00 - Diesel -------- -------- Total................................. 4,591.00 4,325.00 ======== ========
_________________________________ * A measure of the unit capability planned to be available at the time of the system peak load net of seasonal reductions in unit capability due to weather, stream flow, fuel availability and station housepower, including requirements for air and water quality control equipment. Electric Transmission Property PSCo: On December 31, 1999, PSCo's transmission system consisted of approximately 112 circuit miles of 345 Kv overhead lines; 1,936 circuit miles of 230 Kv overhead lines; 15 circuit miles of 230 Kv underground lines; 65 circuit miles of 138 Kv overhead lines; 1,005 circuit miles of 115 Kv overhead lines; 20 circuit miles of 115 Kv underground lines; 332 circuit miles of 69 Kv overhead lines; 137 circuit miles of 44 Kv overhead lines; and 1 circuit mile of 44 Kv underground line. PSCo jointly owns with another utility approximately 342 circuit miles of 345 Kv overhead lines and 359 miles of 230 Kv overhead lines, of which PSCo's share is 112 miles and 147 miles, respectively, which shares are included in the amounts listed above. SPS: On December 31, 1999, SPS's transmission system consisted of approximately 319 circuit miles of 345 Kv overhead lines; 1,604 circuit miles of 230 Kv overhead lines; 2,579 circuit miles of 115 Kv overhead lines; 1,750 circuit miles of 69 Kv overhead lines; 1 circuit mile of 115 Kv underground line; and 5 circuit miles of 69 Kv underground lines. Interconnections PSCo: PSCo's transmission facilities are located wholly within Colorado. PSCo's system is interconnected with the systems of the following utilities: Western Area Power Administration, Tri-State Generation and Transmission, Platte River Power Authority, Colorado Springs Utilities and West Plains Energy. PSCo has major firm purchase power contracts; capacity and energy are provided primarily by generating sources in the locations indicated: 29
Utility Location ------- -------- Basin Electric Power Cooperative................................. Southeast Wyoming PacifiCorp....................................................... West & Northwest U.S. Northwest Colorado Platte River Power Authority..................................... Northcentral Colorado Tri-State........................................................ Southeast Wyoming and Northwest Colorado
PSCo has transmission service agreements with the above, and with other utilities and public power agencies, which are utilized to provide capacity and energy to PSCo's system from time to time (see Purchased Transmission Services). PSCo is a member of the WSCC, an interstate network of transmission facilities which are owned by public entities and investor-owned utilities. WSCC is the regional reliability coordinating council for member electric power systems in the western United States. PSCo is also a member of the Western Systems Power Pool, which is an economic power pool that operates an electronic bulletin board and acts as a clearinghouse for bulk power transactions among over 90 member utilities and marketers. SPS: SPS's transmission system is located in parts of Texas, New Mexico, Oklahoma and Kansas. SPS is connected with utilities west of its service territory through two HVDC interconnections in New Mexico and has four interconnecting transmission lines with utilities of the SPP. These interconnections are described in the following table:
Utility Location ------- -------- El Paso Electric Company and Texas-New Mexico Power Company............. Near Artesia, NM Public Service Company of New Mexico.................................... Near Clovis, NM Public Service Company of Oklahoma...................................... Near Oklaunion, TX and near Elk City, OK West Texas Utilities.................................................... Near Shamrock, TX and near Clarendon, TX WestPlains Energy....................................................... Near Guymon, OK
SPS is a member of the SPP. Transactions with the SPP are handled through interties near Elk City and Guymon, OK, and Shamrock and Oklaunion, TX. These interties allow SPS to sell or to purchase energy from the eastern electrical grid. HVDC interconnections link SPS with the western electrical grid of the United States. SPS purchases and sells energy through HVDC interties near Artesia and Clovis, New Mexico. SPS is a participant in the FERC approved WSPP bulk power market. This arrangement provides for short-term energy and capacity exchanges, transmission services, flexible pricing, and electronic bulletin board posting of available power and energy. PSCo and SPS are proceeding with their plans to interconnect their systems and build additional transmission facilities to alleviate transmission constraints, increase reliability and provide energy supply alternatives in anticipation of competition. This expansion is expected to be completed in a phased approach and will require various regulatory approvals. This first phase is 230 miles of 345 Kv line from Amarillo, TX to Holcomb, KS, and is expected to be completed in 2001, pending regulatory approvals. The second phase is 100 miles of 345 Kv line from Holcomb to Lamar, CO and a high voltage direct current conversion facility, which would interconnect the PSCo and SPS systems, as well as the WSCC and SPP regional transmission grids. This second phase is scheduled for completion in 2004. While not directly related to the interconnection of the PSCo 30 and SPS systems, a third transmission line of approximately 275 miles of 345 Kv from Amarillo to Oklahoma Gas & Electric Company, Oklahoma City, OK, is planned to be in service in 2006. Electric Distribution Property The distribution system of the Company's electric subsidiaries at December 31, 1999 consists of both overhead lines and underground distribution systems. PSCo owns approximately 210 substations (30 of which are jointly owned) having an aggregate transformer capacity of 20,365,000 Kva, of which 4,867,000 Kva is step-up transformer capacity at generating stations. SPS owns approximately 319 substations having an aggregate transformer capacity of 20,597,935 Kva, of which 5,951,000 Kva is step-up transformer capacity. Gas Property The gas property of PSCo at December 31, 1999, consisted of approximately 16,709 miles of distribution mains ranging in size from 0.50 to 30 inches and related equipment. The Denver distribution system consisted of 9,249 miles of mains. Pressures in the system are varied to meet load requirements and individual house regulators are installed on each customer's premises to provide uniform flow of gas to appliances. PSCo also owns and operates four gas storage facilities. Other Property PSCo's steam heating property at December 31, 1999, consisted of 10.75 miles of transmission, distribution and service lines in the central business district of Denver, CO including a steam transmission line connecting the steam heating system with Zuni. Steam is supplied from boilers installed at PSCo's Denver Steam Plant which has a capability of 295,000 pounds of steam per hour under sustained load and an additional 300,000 pounds of steam per hour is available from Zuni on a peak demand basis. An additional 80,000 pounds per hour can be supplied as emergency backup through operation of a leased steam heat boiler housed at the State of Colorado. PSCo also owns service and office facilities in Denver and other communities strategically located throughout its service territory. PSCo's chilled water property at December 31, 1999, consisted of 8,500 tons of chilled water production capacity including both mechanical and ice storage located at the Chilled Water Center, in Denver, CO. Approximately 5,675 feet of chilled water distribution piping is installed in the central business district of Denver, CO to serve chilled water customers. Property of Subsidiaries Unregulated subsidiary property is less than 1% of the total net book value of the properties of the Company and consolidated subsidiaries combined. 1480 Welton, Inc. owns two buildings that are used primarily by PSCo. Character of Ownership The steam electric generating stations, the majority of major electric substations owned by the Company and its subsidiaries are on land owned in fee. Approximately half of the compressor stations and a limited number of town border and meter stations are also on land owned in fee. The remaining major electric substations, compressor stations and the majority of gas regulator stations and town border and meter stations are wholly or partially on land leased from others or on or along public highways or on streets or public places within incorporated towns and cities (under franchises or other rights). PSCo's Cabin Creek Pumped Storage Hydroelectric Generating Station, its Shoshone Hydroelectric Generating Station and a portion of the related intake tunnel are located on public lands of the United States. As to substantially all property on or across public lands of the United States, the Company or its subsidiaries hold licenses or permits issued by appropriate Federal agencies or departments. The Leyden gas storage facility is located largely on leased property under leases expiring December 31, 2040. The Company and its utility subsidiaries have the power of eminent domain pursuant to State 31 law to acquire property for their electric and gas facilities. The electric and gas transmission and distribution facilities are for the most part located on land owned by the Company or its subsidiaries pursuant to easements obtained from the record holders of title or are over or under streets, public highways or other public places and on public lands under franchises or other rights. The water rights of the Company and its subsidiaries are owned subject to divestment to the extent of any abandonment thereof. Substantially all of the utility plant and other physical property owned by the Company's utility subsidiaries are subject to the liens of the respective indentures securing the mortgage bonds of the Company's utility subsidiaries. Item 3. Legal Proceedings See Note 10. Regulatory Matters and Note 11. Commitments and Contingencies in Item 8. Financial Statements And Supplementary Data. Item 4. Submission of Matters to a Vote of Security Holders NCE: None. PSCo: Omitted pursuant to General Instruction I(2)(c). SPS: Omitted pursuant to General Instruction I(2)(c). PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock, $1.00 par value per share, is listed on the New York Stock Exchange. The following table sets forth for the periods indicated the dividends declared per share of common stock and the high and low sale prices of the common stock on the consolidated tape as reported by The Wall Street Journal for NCE. Dividends Price Range 1999 Declared High Low ---- -------- ---- --- First Quarter.................... $0.58 $ 49 1/16 $ 33 5/8 Second Quarter................... 0.58 40 9/16 33 5/16 Third Quarter.................... 0.58 38 9/16 31 15/16 Fourth Quarter................... 0.58 34 11/16 30 5/16 ----- $2.32 1998 ---- First Quarter.................... $0.58 $ 51 3/16 $ 44 1/2 Second Quarter................... 0.58 50 3/4 44 5/16 Third Quarter.................... 0.58 49 3/16 41 5/8 Fourth Quarter................... 0.58 52 1/4 45 1/2 ----- $2.32 At December 31, 1999, the book value of the Company's common equity was $23.59 per share. At February 18, 2000, there were approximately 64,000 holders of record of the Company's common stock and the market price of the stock was $27.875. See Note 5. Capital Stock in Item 8. Financial Statements and Supplemental Data for a discussion of the shareholders' rights plan. The dividend level is dependent upon the Company's results of operations, financial position and other factors and is evaluated quarterly by the Board of Directors. See Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations (NCE). In the proposed merger with NSP, it is anticipated that the combined company will adopt the NCE dividend payment level (see Note 2. Proposed Merger with Northern States Power Company in Item 8. Financial Statements and Supplementary Data). 32 Item 6. Selected Financial Data The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the management's discussion and analysis of financial condition and results of operations appearing elsewhere herein. The NCE selected financial data for 1996 has been prepared from the combination of the historical information of PSCo and SPS as of and for the year ended December 31, 1996. The 1995 selected financial data has been prepared from the combination of PSCo information as of and for the year ended December 31, 1995 with the SPS information as of and for the year ending August 31, 1995.
Year ended December 31, -------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- --------------- --------------- -------------- ----------- NCE (In thousands, except per share data & ratio) Operating revenues: Electric...................................... $2,527,341 $2,624,057 $2,451,421 $2,408,890 $2,283,179 Gas........................................... 764,943 781,571 780,623 640,497 624,585 Other......................................... 83,146 72,143 52,570 39,998 54,444 ---------- ---------- ---------- ---------- ---------- Total...................................... 3,375,430 3,477,771 3,284,614 3,089,385 2,962,208 Total operating expenses........................ 2,733,742 2,827,270 2,655,389 2,453,802 2,345,264 Operating income................................ 641,688 650,501 629,225 635,583 616,944 Income before extraordinary item................ 346,597 341,957 261,487 272,341 281,492 Extraordinary item - U.K. windfall tax.......... - - (110,565) - - Net income...................................... 346,597 341,957 150,922 272,341 281,492 Per share data applicable to common stock (a): Basic earnings per share (c).................. $ 3.01 $ 3.06 $ 2.50 $ 2.64 $ 2.77 Diluted earnings per share (c)................ $ 3.01 $ 3.05 $ 2.50 $ 2.64 $ 2.77 Dividends declared (b)........................ $ 2.32 $ 2.32 $ 2.53 $ 2.18 $ 2.15 Rate of return earned on average common equity (income before extraordinary item to common).. 13.0% 13.8% 11.6% 12.8% 14.0% Total assets.................................... $8,321,992 $7,671,964 $7,321,666 $6,617,442 $6,260,794 Total construction expenditures................. 714,005 608,972 475,497 454,968 380,407 Total common equity............................. 2,732,690 2,614,827 2,357,387 2,170,040 2,064,397 Preferred stock of subsidiaries: Not subject to mandatory redemption........... - - 140,002 140,008 212,688 Subject to mandatory redemption at par (including amounts due within one year)....... - - 41,829 42,489 43,865 PSCo and SPS obligated mandatorily redeemable preferred securities.......................... 294,000 294,000 100,000 100,000 - Long-term debt of subsidiaries (including amounts due within one year)....... 2,510,339 2,343,710 2,245,424 2,050,189 1,854,737 Notes payable & commercial paper................ 633,527 524,394 588,343 298,561 288,050
_________________ (a) Earnings per share are based on the weighted average number of shares of common stock outstanding. (b) The 1997 amount includes two quarterly and one partial dividend declared by each PSCo and SPS for the period January 1, 1997 through July 31, 1997 and two quarterly dividends declared by NCE for the period August 1, 1997 through December 31, 1997. (c) The 1997 amounts are before the $1.06 extraordinary loss per share related to the U.K. windfall tax. 33
Year ended December 31, ----------------------------------------------------------------- 1999 1998 (d) 1997 (e) 1996 (e) 1995 (e) ---------- ----------- -------------- ----------- ----------- PSCo (In thousands) Operating revenues: Electric................................. $1,561,052 $1,635,573 $1,475,061 $1,488,990 $1,449,096 Gas...................................... 657,822 640,064 714,934 640,497 624,585 Other.................................... 8,082 8,449 11,356 7,951 7,010 ---------- ---------- ---------- ---------- ---------- Total................................. 2,226,956 2,284,086 2,201,351 2,137,438 2,080,691 Total operating expenses................... 1,871,450 1,952,068 1,863,998 1,812,902 1,784,784 Operating income........................... 355,506 332,018 337,353 324,536 295,907 Income before extraordinary item........... 204,265 200,103 204,042 190,346 178,856 Extraordinary item - U.K. windfall tax..... - - (110,565) - - Net income................................. 204,265 200,103 93,477 190,346 178,856 Total assets............................... 5,588,942 5,177,636 4,998,875 4,572,648 4,351,789 Total common equity........................ 1,760,885 1,627,332 1,625,541 1,438,288 1,343,645 Preferred stock: Not subject to mandatory redemption...... - - 140,002 140,008 140,008 Subject to mandatory redemption at par (including amounts due within one year).. - - 41,829 42,489 43,865 PSCo obligated mandatorily redeemable preferred securities..................... 194,000 194,000 - - - Long-term debt (including amounts due within one year).. 1,854,782 1,687,611 1,595,298 1,414,558 1,278,389 Notes payable & commercial paper........... 356,192 402,795 348,555 244,725 288,050
_________________ (d) The 1998 information includes NCI through March 31, 1998, at which time it was sold to NC Enterprises. (e) The 1995 through 1997 information includes Cheyenne, WGI, e prime, and Natural Fuels through July 31, 1997. These subsidiaries were transferred by dividend to NCE in connection with the PSCo/SPS Merger.
4 Months Ended Year ended December 31, December 31, Year Ended August 31, ---------------------------------- ---------------------- 1999 1998 1997 1996 (g) 1996 1995 ---------- ---------- ---------- ------------- ---------- ---------- SPS (f) (In thousands) Operating revenues: Electric................................. $ 925,937 $ 951,187 $ 960,355 $ 295,579 $ 899,397 $ 834,083 Other.................................... - - 18,928 10,701 32,403 47,434 ---------- ---------- ---------- ---------- ---------- ---------- Total................................. 925,937 951,187 979,283 306,280 931,800 881,517 Total operating expenses................... 771,163 785,508 820,002 252,299 780,758 723,485 Operating income........................... 154,774 165,679 159,281 53,981 151,042 158,032 Net income................................. 102,709 114,987 75,575 19,137 105,773 119,477 Total assets............................... 2,219,376 2,129,864 2,188,736 2,044,799 1,997,817 1,909,005 Total common equity........................ 761,383 738,220 698,390 731,752 735,119 720,752 Preferred stock, not subject to mandatory redemption..................... - - - - - 72,680 SPS obligated mandatorily redeemable preferred securities..................... 100,000 100,000 100,000 100,000 100,000 - Long-term debt (including amounts due within one year).. 605,875 620,731 620,771 635,631 638,107 582,552 Notes payable & commercial paper........... 177,746 94,162 179,404 53,836 69,624 -
- ----------------- (f) The 1995 through 1997 information includes UE and Quixx through July 31, 1997. These subsidiaries were transferred by sale to NC Enterprises in connection with the PSCo/SPS Merger. (g) On April 22, 1997, SPS changed its fiscal year from a twelve-month period ending August 31 to twelve-month period ending December 31. 34 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (NCE, PSCo and SPS) Competition and Corporate Overview The landscape of the electric and gas utility industry continues to change rapidly. The majority of states are moving forward to develop and implement retail competition with an unbundling of regulated energy services. Merger and acquisition activity over the past few years has been significant as utilities reach to expand their customer base and/or establish a strategic niche in preparing for the future. Certain traditional regulated utilities are divesting generation assets to further evolve this competitive environment, recover stranded costs and pursue other business opportunities. The transition to this competitive environment will be extremely challenging during the next few years and will most likely have significant impacts on the industry. In December 1999, FERC Order 2000 was issued to advance the formation of Regional Transmission Organizations on a voluntary basis. The FERC's goal is to provide a framework which allows the individual states flexibility to manage deregulation and to build upon the foundation it established in 1996, promoting the development of competitive bulk power markets through non-discriminatory open access of transmission services and the recovery of stranded costs. See Forward Looking Information. The Company supports a fair and orderly transition to a competitive market and is aggressively managing these activities to best optimize its future opportunities. In March 1999, the Company announced its proposed merger with Northern States Power Company and is on course for completing this merger in mid-2000. The combination of the Company with NSP is expected to provide the size and scale needed to compete more effectively in an unbundled industry as well as growth opportunities in non-regulated business activities. Electric restructuring legislation was passed in Texas and New Mexico during 1999. Overall, in these states, retail competition and customer choice is expected to be available to most customers by January 1, 2002. In early January 2000, the Company filed its business separation plan in Texas for the unbundling of business activities into power generation, transmission and distribution and retail electric provider services. The Company is diligently working to satisfy the conflicting legislative and regulatory requirements of Texas and New Mexico in developing its transition plans. Major issues include market power, divestiture of generation capacity, transmission constraints, legal separation, refinancing of securities, implementing procedures to govern affiliate transactions, investments in information technology and the pricing of unbundled services, all of which have significant financial implications. The Company can not predict the outcome of its restructuring proceedings at this time. As these issues are addressed in 2000 and sufficient details are available to reasonably determine how this transition will affect the portions of the businesses whose pricing is being deregulated, SPS may discontinue applying regulatory accounting for those businesses. The resolution of these matters may have a significant impact on the financial position, results of operations and cash flows of the Company (see Note 2. Proposed Merger with Northern States Power Company and Note 10. Regulatory Matters in Item 8. Financial Statements and Supplementary Data). Earnings Earnings per share were $3.01 (basic and diluted), $3.06 (diluted earnings per share were $3.05) and $1.44 (basic and diluted, $2.50 before the extraordinary item) during 1999, 1998 and 1997, respectively. Cooler than normal summer weather, combined with warmer than normal winter temperatures negatively impacted earnings during 1999, while hotter than normal summer weather favorably impacted earnings during 1998. Overall, earnings during 1999 were approximately $0.20 per share lower than 1998 due to the effects of weather. Lower operating and maintenance expenses resulting from effectively managing and containing costs throughout the Company positively impacted earnings during 1999. Equity in earnings of Yorkshire Power were approximately $45 million. However, Yorkshire Power's contribution to earnings in 2000 is expected to decline due to the distribution and supply price reductions that will be effective April 2000 as well as the impacts of possible increased competition in its supply business. An aggressive cost reduction program is expected to mitigate, to a certain degree, these reductions. 35 The increase in 1998 earnings, as compared to 1997, was primarily attributed to increased electricity sales during the hot summer months with continued strong customer growth in Colorado. Earnings during 1997 were negatively impacted by the recognition of an extraordinary item related to the one-time U.K. windfall tax of approximately $110.6 million, or $1.06 per share and by the write-offs of certain investments in waste-to-energy cogeneration facilities, higher merger and business integration costs resulting from the PSCo/SPS Merger and electric rate decreases which were instituted in 1997. Electric Operations The following table details the annual change in electric operating revenues and energy costs as compared to the preceding year (in thousands).
Increase (Decrease) From Prior Year --------------- 1999 1998 -------- -------- Electric operating revenues: Retail................................................................................. $(50,213) $ 62,565 Wholesale.............................................................................. (81,441) 120,343 Other (including unbilled revenues)..................................................... 34,938 (10,272) -------- -------- Total revenues........................................................................ (96,716) 172,636 Fuel used in generation................................................................. (26,309) (27,494) Purchased power......................................................................... (72,227) 129,908 -------- -------- Net increase in electric margin....................................................... $ 1,820 $ 70,222 ======== ========
The following table summarizes electric Kwh sales by major customer classes.
% Change * Millions of Kwh Sales From Prior Year --------------------- --------------- 1999 1998 1999 1998 -------- ------ ---- ---- Residential............................................................................. 10,235 10,136 1.0% 4.2% Commercial and Industrial............................................................... 27,489 27,666 (0.6) 2.4 Public Authority........................................................................ 758 841 (9.9) 8.7 -------- ------ Total Retail.......................................................................... 38,482 38,643 (0.4) 3.0 Wholesale............................................................................... 13,669 15,948 (14.3) 38.7 -------- ------ Total................................................................................... 52,151 54,591 (4.5) 11.2 ======== ====== Power marketing and trading............................................................. 14,908 2,917 ** ** ======== ======
* Percentages are calculated using unrounded amounts. ** Percentage change is significant, but presentation of the amount is not meaningful. Electric margin increased slightly during 1999, when compared to 1998. Retail sales were flat in 1999 as the negative effects of weather substantially offset the favorable impact of customer growth of approximately 2%. Mild weather throughout 1999 and hot summer weather in 1998 significantly affected sales. Comparison of retail revenues was also impacted by an SPS 1985 FERC rate case settlement which increased margin approximately $16.9 million in 1998. Additionally, an increase of approximately $15 million in PSCo's 1999 provisions for estimated customer refunds in connection with the quality of service plan refund and earnings sharing in excess of 11% return on equity also served to lower the current year margin (see Note 10. Regulatory Matters in Item 8. Financial Statements and supplementary data). Wholesale revenues decreased due to lower non-firm sales. Power marketing and trading activities have increased, although revenues and purchased energy costs for these activities are presented net for financial reporting purposes. Activities from wholesale marketing and trading positively contributed to electric margin, but the amount was not significant. Electric margin increased during 1998, when compared to 1997, due primarily to a 3.0% increase in total retail sales and a 11.2% increase in total sales resulting from customer growth of 2.2% and hotter than normal weather during the second and third quarters of 1998. In addition, PSCo's margin was positively impacted by 36 lower accruals of approximately $9.6 million for the estimated customer refund obligation associated with the sharing of earnings in excess of 11% return on equity. SPS's margin was also positively impacted by $16.9 million in revenue recognized with the settlement of a 1985 FERC rate case. Higher wholesale sales and power trading activities contributed to the higher operating revenues, however, the margin on such sales was minimal. The Company's regulated subsidiaries have cost adjustment mechanisms which recognize the majority of the effects of changes in fuel used in generation and purchased power costs and allow recovery of such costs on a timely basis (see Note 10. Regulatory Matters in Item 8. Financial Statements and Supplementary data). PSCo has an ICA, which allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders. PSCo recognized cost savings associated with the ICA of approximately $3 million in 1999 and a minimal amount in 1998. Fuel used in generation expense decreased approximately 4.1% during 1999, as compared to 1998, primarily due to reduced generation levels and lower per unit cost of coal and natural gas at SPS offset, in part, by increased generation levels at PSCo. Fuel used in generation expense decreased approximately 4.1% during 1998, as compared to 1997, primarily due to lower per unit cost of coal and natural gas despite increased generation levels at PSCo and SPS. Purchased power expense decreased 11.3% during 1999, as compared to 1998 primarily due to a lower volume of non-firm power purchases related to wholesale marketing activities offset, in part, by higher firm power purchases under new contracts at PSCo and an increase in the quantity of power purchased and higher capacity charges at SPS. Purchased power expense increased 25.5% during 1998, as compared to the previous year primarily due to purchases in connection with increased wholesale marketing activities at PSCo. Gas Operations The following table details the annual change in gas revenues and gas purchased for resale as compared to the preceding year (in thousands).
Increase (Decrease) From Prior Year --------------- 1999 1998 -------- ------- Revenues from gas sales (including unbilled revenues)............................ $(19,625) $(1,232) Gas purchased for resale......................................................... (17,772) (4,439) -------- ------- Net (decrease) increase in gas sales margin...................................... (1,853) 3,207 Transportation revenues.......................................................... 2,997 2,180 -------- ------- Increase in net gas margin..................................................... $ 1,144 $ 5,387 ======== =======
The following table compares gas Dth deliveries by major customer classes.
Millions of % Change * Dth Deliveries From Prior Year -------------- --------------- 1999 1998 1999 1998 ----- ----- ---- ---- Residential...................................................................... 86.6 84.7 2.2% (3.1)% Commercial....................................................................... 41.4 42.4 (2.2) (10.8) ----- ----- Total Sales..................................................................... 128.0 127.1 0.7 (5.8) Transportation, gathering and processing......................................... 111.5 107.4 3.8 15.2 ----- ----- Total........................................................................... 239.5 234.5 2.1 2.8 ===== ===== Non-regulated gas marketing and trading.......................................... 230.7 70.6 ** 18.4 ===== =====
* Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful 37 Gas sales margin decreased $1.9 million in 1999, when compared to 1998. Gas sales increased slightly due to customer growth of 3.4%, but were negatively impacted by the effects of warmer weather. Higher base rates effective July 1, 1999 resulting from PSCo's 1998 rate case provided an additional $5 million which served to partially offset the negative effects of weather. Gas sales margin increased slightly in 1998, when compared to 1997, primarily due to an increase in PSCo's base revenues associated with a rate increase effective February 1, 1997, offset in part, by lower PSCo retail sales which resulted from warmer weather. Gas transportation revenues increased during 1999 and 1998, when compared to the respective preceding years, primarily due to increases in deliveries and higher transportation rates effective July 1, 1999 at PSCo. In addition, the shifting of various PSCo commercial customers to firm transportation customers, some of which became retail customers of the Company's non-regulated subsidiaries, contributed to the increases in both 1999 and 1998. PSCo and Cheyenne have in place GCA mechanisms for natural gas sales, which provide for the recovery of actual gas costs on a timely basis. As a result, the changes in revenues associated with these mechanisms during 1999 and 1998 had little impact on net income. However, the fluctuations in gas sales impact the amount of gas the Company's gas utilities must purchase and, therefore, along with the increases and decreases in the per-unit cost of gas, affect total gas purchased for resale. Other Operating Revenues and Equity in Earnings of Unconsolidated Subsidiaries Other operating revenues increased approximately $11.0 million and $19.6 million during 1999 and 1998, respectively, as compared the preceding year, primarily due to higher revenues from diversified energy related businesses, primarily engineering, design and construction management, energy management and consulting services. The increase in revenue from energy management and consulting services was offset, in part, by lower development fee income from non-regulated independent power projects. Equity in earnings of Yorkshire Power and other unconsolidated subsidiaries increased approximately $8.2 million and $1.9 million during 1999 and 1998, respectively, as compared to the preceding year primarily due to higher earnings from Yorkshire Power resulting from strong performance in its supply business (see Note 3. Investment in Yorkshire Power in Item 8. Financial Statements and Supplementary data). Non-Fuel Operating Expenses and Other Income and Deductions Other operating and maintenance expenses-regulated decreased $8.2 million during 1999 primarily due to the continued deployment of cost saving-programs instituted as part of the PSCo/SPS Merger, including lower pension and benefit costs resulting in part from changes in actuarial assumptions. In anticipation of completing the merger with NSP in mid-2000 the Company instituted a hiring freeze which also served to lower expenses. Other operating and maintenance expenses-regulated increased $10.0 million during 1998, as compared to the preceding year, primarily due to higher labor costs from wage rate increases, increased contract labor costs, higher data processing costs, including Year 2000 related costs and additional transmission wheeling costs. Other operating and maintenance expenses-nonregulated increased $15.7 million and $33.3 million during 1999 and 1998, respectively, as compared to the same period in the preceding year, primarily due to increased operating costs due to the acquisition of Planergy, effective April 1, 1998 and higher costs incurred in providing energy management and consulting services. Depreciation and amortization expense increased $12.2 million and $25.7 million in 1999 and 1998, respectively, primarily due to higher depreciation expenses from property additions. The increase in 1998 also includes $7.6 million of additional depreciation in connection with a settlement related to an SPS 1985 wholesale rate case. 38 Interest charges and preferred dividends of subsidiaries increased $12.1 million in 1999, when compared to 1998, primarily due to higher average amounts of debt outstanding used to finance capital expenditures, including PSCo's April 1998 issuance of $250 million and July 1999 issuance of $200 million of long- term debt and SPS's March 1999 issuance of $100 million of long-term debt. Lower AFDC in 1999 also contributed to the increase in interest charges. Interest charges and preferred dividends of subsidiaries decreased $1.8 million in 1998, when compared to 1997. Proceeds from PSCo's issuance of $250 million in long-term debt in April 1998 were used, in part, to reduce short term-debt. Proceeds from NCE's November 1998 issuance of $117 million in common stock were used primarily to reduce short-term debt and other borrowings. Higher average levels of debt were offset by lower average interest rates during 1998, compared to 1997. Additionally, in May 1998, PSCo issued $194 million of Trust Originated Preferred Securities ("TOPRS"). The proceeds were used to redeem all of PSCo's outstanding preferred stock (totaling $181.8 million) on June 10, 1998. A redemption premium totaling approximately $2.1 million was incurred as part of this refinancing, however, the after-tax financing costs associated with the TOPRS will be lower over the long-term. Additionally, higher AFDC was recorded in 1998 as a result of higher construction expenditures. Risk Management NCE and its subsidiaries are exposed to market risks in both the energy trading and non-trading operations. The objective of NCE's trading operations, which were primarily initiated in 1998, is to generate profits while minimizing the related exposure to changes in commodity prices. These operations include the gas marketing and trading activities at e prime and the wholesale power trading activities at PSCo. Power marketing and trading activities at e prime were discontinued during 1999. The objective of NCE's non-trading activities is to protect the Company's profitability. These operations include the retail gas business at e prime, the gas distribution and electricity load management activities at PSCo in addition to the normal operations of the Company. The market risks mentioned above include changes in commodity prices, interest rates, and currency exchange rates. Due to cost-based rate regulation, NCE's regulated subsidiaries have limited exposure to commodity price and interest rate risk. The Company manages these market risks through various policies and procedures that allow for the use of various instruments in the energy and financial markets. Risk management activities are monitored by the Company's Risk Management Compliance Committee, whose responsibilities include reviewing NCE and its subsidiaries' overall risk management strategy and monitoring risk management activities to ensure compliance with risk management limitations, policies and procedures. Commodity Price Risk NCE has continued to develop and expand its gas and power marketing and trading activities during 1999 and management expects to continue the growth of these activities during 2000. As a result, the Company's exposure to changes in commodity prices may increase and NCE may experience earnings volatility. To manage exposure to price volatility in the natural gas and electricity markets, a variety of energy contracts, both financial and commodity based are utilized as hedges. These contracts consist mainly of commodity futures and options, index or fixed price swaps and basis swaps and are used by both the trading and non-trading operations. NCE measures its open exposure to commodity price changes separately for the trading and non-trading operations using a Value-at-Risk ("VaR") methodology to quantify the estimates of the magnitude and probability of potential future losses related to open contractual positions. VaR expresses the potential loss in fair value of all open forward contract and option positions over a particular period of time, with a specified likelihood of occurrence. The model employs a 95 percent confidence level based on historical price movement for a holding period of 30 days. As of December 31, 1999 and 1998, the calculated VaR was as follows (in thousands): 39
NCE PSCo --- ---- 1999 1998 1999 1998 ----- ------ ----- ------ Natural gas marketing & trading activities.. $ 383 $ 29 $ - $ - Power marketing & trading activities........ 103 307 103 291 Natural gas non-trading activities.......... 564 312 - - Power non-trading activities................ 47 1,159 47 1,159
On a thirty-day holding period as of December 31, 1999, the VaR for NCE did not exceed $1.1 million. On a thirty-day holding period as of December 31, 1998, the VaR for NCE did not exceed $1.3 million. Due to the relative immaturity of the competitive market for electricity and related derivatives and the seasonality on changes in market prices, the VaR calculation may not reflect the full extent of NCE's and PSCo's commodity price risk exposure. Interest Rate Risk NCE and its subsidiaries have both long-term and short-term debt instruments that subject the Company and certain of its subsidiaries to the risk of loss associated with movements in market interest rates. This risk is limited for NCE's regulated companies primarily due to cost-based rate regulation. Except for one interest rate swap agreement entered into by SPS, the Company is not currently utilizing financial instruments to manage its exposure to interest rate fluctuations. In the future, management anticipates utilizing financial instruments to manage its exposure to changes in interest rates. These instruments may include interest rate swaps, caps, collars and exchange-traded futures contracts and put or call options on U.S. Treasury securities. As of December 31 1999, a 100 basis point change in each outstanding debt instrument's benchmark rate would impact net income of NCE, PSCo and SPS by approximately $5.0 million, $3.7 million and $0.8 million, respectively. If interest rates were to decline by 10% from their levels at December 31, 1999, the corresponding increase in fair value of $104.3 million at NCE and its subsidiaries, $70.7 million at PSCo and its subsidiaries and $32.9 million at SPS would impact earnings and cash flows only if the Company and its subsidiaries were to reacquire all or a portion of these instruments in the open market prior to their maturity. As of December 31, 1998, a 100 basis point change in each outstanding debt instrument's benchmark rate would impact net income of NCE, PSCo and SPS by approximately $5.8 million, $2.9 million and $2.1 million, respectively. If interest rates were to decline by 10% from their levels at December 31, 1998, the corresponding increase in fair value of $69 million at NCE and its subsidiaries, $53 million at PSCo and its subsidiaries and $15 million at SPS would impact earnings and cash flows only if the Company and its subsidiaries were to reacquire all or a portion of these instruments in the open market prior to their maturity. Currency Exchange Risk NCE's investment in Yorkshire Power, a foreign currency denominated joint venture, also exposes the Company to currency translation rate risk. At December 31, 1999 and 1998, the Company's exposure to changes in foreign currency exchange rates is not material to its consolidated financial position, results of operations or cash flows. The Company does not presently utilize financial instruments to manage its exposures to foreign currency exchange rate movements. Credit Risk In addition to the risks discussed above, NCE and its subsidiaries are exposed to credit risk in its risk management activities. Credit risk relates to the risk of loss resulting from the nonperformance of a counterparty of its contractual obligations. As the Company continues to expand its gas and power marketing and trading activities, the Company's exposure to credit risk and counterparty default may increase. NCE and its subsidiaries maintain credit policies intended to minimize overall credit risk. 40 NCE and its subsidiaries conduct standard credit reviews for all of its counterparties. The Company employs additional credit risk control mechanisms when appropriate, such as letters of credit, parental guarantees and standardized master netting agreements that allow for offsetting of positive and negative exposures. The credit exposure is monitored and, when necessary, the activity with a specific counterparty is limited until credit enhancement is provided. Commitments and Contingencies Issues relating to regulatory and environmental matters are discussed in Notes 10 and 11 in Item 8. Financial Statements and Supplementary Data. These matters and the future resolution thereof may impact the Company's future results of operations, financial position or cash flows. Year 2000 Issue The Y2K issue was the result of a universal programming standard that records dates as six digits, e.g., mm/dd/yy, using only the last two digits for the year. Any automated system software or firmware that uses two-digit fields could understand the year 2000 as the year 1900 if the issue was not corrected. This situation was not limited to computers; it had the potential to affect many systems, components and devices which have embedded computer chips and which may be date sensitive. The Company's most critical systems that required evaluation and remediation were power generation and distribution systems, telecommunications systems, energy trading systems and billing systems. The NCE Year 2000 Program was successful in preparing the Company and its subsidiaries for the Year 2000. The Year 2000 transition event resulted in no material adverse impact to the operations of the Company and occurred with no Y2K related disruption to the Company's ability to provide service to customers. The NCE Year 2000 Program was successful in correcting potential Y2K failure points identified in its critical automated systems to maintain service to its customers and to mitigate legal and financial risks. The Company anticipates no additional risks to its business operations as a result of the Y2K issue (see Note 11. Commitments and Contingencies - Year 2000 Issue in Financial Statements and Supplementary Data). Tax Matters PSRI, a subsidiary of PSCo, owns and manages permanent life insurance policies on certain past and present employees. These COLI policies were entered into prior to July 1, 1986. In 1996, Congress passed legislation to phase out the tax benefits with certain COLI policies, however, PSRI's policies were grandfathered under this legislation. In August 1998, the IRS issued a Notice of Proposed Adjustment proposing to disallow the 1993 and 1994 deductions of interest expense totaling approximately $54.6 million related to policy loans on the COLI policies. A Request for Technical Advice from the IRS National Office with respect to the proposed adjustment is pending. Management is vigorously contesting this issue. PSRI has not recorded any provision for income tax or interest expense related to this matter and has continued to take deductions for interest expense related to policy loans on its income tax returns for subsequent years. Management believes that PSRI's tax deduction of interest expense on life insurance policy loans was in full compliance with IRS regulations and believes that the resolution of this matter will not have a material adverse impact on NCE's or PSCo's financial position, results of operations or cash flows. Common Stock Dividend During 1999, the Company declared common stock dividends totaling $2.32 per share. The Company's common stock dividend level is dependent upon the Company's results of operations, financial position, cash flows and other factors. The Board of Directors of the Company will continue to evaluate the common stock dividend on a quarterly basis. 41 It is anticipated that Xcel Energy will initially adopt the NCE dividend payment level, adjusted for the exchange ratio, resulting in a pro forma dividend of $1.50 per share on an annual basis, following completion of the NCE/NSP Merger. The actual dividend level will be dependent upon the combined company's results of operations, financial position, cash flows and other factors, and will be evaluated by the Board of Directors of Xcel Energy. Liquidity and Capital Resources Cash Flows
1999 1998 1997 ---- ---- ---- Net cash provided by operating activities (in millions)............... $644.3 $659.5 $344.4
Cash provided by operating activities decreased slightly during 1999, when compared to 1998 primarily due to the cash proceeds received in 1998 by SPS and a non-regulated subsidiary, of approximately $67 million for the recovery of deferred costs and income from the investment in a non-regulated energy development project and the net changes in the recovery of purchased gas and electric energy costs. Cash provided by operations increased in 1998, when compared to 1997, primarily due to higher earnings from utility operations and a decrease in payments to gas suppliers resulting from lower gas costs during 1998.
1999 1998 1997 ---- ---- ---- Net cash used in investing activities (in millions)................... $639.5 $614.0 $856.4
Cash used in investing activities increased during 1999, when compared to 1998, primarily due to an increase in the level of construction expenditures reduced in part by the sale of certain newly constructed generation and gas transportation assets. Cash used in investing activities decreased during 1998, when compared to 1997, primarily due to the investment in Yorkshire Power in 1997, partially offset by higher 1998 construction expenditures and the acquisition of Planergy.
1999 1998 1997 ---- ---- ---- Net cash provided by (used in) financing activities (in millions)..... $ 22.3 $(61.5) $534.6
Cash provided by financing activities increased during 1999, when compared to 1998, primarily due to higher net proceeds from several debt financing activities completed in 1999. During the first quarter of 1999, SPS issued $100 million of senior notes used initially for the repayment of short-term debt. PSCo issued $200 million of long-term debt in July 1999, the proceeds of which were used for general corporate purposes. Cash provided by financing activities decreased during 1998, when compared to 1997, primarily due to PSCo's issuance of debt in early 1997 to finance the investment in Yorkshire Power. In November 1998, the Company issued $117 million in common stock and in April 1998, PSCo's issued $250 million of long-term bonds. Proceeds from the 1998 financings were primarily used to reduce short-term debt and other corporate purposes. In May 1998, PSCo issued $194 million of Trust Originated Preferred Securities. The proceeds were used to redeem all of PSCo's outstanding preferred stock (totaling $181.8 million) on June 10, 1998. 42 Prospective Capital Requirements The estimated cost as of December 31, 1999 of the construction programs of the Company and its subsidiaries and other capital requirements for the years 2000, 2001 and 2002 are shown in the table below (in millions):
2000 2001 2002 ----- ----- ----- Electric Production....................................... $ 162 $ 164 $ 163 Transmission..................................... 57 92 96 Distribution..................................... 161 163 161 Gas................................................. 62 45 43 General and non-utility subsidiaries................ 82 66 64 ----- ----- ----- Total construction expenditures.................. 524 530 527 Less: Allowance for funds used during construction.. 14 13 11 Add: Sinking funds and debt maturities.............. 158 140 116 ----- ----- ----- Total capital requirements.......................... $ 668 $ 657 $ 632 ===== ===== =====
The construction programs of the Company's subsidiaries are subject to continuing review and modification. In particular, actual construction expenditures may vary from the estimates due to changes in the electric system projected load growth, the desired reserve margin and the availability of purchased power, as well as alternative plans for meeting the Company's long- term energy needs. In addition, the Company's ongoing evaluation of merger, acquisition and divestiture opportunities to support corporate strategies, to address restructuring requirements and comply with future requirements to install emission control equipment may impact actual capital requirements (see Note 2. Proposed Merger with Northern States Power Company, Note 10. Regulatory Matters and Note 11. Commitments and Contingencies - Environmental Issues in Item 8. Financial Statements and Supplementary data). Capital Sources At December 31, 1999, the Company and its subsidiaries estimate that their 2000-2002 capital requirements will be met with a combination of funds from external sources and funds from operations. The Company and its subsidiaries may meet their external capital requirements through the sale of common stock by NCE, the issuance by NCE and its subsidiaries of secured and unsecured long-term and short-term debt and the sale of other securities. The financing needs are subject to continuing review and can change depending on market and business conditions and changes, if any, in the construction programs and other capital requirements of the Company and its subsidiaries. Registration Statements The Company has an effective registration statement covering the issuance of 10 million shares of common stock to be issued under the Company's Dividend Reinvestment and Cash Payment Plan ("Dividend Reinvestment Plan"). Any proceeds received by the Company will be used for general corporate purposes. This program allows for either the purchase of shares on the open market or the issuance of new shares. The Dividend Reinvestment Plan allows the Company's shareholders to purchase additional shares of the Company's common stock through the reinvestment of cash dividends and the purchase of additional shares of common stock with optional cash payments. As of December 31, 1999, approximately 7.7 million shares were available for issuance. Subsidiary Registration Statement PSCo has an effective shelf registration statement under which $300 million of senior debt securities are available for issuance. 43 Short-Term Borrowing Arrangements NCE has two credit facilities with several banks: a $100 million facility expiring November 22, 2000 and a $225 million facility expiring August 11, 2002. The facilities are used primarily to support issuance of the commercial paper by NCE. As of December 31, 1999, NCE had used $81.0 million of the total capacity available under these committed lines, $80.2 million of commercial paper and $0.8 million for a Letter of Credit issued under the NCE facility. NCE arrangements for uncommitted bank lines of credit totaled $20 million at December 31, 1999, of which all were used. PSCo and its subsidiaries have available committed lines of credit to meet their short-term cash requirements. PSCo and its subsidiaries have a credit facility with several banks which provides $300 million in committed bank lines of credit and is used primarily to support the issuance of commercial paper by PSCo and PSCCC, and to provide for direct borrowings thereunder. The facility expires November 17, 2000. Additionally, PSCo has a credit facility, which provides $300 million in committed lines of credit and expires on June 23, 2000. As of December 31, 1999, PSCo had used $355.6 million of the total capacity available under its committed lines of credit. Generally, the banks participating in the credit facility would have no obligation to continue their commitments if there has been a material adverse change in the consolidated financial condition, operations, business or otherwise that would prevent PSCo and its subsidiaries from performing their obligations under these credit facilities. Individual PSCo arrangements for uncommitted bank lines of credit totaled $150 million at December 31, 1999, none of which were used or outstanding. PSCCC may periodically issue medium-term notes to supplement the financing or purchase of PSCo's customer accounts receivable and fossil fuel inventories. As of December 31, 1999, PSCCC had issued and had outstanding $100 million in medium-term notes. The level of financing of PSCCC is tied directly to daily changes in the level of PSCo's outstanding customer accounts receivable and monthly changes in fossil fuel inventories and will vary minimally from year-to- year although seasonal fluctuations in the level of assets will cause corresponding fluctuations in the level of associated financing. SPS has two credit facilities which provide $250 million in committed bank lines of credit, each with a commitment termination date of February 22, 2000. As of December 31, 1999, SPS had used $181 million of the total capacity available under its committed lines of credit. Accounting Pronouncements Issued But Not Yet Effective In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. In July 1999, the FASB delayed the effective date for one year, to fiscal years beginning after June 15, 2000. The Company will adopt the standard as required by January 1, 2001. The Company has not yet quantified all effects of adopting SFAS 133 on the financial statements. The derivatives used in the Company's energy trading activities are accounted for on a mark-to-market basis and will not be affected by SFAS 133. As discussed in the following paragraphs, SFAS 133 could increase volatility in the Company's earnings and other comprehensive income or involve certain changes in business practices. SFAS 133, in part, allows special hedge accounting for fair value and cash flow hedges. SFAS 133 provides that the gain or loss on a derivative instrument designated and qualifying as a fair value hedging instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk be recognized currently in earnings in the same accounting period. SFAS 133 provides that the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument be reported as a component of other comprehensive income and be reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, must be recognized currently in earnings. 44 The Company and its subsidiaries enter into fixed-price contracts for future purchases of commodities from suppliers. In the event of default under such a contract, the Company and its supplier would be required to exchange an amount based on the change in the value of the underlying commodity. Under SFAS 133, the net settlement feature in default causes such contracts to be derivatives. However, the contracts may be designated as cash flow hedges of the underlying commodity purchases. The Company continues to evaluate the impact of the terms of such contracts and change the terms of certain contracts to eliminate such net settlement features under SFAS 133. The Company believes that the majority of its contracts for purchased power, fuel supply and gas purchased for resale are in the normal course of business and would not be impacted by SFAS 133; however, the Company has not yet completed its review of every contract that could potentially be impacted by SFAS 133. Item 7a. Quantitative and Qualitative Disclosure About Market Risk (NCE, PSCo, and SPS) Reference is made to the "Risk Management" section in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (NCE, PSCo and SPS). 45 Item 8. Financial Statements and Supplementary Data (NCE) REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS The Audit Committee of the Board of Directors, composed entirely of independent directors, met three times in 1999. The Committee assists the board in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing and reporting practices of the corporation and such other duties as directed by the Board. The full responsibilities of the committee are set forth in its charter, which is reviewed and amended periodically and approved by the Board. In fulfilling its responsibilities, the Committee recommended to the Board, subject to shareholder approval, the selection of Arthur Andersen LLP as the Company's independent public accountant. The Committee: . Discussed and considered the independence of Arthur Andersen LLP, reviewing as necessary all relationships and services which might bear on the objectivity of the independent public accountant; . Received written affirmation that the independent public accountant is in fact independent; . Discussed the overall audit process, receiving and reviewing all reports; . Involved the independent public accountant in the Committee's review of the Company's financial statements and related reports; . And provided to the independent public accountant full access to the Committee (and the Board) to report on any and all appropriate matters. The Committee provided guidance and oversight to the internal audit function of the Company, including review of the organization, plans and results of this activity. Both the chief internal auditor and the independent public accountant were afforded the routine opportunity to meet privately with the Committee and were encouraged to discuss any matters they desired. The Committee also met with selected members of management and the auditors to review financial statements (including quarterly reports), discussing such matters as the quality of earnings, estimates, reserves and accruals, suitability of accounting principles, highly judgmental areas, and audit adjustments whether or not recorded. In addition, the Committee considered the quality and adequacy of the Company's internal controls and the status of pending litigation, taxation matters and other areas of oversight to the financial reporting and audit process that the Committee felt appropriate. Management's responsibility for financial reporting and opinion of Arthur Andersen LLP are filed separately in this annual report and should be read in conjunction with this letter and reading of the financial statements. Based upon its work and the information received in the inquiries outlined above, the Committee is satisfied that its responsibilities under the charter for the period ending December 31, 1999 were met and that the financial reporting and audit processes of the Company are functioning effectively. Danny H. Conklin, Chairman Audit Committee February 22, 2000 46 REPORT OF MANAGEMENT The accompanying financial statements of New Century Energies, Inc. and subsidiaries have been prepared by Company personnel in conformity with generally accepted accounting principles consistent with the Uniform System of Accounts of the Federal Energy Regulatory Commission. The integrity and objectivity of the data in these financial statements are the responsibility of management. Financial information contained elsewhere in this Annual Report on Form 10-K is consistent with that in the financial statements. The accompanying financial statements have been audited by independent public accountants. Management has made available to its independent public accountants all the Company's and its subsidiaries' financial records and related data and has provided to them representations we believe to be valid and appropriate. The Company maintains a system of internal control over financial reporting, including the safeguarding of assets against unauthorized acquisition, use or disposition, which is designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation of reliable published financial statements and such asset safeguarding. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a code of conduct to foster a strong ethical climate, which are communicated throughout the Company, and the careful selection, training and development of our people. Internal auditors monitor the operation of the internal control system and report findings and recommendations to management and the Audit Committee of the Board of Directors, and corrective actions are taken to address control deficiencies and other opportunities for improving the system as they are identified. The board, operating through its Audit Committee, which is composed entirely of directors who are not officers or employees of the Company, provides oversight to the financial reporting process. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control system effectiveness may vary over time. The Company assessed its internal control system as of December 31, 1999 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, 1999, 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. Teresa S. Madden Bill D. Helton Principal Accounting Officer Chief Executive Officer February 22, 2000 47 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO NEW CENTURY ENERGIES, INC.: We have audited the consolidated balance sheets of New Century Energies, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of New Century Energies, Inc. and its subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Denver, Colorado, February 15, 2000. 48 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) December 31, 1999 and 1998 ASSETS ASSETS
1999 1998 ---------- ---------- Property, plant and equipment, at cost: Electric...................................................................... $7,496,942 $7,097,070 Gas........................................................................... 1,327,048 1,210,605 Steam and other............................................................... 113,050 111,620 Common to all departments..................................................... 464,059 423,287 Construction in progress...................................................... 400,439 391,100 ---------- ---------- 9,801,538 9,233,682 Less: accumulated depreciation................................................ 3,540,516 3,351,659 ---------- ---------- Total property, plant and equipment.......................................... 6,261,022 5,882,023 ---------- ---------- Investments, at cost: Investment in Yorkshire Power and other unconsolidated subsidiaries (Note 3).. 391,754 340,874 Other......................................................................... 89,404 64,562 ---------- ---------- Total investments............................................................ 481,158 405,436 ---------- ---------- Current assets: Cash and temporary cash investments........................................... 83,763 56,667 Accounts receivable, less reserve for uncollectible accounts ($4,601 at December 31, 1999; $4,842 at December 31, 1998).............................. 371,116 319,145 Accrued unbilled revenues..................................................... 266,537 130,455 Recoverable purchased gas and electric energy costs........................... 46,863 66,154 Materials and supplies, at average cost....................................... 75,021 69,298 Fuel inventory, at average cost............................................... 29,618 24,653 Gas in underground storage, at cost (LIFO).................................... 63,656 52,624 Current portion of accumulated deferred income taxes (Note 14)................ 4,987 - Prepaid expenses.............................................................. 74,905 74,017 Other......................................................................... 10,672 9,544 ---------- ---------- Total current assets......................................................... 1,027,138 802,557 ---------- ---------- Deferred charges: Regulatory assets (Note 1).................................................... 337,965 381,632 Unamortized debt expense...................................................... 29,775 27,408 Other......................................................................... 184,934 172,908 ---------- ---------- Total deferred charges....................................................... 552,674 581,948 ---------- ---------- $8,321,992 $7,671,964 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 49 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) December 31, 1999 and 1998 CAPITAL AND LIABILITIES
1999 1998 ----------- ---------- Common stock (Note 5).................................................................... $1,916,088 $1,866,386 Retained earnings........................................................................ 819,553 740,677 Accumulated comprehensive income......................................................... (2,951) 7,764 ---------- ---------- Total common equity.................................................................... 2,732,690 2,614,827 PSCo and SPS obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debentures of PSCo and SPS (Note 6).. 294,000 294,000 Long-term debt of subsidiaries (Note 7).................................................. 2,374,121 2,205,545 ---------- ---------- 5,400,811 5,114,372 ---------- ---------- Noncurrent liabilities: Employees' postretirement benefits other than pensions (Note 13)........................ 57,596 61,732 Employees' postemployment benefits (Note 13)............................................ 32,823 31,326 ---------- ---------- Total noncurrent liabilities........................................................... 90,419 93,058 ---------- ---------- Current liabilities: Notes payable and commercial paper (Note 8)............................................. 633,527 524,394 Long-term debt due within one year...................................................... 136,218 138,165 Accounts payable........................................................................ 471,757 285,080 Dividends payable....................................................................... 70,045 69,271 Recovered electric energy costs......................................................... 11,873 18,760 Customers' deposits..................................................................... 30,810 30,793 Accrued taxes........................................................................... 88,617 85,384 Accrued interest........................................................................ 61,701 50,229 Current portion of accumulated deferred income taxes (Note 14).......................... - 2,031 Other................................................................................... 152,535 120,716 ---------- ---------- Total current liabilities.............................................................. 1,657,083 1,324,823 ---------- ---------- Deferred credits: Customers' advances for construction.................................................... 56,259 55,400 Unamortized investment tax credits...................................................... 95,426 100,925 Accumulated deferred income taxes (Note 14)............................................. 967,408 947,247 Other................................................................................... 54,586 36,139 ---------- ---------- Total deferred credits................................................................. 1,173,679 1,139,711 ---------- ---------- Commitments and contingencies (Notes 10 and 11).......................................... ---------- ---------- $8,321,992 $7,671,964 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 50 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands of Dollars, Except per Share Data) Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---------- ---------- ---------- Operating revenues: Electric.............................................................................. $2,527,341 $2,624,057 $2,451,421 Gas................................................................................... 764,943 781,571 780,623 Other................................................................................. 83,146 72,143 52,570 ---------- ---------- ---------- 3,375,430 3,477,771 3,284,614 Operating expenses: Fuel used in generation............................................................... 618,002 644,311 671,805 Purchased power....................................................................... 567,230 639,457 509,549 Cost of gas sold...................................................................... 485,107 502,879 507,318 Other operating and maintenance expenses - regulated.................................. 538,967 547,136 537,091 Other operating and maintenance expenses - nonregulated............................... 106,264 90,607 57,268 Depreciation and amortization......................................................... 280,913 268,743 243,078 Taxes (other than income taxes)....................................................... 137,259 134,137 129,280 ---------- ---------- ---------- 2,733,742 2,827,270 2,655,389 ---------- ---------- ---------- Operating income....................................................................... 641,688 650,501 629,225 Other income and deductions: Equity in earnings of Yorkshire Power and other unconsolidated subsidiaries (Note 3).............................................................................. 44,265 36,101 34,166 PSCo/SPS Merger expenses.............................................................. - (790) (34,088) Write-off of investments in a cogeneration project (Note 4)........................... - - (16,052) Miscellaneous income and deductions - net............................................. (9,098) (3,460) (11,215) ---------- ---------- ---------- 35,167 31,851 (27,189) Interest charges and preferred dividends of subsidiaries: Interest on long-term debt............................................................ 176,729 168,184 165,560 Other interest........................................................................ 30,461 31,069 32,389 Allowance for borrowed funds used during construction................................. (13,372) (17,347) (10,921) Dividends on PSCo and SPS obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debentures of PSCo and SPS.......... 23,050 17,561 7,850 Dividend requirements and redemption premium on preferred stock of subsidiaries....... - 5,332 11,752 ---------- ---------- ---------- 216,868 204,799 206,630 ---------- ---------- ---------- Income before income taxes and extraordinary item...................................... 459,987 477,553 395,406 Income taxes (Note 14)................................................................. 113,390 135,596 133,919 ---------- ---------- ---------- Income before extraordinary item....................................................... 346,597 341,957 261,487 Extraordinary item - U.K. windfall tax (Note 3)........................................ - - (110,565) ---------- ---------- ---------- Net income............................................................................. $ 346,597 $ 341,957 $ 150,922 ========== ========== ========== Weighted average common shares outstanding: Basic................................................................................. 115,211 111,859 104,805 Diluted............................................................................... 115,233 112,008 104,872 Earnings per share of common stock outstanding - Basic: Income before extraordinary item...................................................... $ 3.01 $ 3.06 $ 2.50 Extraordinary item.................................................................... - - (1.06) ---------- ---------- ---------- Net income............................................................................ $ 3.01 $ 3.06 $ 1.44 ========== ========== ========== Earnings per share of common stock outstanding - Diluted: Income before extraordinary item...................................................... $ 3.01 $ 3.05 $ 2.50 Extraordinary item.................................................................... - - (1.06) ---------- ---------- ---------- Net income............................................................................ $ 3.01 $ 3.05 $ 1.44 ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 51 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Thousands of Dollars, Except Share Information) Years ended December 31, 1999, 1998 and 1997
Accumulated Other Common Stock, $1 par value Paid Retained Comprehensive ---------------------------- Shares Amount in Capital Earnings Income Total --------------- ----------- ----------- ---------- -------------- ----------- Balance at January 1, 1997................ 103,690,772 $103,691 $1,293,158 $ 773,191 $ - $2,170,040 Comprehensive income: Net income.............................. - - - 150,922 - 150,922 Foreign currency translation adjustment........................... - - - - 4,142 4,142 ---------- Comprehensive income (Note 1)........ 155,064 Dividends declared on common stock........ - - - (264,957) - (264,957) Issuance of common stock: Employees' Savings Plan................. 250,058 250 9,518 - - 9,768 Dividend Reinvestment Plan.............. 818,783 819 32,512 - - 33,331 Incentive Compensation Plans............ 89,688 89 2,765 - - 2,854 Stock offering proceeds, net (Note 5)... 5,900,000 5,900 245,493 - - 251,393 Other..................................... - - - (106) - (106) ----------- -------- ---------- --------- ------------- ---------- Balance at December 31, 1997.............. 110,749,301 110,749 1,583,446 659,050 4,142 2,357,387 Comprehensive income: Net income.............................. - - - 341,957 - 341,957 Foreign currency translation adjustment........................... - - - - 3,622 3,622 ---------- Comprehensive income (Note 1)........ 345,579 Dividends declared on common stock........ - - - (260,330) - (260,330) Issuance of common stock: Employees' Savings Plan................. 222,387 222 10,146 - - 10,368 Dividend Reinvestment Plan.............. 825,005 825 37,198 - - 38,023 Incentive Compensation Plans............ 194,079 195 6,605 - - 6,800 Stock offering proceeds, net (Note 5)... 2,500,000 2,500 114,500 - - 117,000 ----------- -------- ---------- --------- ------------- ---------- Balance at December 31, 1998.............. 114,490,772 114,491 1,751,895 740,677 7,764 2,614,827 Comprehensive income: Net income.............................. - - - 346,597 - 346,597 Foreign currency translation adjustment........................... - - - - (10,715) (10,715) ---------- Comprehensive income (Note 1)........ 335,882 Dividends declared on common stock........ - - - (267,721) - (267,721) Issuance of common stock: Employees' Savings Plan................. 200,880 201 8,267 - - 8,468 Dividend Reinvestment Plan.............. 1,095,495 1,095 38,339 - - 39,434 Incentive Compensation Plans............ 51,235 51 1,799 - - 1,850 Other................................... 33,177 33 1,158 1,191 Repurchase of common stock................ (34,360) (34) (1,207) - - (1,241) ----------- -------- ---------- --------- ------------- ---------- Balance at December 31, 1999.............. 115,837,199 $115,837 $1,800,251 $ 819,553 $ (2,951) $2,732,690 =========== ======== ========== ========= ============= ==========
Authorized shares of common stock were 260 million at December 31, 1999, 1998 and 1997. The accompanying notes to consolidated financial statements are an integral part of these financial statements. 52 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands of Dollars) Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---------- ---------- ---------- Operating activities: Net income........................................................................... $ 346,597 $ 341,957 $ 150,922 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary item - U.K. windfall tax (Note 3).................................... - - 110,565 Depreciation and amortization...................................................... 294,516 279,829 253,263 Amortization of investment tax credits............................................. (5,499) (5,222) (5,501) Deferred income taxes.............................................................. 37,184 6,248 52,211 Write-off of investments in a cogeneration project (Note 4)........................ - - 16,052 Equity in earnings of Yorkshire Power and other unconsolidated subsidiaries, net... (39,970) (34,199) (31,168) Allowance for equity funds used during construction................................ (968) - 1 Change in accounts receivable...................................................... (54,254) 2,026 (29,627) Change in inventories.............................................................. (21,955) (7,485) (2,334) Change in other current assets..................................................... (118,905) 16,965 (97,063) Change in accounts payable......................................................... 183,174 (13,704) (18,791) Change in other current liabilities................................................ 39,537 69,908 (15,356) Change in deferred amounts......................................................... (14,810) 740 (46,134) Change in noncurrent liabilities................................................... (2,639) 2,389 4,567 Other.............................................................................. 2,271 87 2,832 --------- --------- --------- Net cash provided by operating activities......................................... 644,279 659,539 344,439 Investing activities: Construction expenditures............................................................ (714,005) (608,972) (475,497) Allowance for equity funds used during construction.................................. 968 - (1) Proceeds from disposition of property, plant and equipment........................... 83,190 9,369 2,117 Acquisition and disposition of subsidiaries, net of cash acquired or sold (Note 4)... 13,877 (13,725) - Investment in Yorkshire Power (Note 3)............................................... - - (362,342) Purchase of other investments........................................................ (36,581) (6,131) (32,560) Sale of other investments............................................................ 13,072 5,466 11,844 --------- --------- --------- Net cash used in investing activities............................................. (639,479) (613,993) (856,439) Financing activities: Proceeds from sale of common stock (Note 5).......................................... 40,190 161,823 286,869 Proceeds from sale of long-term debt (Note 7)........................................ 355,594 350,497 419,819 Proceeds from sale of PSCo obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debentures of PSCo (Note 7)........... - 187,700 - Redemption of long-term debt......................................................... (215,674) (259,323) (227,577) Short-term borrowings - net.......................................................... 109,133 (63,949) 289,782 Redemption of preferred stock of subsidiaries........................................ - (181,824) (665) Dividends on common stock............................................................ (266,947) (256,426) (233,620) --------- --------- --------- Net cash provided by (used in) financing activities............................... 22,296 (61,502) 534,608 --------- --------- --------- Net increase (decrease) in cash and temporary cash investments.................... 27,096 (15,956) 22,608 Cash and temporary cash investments at beginning of year.......................... 56,667 72,623 50,015 --------- --------- --------- Cash and temporary cash investments at end of year................................ $ 83,763 $ 56,667 $ 72,623 ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 53 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (PSCo) The following narrative analysis discusses PSCo's results of operations comparing the changes for the years ended December 31, 1999, 1998 and 1997. Effective with the PSCo/SPS Merger on August 1, 1997, Cheyenne, WGI, e prime and Natural Fuels were transferred by a dividend of the subsidiaries' common stock, at net book value, aggregating approximately $49.9 million to NCE. NCE subsequently made a capital contribution of the e prime and Natural Fuels common stock, at net book value, aggregating approximately $29.5 million, to NC Enterprises, an intermediate holding company of NCE. Accordingly, the consolidated statements of income and cash flows for 1997 reflect the results of operations of Cheyenne, WGI, e prime and Natural Fuels through July 31, 1997. Where relevant, additional information has been presented to discuss the impact of the transfer of these subsidiaries. Certain information has been omitted pursuant to General Instructions I(2)(a). Discussion related to PSCo's Commitments and Contingencies is covered within NCE's Management's Discussion and Analysis of Financial Condition and Results of Operations. See Forward Looking Information. In addition, on March 31, 1998, PSCo sold its common stock in NCI at net book value (approximately $292.6 million), to NC Enterprises, and received as consideration a promissory note from NC Enterprises. The consolidated statements of income and cash flows for 1998 and 1997 reflect the results of NCI for the period from April 1, 1997 through March 31, 1998 (see Note 3. Investment in Yorkshire Power in Item 8. Financial Statements and Supplementary Data). Earnings Available for Common Stock Earnings were $204.3 million, $194.8 million, and $81.7 million during 1999, 1998 and 1997, respectively. The significant decrease in 1997 was primarily attributable to the recognition of an extraordinary item related to the one-time U.K. windfall tax of approximately $110.6 million for its 50% ownership in Yorkshire Power. The increase in 1999 earnings was primarily due to an increase in electric margin resulting from customer growth and lower operating and maintenance expenses. Excluding the impact of this extraordinary item in 1997, earnings increased slightly from 1997 to 1998 primarily due to higher 1998 electric margin resulting from customer growth and lower merger costs, offset in part by the impacts resulting from the sale of NCI to NC Enterprises. Electric Operations The following table details the annual change in electric operating revenues and energy costs as compared to the preceding year (in thousands).
Increase (Decrease) From Prior Year ------------------------------------------ 1999 1998 --------- ------------------------------ Cheyenne PSCo & e prime Total ---- --------- ----- Electric operating revenues: Retail....................................... $ 31,478 $ 40,850 $(21,492) $ 19,358 Wholesale.................................... (180,332) 104,994 - 104,994 Other (including unbilled revenues).......... 74,333 36,492 (332) 36,160 --------- -------- -------- -------- Total revenues.............................. (74,521) 182,336 (21,824) 160,512 Fuel used in generation....................... 19,192 13,478 - 13,478 Purchased power............................... (114,537) 121,546 (15,676) 105,870 --------- -------- -------- -------- Net increase (decrease) in electric margin.. $ 20,824 $ 47,312 $ (6,148) $ 41,164 ========= ======== ======== ========
54 The following table compares electric Kwh sales by major customer classes.
Millions of Kwh Sales % Change From Prior Year * --------------------- ---------------------------------- 1999 1998 --------- --------------------- PSCo 1999 1998 Consolidated Only ---------- --------- -------------- ---- Residential.................. 7,053 6,761 4.3% 1.5% 3.4% Commercial and Industrial.... 16,048 15,610 2.8 (0.1) 2.3 Public Authority............. 232 207 12.3 9.4 10.8 ---------- --------- Total Retail............... 23,333 22,578 3.3 0.5 2.7 Wholesale.................... 5,204 7,874 (33.9) 75.3 75.3 ---------- --------- Total........................ 28,537 30,452 (6.3) 10.2 15.0 ========== ========= Power Marketing and Trading.. 12,793 - ** ========== =========
* Percentages are calculated using unrounded amounts. ** Percentages change is significant, but presentation of the amount is not meaningful. Electric margin increased in 1999, when compared to 1998, primarily due to higher retail sales of 3.3% resulting primarily from customer growth of approximately 2.5% offset, in part, by warmer than normal weather and the negative impact of higher 1999 accruals related to the estimated customer refund obligation (approximately $15 million) in connection with the quality of service plan refund and earnings sharing in excess of 11% return on equity (see Note 10. Regulatory Matters in Item 8. Financial Statements and Supplementary Data). Wholesale revenues decreased due to lower non-firm sales. Power marketing and trading activities have increased although revenues and purchased energy costs for these activities are presented net for financial reporting purposes. Activities from wholesale marketing positively contributed to electric margin, but the amount was not significant. Electric margin increased in 1998, when compared to 1997, primarily due to higher retail sales of 2.7% resulting from customer growth of approximately 1.8%. PSCo has cost adjustment mechanisms which recognize the effects of changes in fuel used in generation and purchased power costs and allow recovery of such costs on a timely basis. PSCo has an ICA which allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders. PSCo's share of cost reductions under the ICA was approximately $3 million and $200,000 in 1999 and 1998, respectively (see Note 10. Regulatory Matters in Item 8. Financial Statements and Supplementary Data). Fuel used in generation expense increased approximately $19.2 million during 1999 and $13.5 million during 1998, as compared to the respective prior year, primarily due to increased generation levels at PSCo's power plants. The increased generation primarily came from the additional combustion turbine capacity installed at Fort St. Vrain which began operations in June 1999. Purchased power expense decreased approximately $114.5 million during 1999, as compared to 1998, primarily due to the lower non-firm power purchases resulting for non-trading activities offset, in part, by higher firm power purchases under new contracts. Purchased power expense increased approximately $105.9 million during 1998, as compared to 1997, primarily due to purchases in connection with increased wholesale marketing activities. The average cost of purchased power for non-trading activities decreased approximately 19% in 1999 and increased approximately 22% in 1998 as compared to the respective prior years. 55 Gas Operations The following table details the annual change in revenues from gas sales and gas purchased for resale as compared to the preceding year (in thousands).
Increase (Decrease) From Prior Year ------------------------------------------- 1998 ---------------------------------- Cheyenne Natural Fuels WGI & 1999 PSCo e prime Total ------- ------- --------- --------- Revenues from gas sales (including unbilled revenues).. $14,728 $15,122 $ (91,999) $(76,877) Gas purchased for resale............................... 14,124 14,078 (83,112) (69,034) ------- ------- --------- -------- Net increase (decrease) in gas sales margin........... 604 1,044 (8,887) (7,843) Transportation......................................... 3,030 2,464 (457) 2,007 ------- ------- --------- -------- Increase (decrease) in gas margin..................... $ 3,634 $ 3,508 $ (9,344) $ (5,836) ======= ======= ========= ========
The following table compares gas Dth deliveries by major customer classes.
Millions of % Change From Prior Year * ----------- ------------------------------------------- Dth Deliveries 1999 1998 -------------- ---- --------------------- PSCo 1999 1998 Consolidated Only ----- ----- ------------ ------- Residential..... 84.1 82.2 2.3% (5.1)% (3.2)% Commercial...... 39.2 40.2 (2.4) (14.2) (11.7) ----- ----- Total sales..... 123.3 122.4 0.7 (8.3) (6.2) Transportation.. 93.1 90.7 2.6 4.5 17.3 ----- ----- Total......... 216.4 213.1 1.5 (3.3) 2.5 ===== =====
* Percentages are calculated using unrounded amounts. Gas sales margin increased approximately $600,000 in 1999, compared to 1998. Gas sales increased slightly due to customer growth of approximately 3.5%, but were negatively impacted by the effects of warmer weather (approximately 8% fewer heating degree days). Higher base rates effective July 1, 1999 resulting from PSCo's 1998 rate case provided an additional $5 million in revenues which served to partially offset the negative effects of weather. PSCo's gas sales margin increased in 1998, when compared to 1997, primarily due to an increase in base revenues associated with the higher rates effective February 1, 1997, resulting from the 1996 rate case. This increase in 1998 was offset, in part, by a 6.2% decrease in PSCo's retail gas sales, which resulted from warmer weather despite a 2.8% increase in customers. Gas marketing activities by non-regulated subsidiaries favorably contributed to the gas sales margin in 1997. Gas transportation revenues increased approximately $3.0 million and $2.0 million, respectively, when compared to 1998 and 1997, primarily due to an increase in transport deliveries and higher transportation rates effective July 1, 1999. The increase in transport deliveries continues to be impacted by the shifting of various commercial customers to transport customers as such customers procure their unbundled gas supply from other sources. PSCo has in place a GCA mechanism for natural gas sales, which recognizes the majority of the effects of changes in the cost of gas purchased for resale and adjusts revenues to reflect such changes in cost on a timely basis. As a result, the changes in revenues associated with these mechanisms in 1999 and 1998, when compared to the respective preceding year, had little impact on net income. However, the fluctuations in gas sales impact the amount of gas PSCo must purchase and, therefore, along with the increases and decreases in the per- unit cost of gas, affect total gas purchased for resale. 56 Non-Fuel Operating Expenses Other operating and maintenance expenses decreased approximately $8.4 million during 1999 as compared to 1998 primarily due to lower administrative and general costs, including a decrease in pension and benefit costs. PSCo's net periodic pension cost has decreased over the past couple years as a result of higher investment returns and changes to actuarial assumptions. PSCo has continued to realize cost savings from the PSCo/SPS merger and minimize the impacts of higher costs to serve a growing customer base. Other operating and maintenance expenses increased approximately $12.1 million during 1998 as compared to 1997 primarily due to increased costs for electric operations, including higher distribution costs to serve new customers and a $5 million reduction in the decommissioning liability during 1997. Depreciation and amortization expense increased $13.5 million in 1999 and $12.5 million in 1998 primarily due to the depreciation of property additions and the higher amortization of software costs. Income taxes decreased $4.9 million in 1999, as compared to 1998, primarily due to the recognition of additional Colorado state tax credits, additional tax benefits related to PSR and favorable impact of deducting certain prior year severance costs. Income taxes increased $10.7 million in 1998, as compared to 1997, primarily due to higher pre-tax income and lower foreign tax credits as PSCo transferred its investment in Yorkshire Power to NCI on March 31, 1998. Other Income and Deductions Other income and deductions decreased $1.5 million during 1999, when compared to 1998. On March 31, 1998, PSCo sold its common stock in NCI at net book value (approximately $292.6 million), to NC Enterprises, an intermediate holding company of NCE, and received as consideration a promissory note from NC Enterprises (see Note 3. Investment in Yorkshire Power in Item 8. Financial Statements and Supplementary Data). Approximately $13.5 million of interest income on the promissory note was recognized in 1999, compared to $14.2 million of interest income in 1998 and the recognition of equity earnings associated with PSCo's investment in Yorkshire Power of approximately $3.4 million in 1998, prior to the sale. Other income and deductions increased $3.5 million during 1998, when compared to 1997, primarily due to the absence of PSCo/SPS Merger and business integration costs and legal costs associated with various employee lawsuits. In addition, equity in earnings from Yorkshire Power decreased as a result of the sale of NCI to NC Enterprises in exchange for a promissory note, effective March 31, 1998. This decrease in equity earnings was offset, in part, by interest income recognized on the note receivable. Interest Charges Interest charges and dividend requirements and redemption premium on preferred stock increased $12.5 million during 1999, when compared to 1998. The increase is primarily attributable to costs to finance capital expenditures, including higher interest costs on long-term debt resulting from the April 1998 issuance of $250 million and the July 1999 issuance of $200 million of long-term debt. Additionally, in May 1998, PSCo issued $194 million of Trust Originated Preferred Securities. The proceeds were used to redeem all of PSCo's outstanding preferred stock (totaling $181.8 million) in June 1998 (see Note 6. PSCo and SPS Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debentures in Item 8. Financial Statements and Supplementary Data). Interest charges and dividend requirements and redemption premium on preferred stock decreased $4.3 million during 1998, when compared to 1997. Proceeds from the issuance of $250 million of long-term debt in April 1998 were used, in part, to reduce short-term debt. Higher interest costs on additional long-term debt, net of retirements, were offset, in part, by lower interest rates. Other interest expense decreased primarily due to lower short-term borrowings. The lower financing costs of the Trust Originated Preferred Securities also served to lower the costs for 1998. 57 Liquidity and Capital Resources Prospective Capital Requirements The estimated cost as of December 31, 1999, of the construction programs of PSCo and its subsidiaries and other capital requirements for the years 2000, 2001 and 2002 are shown in the table below (in millions):
2000 2001 2002 ----- ----- ----- Electric Production......................................... $ 135 $ 141 $ 135 Transmission....................................... 23 35 27 Distribution....................................... 136 135 130 Gas...................................................... 61 43 42 General and Non-utility.................................. 46 39 39 ----- ----- ----- Total construction expenditures.................. 401 393 373 Less: AFDC............................................... 10 8 10 Add: Sinking funds and debt maturities and refinancings.. 131 140 138 ----- ----- ----- Total capital requirements....................... $ 522 $ 525 $ 501 ===== ===== =====
The construction programs of PSCo and its subsidiaries are subject to continuing review and modification. In particular, actual construction expenditures may vary from the estimates due to changes in the electric system projected load growth, the desired reserve margin and the availability of purchased power, as well as alternative plans for meeting PSCo's long-term energy needs. In addition, PSCo's ongoing evaluation of asset acquisition and divestiture opportunities to support corporate strategies and future requirements to install emission control equipment may impact actual capital requirements (see Note 11. Commitments and Contingencies - Environmental Issues in Item 8. Financial Statements and Supplementary data). Capital Sources At December 31, 1999, PSCo and its subsidiaries estimate that their 2000-2002 capital requirements, as summarized above, and the payment of common stock dividends to NCE will be met with a combination of funds from external sources and funds from operations. PSCo and its subsidiaries may meet their external capital requirements through capital contributions by NCE, the issuance of secured or unsecured long-term and short-term debt and the sale of other securities by PSCo and its subsidiaries. The financing needs are subject to continuing review and can change depending on market and business conditions and changes, if any, in the construction programs and other capital requirements of PSCo and its subsidiaries. 58 Item 8. Financial Statements and Supplementary Data (PSCo) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO PUBLIC SERVICE COMPANY OF COLORADO: We have audited the accompanying consolidated balance sheets and statements of capitalization of Public Service Company of Colorado (a Colorado corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Denver, Colorado, February 15, 2000. 59 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) December 31, 1999 and 1998 ASSETS
1999 1998 ---------- ---------- Property, plant and equipment, at cost: Electric.................................................................. $4,629,092 $4,369,134 Gas....................................................................... 1,289,995 1,171,198 Steam and other........................................................... 68,109 71,986 Common to all departments................................................. 458,940 418,484 Construction in progress.................................................. 300,224 264,752 ---------- ---------- 6,746,360 6,295,554 Less: accumulated depreciation............................................ 2,373,824 2,241,165 ---------- ---------- Total property, plant and equipment...................................... 4,372,536 4,054,389 ---------- ---------- Investments, at cost: Note receivable from affiliate (Note 3)................................... 192,620 192,620 Other..................................................................... 12,679 22,664 ---------- ---------- Total investments........................................................ 205,299 215,284 ---------- ---------- Current assets: Cash and temporary cash investments....................................... 51,731 19,926 Accounts receivable, less reserve for uncollectible accounts ($ 2,533 at December 31, 1999; $2,254 at December 31, 1998)......................... 199,304 172,587 Accrued unbilled revenues................................................. 220,330 119,856 Recoverable purchased gas and electric energy costs....................... 42,697 62,761 Materials and supplies, at average cost................................... 53,984 47,881 Fuel inventory, at average cost........................................... 27,326 22,361 Gas in underground storage, at cost (LIFO)................................ 62,487 51,779 Current portion of deferred income taxes.................................. 3,532 - Prepaid expenses and other................................................ 42,760 46,523 ---------- ---------- Total current assets..................................................... 704,151 543,674 ---------- ---------- Deferred charges: Regulatory assets (Note 1)................................................ 236,251 269,112 Unamortized debt expense.................................................. 18,892 17,874 Other..................................................................... 51,813 77,303 ---------- ---------- Total deferred charges................................................... 306,956 364,289 ---------- ---------- $5,588,942 $5,177,636 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 60 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) December 31, 1999 and 1998 CAPITAL AND LIABILITIES
1999 1998 ---------- ---------- Common stock.............................................................. $1,414,835 $1,302,119 Retained earnings......................................................... 346,050 325,213 ---------- ---------- Total common equity..................................................... 1,760,885 1,627,332 PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo (Note 6)............ 194,000 194,000 Long-term debt (Note 7)................................................... 1,721,959 1,643,130 ---------- ---------- 3,676,844 3,464,462 ---------- ---------- Noncurrent liabilities: Employees' postretirement benefits other than pensions (Note 13)......... 51,080 55,537 Employees' postemployment benefits (Note 13)............................. 26,229 27,195 ---------- ---------- Total noncurrent liabilities............................................ 77,309 82,732 ---------- ---------- Current liabilities: Notes payable and commercial paper (Note 8).............................. 356,192 402,795 Long-term debt due within one year....................................... 132,823 44,481 Accounts payable......................................................... 336,891 226,712 Dividends payable........................................................ 44,575 46,461 Recovered electric energy costs.......................................... 11,873 - Customers' deposits...................................................... 24,370 23,902 Accrued taxes............................................................ 67,030 57,848 Accrued interest......................................................... 44,034 36,729 Current portion of accumulated deferred income taxes (Note 14)........... - 8,142 Other.................................................................... 91,067 68,729 ---------- ---------- Total current liabilities............................................... 1,108,855 915,799 ---------- ---------- Deferred credits: Customers' advances for construction..................................... 54,826 54,260 Unamortized investment tax credits....................................... 89,286 94,459 Accumulated deferred income taxes (Note 14).............................. 555,829 538,581 Other.................................................................... 25,993 27,343 ---------- ---------- Total deferred credits.................................................. 725,934 714,643 ---------- ---------- Commitments and contingencies (Notes 10 and 11)........................... ---------- ---------- $5,588,942 $5,177,636 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 61 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION (Thousands of Dollars, Except Share Information) December 31, 1999 and 1998
1999 1998 ----------- ----------- Common shareholder's equity: Common stock, $0.01 par value, authorized and outstanding 100 shares in 1999 and 1998.... $ - $ - Paid in capital.......................................................................... 1,414,835 1,302,119 Retained earnings........................................................................ 346,050 325,213 ---------- ---------- Total common shareholder's equity...................................................... 1,760,885 1,627,332 ---------- ---------- Preferred stock (Note 5): $0.01 par value, 10 million shares authorized, no shares outstanding................... - - ---------- ---------- PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo (Note 6).............................. 194,000 194,000 Long-term debt (Note 7): Public Service Company of Colorado: First Mortgage Bonds 6% due January 1, 2001................................................................. 102,667 102,667 6% due April 15, 2003.................................................................. 250,000 250,000 8-1/8% due March 1, 2004............................................................... 100,000 100,000 Pollution Control Series A and B, 5-7/8% due March 1, 2004............................. - 21,500 6-3/8% due November 1, 2005............................................................ 134,500 134,500 7-1/8% due June 1, 2006................................................................ 125,000 125,000 Pollution Control Series G, 5-5/8% due April 1, 2008................................... 18,000 18,000 Pollution Control Series F, 7-3/8% due November 1, 2009................................ - 27,250 Pollution Control Series G, 5-1/2% due June 1, 2012.................................... 50,000 50,000 Pollution Control Series G, 5-7/8% due April 1, 2014................................... 61,500 61,500 9-7/8% due July 1, 2020................................................................ 70,000 75,000 8-3/4% due March 1, 2022............................................................... 148,000 150,000 7-1/4% due January 1, 2024............................................................. 110,000 110,000 Pollution Control Series 1999, 5.1% due January 1, 2019................................ 21,500 - Pollution Control Series 1999, 5.1% due January 1, 2019................................ 27,250 - Unsecured Senior A Notes 6-7/8% due July 15, 2009............................................................... 200,000 - Secured Medium-Term Notes, Series A and B, 6.02% - 9.25%, due March 15, 1999 - March 5, 2007..................................................... 256,500 296,500 Unamortized discount..................................................................... (6,998) (4,616) Capital lease obligations, 6.68% -11.21% due in installments through May 31, 2025........ 56,565 39,555 ---------- ---------- 1,724,484 1,556,856 ---------- ---------- PS Colorado Credit Corporation, Inc.: Unsecured Medium-Term Notes, Series A, 5.86% due May 30, 2000.............................................................. 100,000 100,000 1480 Welton, Inc.: 13.25% secured promissory note, due in installments through October 1, 2016............. 30,298 30,755 ---------- ---------- 1,854,782 1,687,611 Less: maturities due within one year...................................................... 132,823 44,481 ---------- ---------- Total long-term debt................................................................ 1,721,959 1,643,130 ---------- ---------- Total capitalization....................................................................... $3,676,844 $3,464,462 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 62 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands of Dollars) Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ----------- ----------- ----------- Operating revenues: Electric................................................................................. $1,561,052 $1,635,573 $1,475,061 Gas...................................................................................... 657,822 640,064 714,934 Other.................................................................................... 8,082 8,449 11,356 ---------- ---------- ---------- 2,226,956 2,284,086 2,201,351 Operating expenses: Fuel used in generation.................................................................. 231,376 212,184 198,706 Purchased power.......................................................................... 475,100 589,637 483,767 Gas purchased for resale................................................................. 394,678 380,554 449,588 Other operating and maintenance expenses................................................. 394,901 403,292 391,177 Depreciation and amortization............................................................ 194,365 180,913 168,451 Taxes (other than income taxes).......................................................... 84,456 83,994 81,496 Income taxes (Note 14)................................................................... 96,574 101,494 90,813 ---------- ---------- ---------- 1,871,450 1,952,068 1,863,998 ---------- ---------- ---------- Operating income............................................................................ 355,506 332,018 337,353 Other income and deductions: Interest income (Note 16)................................................................ 18,719 16,618 2,829 Equity in earnings of Yorkshire Power (Note 3)........................................... - 3,446 34,926 PSCo/SPS merger expenses................................................................. - 418 (18,661) Miscellaneous income and deductions - net................................................ (13,786) (14,083) (16,203) ---------- ---------- ---------- 4,933 6,399 2,891 Interest charges: Interest on long-term debt............................................................... 125,106 120,082 118,438 Other interest........................................................................... 26,525 20,849 24,117 Allowance for borrowed funds used during construction.................................... (10,657) (12,328) (6,353) Dividends on PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo (Note 6)................ 15,200 9,711 - ---------- ---------- ---------- 156,174 138,314 136,202 ---------- ---------- ---------- Income before extraordinary item............................................................ 204,265 200,103 204,042 Extraordinary item - U.K. windfall tax (Note 3)............................................. - - (110,565) ---------- ---------- ---------- Net income.................................................................................. 204,265 200,103 93,477 Dividend requirements and redemption premium on preferred stock............................. - 5,332 11,752 ---------- ---------- ---------- Earnings available for common stock......................................................... $ 204,265 $ 194,771 $ 81,725 ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 63 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (Thousands of Dollars, Except Share Information) Years ended December 31, 1999, 1998 and 1997
Accumulated Other Common Stock, (1) Paid Retained Comprehensive ----------------- Shares Amount in Capital Earnings Income Total ---------------- --------- ---------- --------- ------------- ---------- Balance at January 1, 1997............... 64,818,759 324,094 724,353 389,841 - 1,438,288 Comprehensive income: Net income.............................. - - - 93,477 - 93,477 Foreign currency translation adjustment............................. - - - - 4,142 4,142 ---------- Comprehensive income (Note 1)......... 97,619 Dividends declared: Common stock, prior to August 1, 1997 Merger................. - - - (76,202) - (76,202) Common stock, to NCE.................... - - - (76,093) - (76,093) Preferred stock, $100 par value......... - - - (8,803) - (8,803) Preferred stock, $25 par value.......... - - - (2,940) - (2,940) Issuance of common stock: Employees' Savings Plan................. 250,058 1,250 8,518 - - 9,768 Dividend Reinvestment Plan.............. 488,224 2,441 16,899 - - 19,340 Incentive Compensation Plan............. 40,404 202 993 - - 1,195 Merger with SPS: Exchange of common stock for NCE stock............................. (65,597,345) (327,987) 327,987 - - - Dividend of subsidiaries' stock to NCE................................ - - (49,912) - - (49,912) Contribution of capital by NCE (Note 5).. - - 273,300 - - 273,300 Other.................................... - - (19) - - (19) ---------------- --------- ---------- --------- ------------- ---------- Balance at December 31, 1997............. 100 - 1,302,119 319,280 4,142 1,625,541 Comprehensive income: Net income.............................. - - - 200,103 - 200,103 Foreign currency translation adjustment............................. - - - - 5,260 5,260 Sale of NCI to NC Enterprises........... - - - - (9,402) (9,402) ---------- Comprehensive income (Note 1)........ 195,961 Dividends declared Common stock, to NCE................................ - - - (188,845) - (188,845) Preferred stock, $100 par value......... - - - (4,166) - (4,166) Preferred stock, $25 par value.......... - - - (1,166) - (1,166) Other.................................... - - - 7 - 7 ---------------- --------- ---------- --------- ------------- ---------- Balance at December 31, 1998............. 100 - 1,302,119 325,213 - 1,627,332 Net income-Comprehensive income.......... - - - 204,265 - 204,265 Dividends declared Common stock, to NCE.................... - - - (183,428) - (183,428) Contribution of capital by NCE (Note 5).. - - 109,372 - - 109,372 Contribution of subsidiary's stock by NCE (Note 1)............................ - - 3,344 - - 3,344 ---------------- --------- ---------- --------- ------------- ---------- Balance at December 31, 1999............. 100 $ - $1,414,835 $ 346,050 $ - $1,760,885 ================ ========= ========== ========= ============= ==========
(1) Authorized shares of common stock were 100 at December 31, 1999 and 1998 and 1997. Common stock, par value was $5 through September 18, 1997. Effective September 19, 1997, common stock, par value was changed to $0.01. The accompanying notes to consolidated financial statements are an integral part of these financial statements. 64 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands of Dollars) Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---------- ---------- ---------- Operating activities: Net income.............................................................. $ 204,265 $ 200,103 $ 93,477 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary item - U.K. windfall tax (Note 3)....................... - - 110,565 Depreciation and amortization......................................... 202,634 186,620 173,047 Amortization of investment tax credits................................ (5,173) (4,896) (5,219) Deferred income taxes................................................. 15,817 7,092 37,390 Equity in earnings of Yorkshire Power................................. - (3,446) (34,926) Allowance for equity funds used during construction................... - - 6 Change in accounts receivable......................................... (25,687) 21,540 (15,378) Change in inventories................................................. (21,298) (6,553) (2,163) Change in other current assets........................................ (76,633) 7,937 (52,914) Change in accounts payable............................................ 109,870 9,148 (5,413) Change in other current liabilities................................... 50,749 22,957 (15,870) Change in deferred amounts............................................ 26,505 (18,289) (21,913) Change in noncurrent liabilities...................................... (5,423) (995) 3,367 Other................................................................. - - (144) --------- --------- --------- Net cash provided by operating activities............................ 475,626 421,218 263,912 Investing activities: Construction expenditures............................................... (567,282) (504,727) (352,273) Allowance for equity funds used during construction..................... - - (6) Proceeds from disposition of property, plant and equipment.............. 92,861 9,102 3,187 Investment in Yorkshire Power (Note 3).................................. - - (362,342) Payment received on note receivable from NC Enterprises (Note 3)........ - 100,000 - Contribution of subsidiary from NCE (Note 1)............................ 344 - - Transfer of subsidiaries to NCE (Note 1)................................ - - (2,229) Purchase of other investments........................................... (2,550) (1,345) (19,224) Sale of other investments............................................... 12,952 4,101 11,162 --------- --------- --------- Net cash used in investing activities................................ (463,675) (392,869) (721,725) Financing activities: Contribution of capital by NCE.......................................... 109,372 - 273,300 Proceeds from sale of common stock (Note 5)............................. - - 20,517 Proceeds from sale of PSCo obligated manadatorily redeemable preferred securities (Note 6).................................................... - 187,700 - Proceeds from sale of long-term debt (Note 7)........................... 242,846 347,025 412,220 Redemption of long-term debt............................................ (99,928) (257,737) (205,550) Short-term borrowings - net............................................. (47,121) 66,195 127,530 Redemption of preferred stock........................................... - (181,824) (665) Dividends on common stock (Notes 5 and 16).............................. (185,315) (180,430) (148,279) Dividends and redemption premium on preferred stock..................... - (8,261) (11,757) --------- --------- --------- Net cash provided by (used in) financing activities.................. 19,854 (27,332) 467,316 --------- --------- --------- Net increase in cash and temporary cash investments.................. 31,805 1,017 9,503 Cash and temporary cash investments at beginning of year............. 19,926 18,909 9,406 --------- --------- --------- Cash and temporary cash investments at end of year................... $ 51,731 $ 19,926 $ 18,909 ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 65 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (SPS) Competition and Corporate Overview The following narrative analysis discusses SPS's results of operations comparing the years ending December 31, 1999, 1998 and 1997. Effective with the PSCo/SPS Merger on August 1, 1997, Quixx and UE, previously wholly-owned subsidiaries, were transferred through the sale by SPS of all of the outstanding common stock of such subsidiaries at net book value to NC Enterprises, an intermediate holding company of NCE. The 1997 statements of income and cash flows reflect the results of operations of Quixx and UE through July 31, 1997. Electric restructuring legislation was passed in Texas and New Mexico during 1999. Overall, in these states, retail competition and customer choice is expected to be available to most customers by January 1, 2002. In early January 2000, SPS filed its business separation plan in Texas for the unbundling of business activities into power generation, transmission and distribution and retail electric provider services. SPS is diligently working to satisfy the conflicting legislative and regulatory requirements of Texas and New Mexico in developing its transition plans. Major issues include market power, divestiture of generation capacity, transmission constraints, legal separation, refinancing of securities, implementing procedures to govern affiliate transactions, investments in information technology and the pricing of unbundled services, all of which have significant financial implications. SPS can not predict the outcome of these proceedings at this time. As these issues are addressed in 2000 and sufficient details are available to reasonably determine how this transition will affect the portions of the businesses whose pricing is being deregulated, SPS may discontinue applying regulatory accounting for those businesses. The resolution of these matters may have a significant impact on the financial position, results of operations and cash flows of SPS (see Note 10. Regulatory Matters in Item 8. Financial Statements and Supplementary Data). Information has been presented where meaningful, however, certain information has been omitted pursuant to General Instructions I(2)(a). Discussion related to Commitments and Contingencies is covered within NCE's Management's Discussion and Analysis of Financial Condition and Results of Operations. See Forward Looking Information. Earnings Available for Common Stock Earnings available for common stock were $102.7 million, $115.0 million and $75.6 million during 1999, 1998 and 1997, respectively. The decrease in 1999 earnings was primarily due to lower retail sales, resulting from the effects of milder weather during the current year and the absence of a FERC rate case settlement recognized in 1998. The increase in 1998 earnings was primarily due to higher electric sales, lower operation and maintenance expenses, the recognition of merger and business integration costs during 1997 and the write- off of Quixx's and UE's investment in the Carolina Energy Project in 1997. 66 Electric Operations Substantially all of SPS's operating revenues result from the sale of electric energy. The principal factors impacting revenues are the amount and price of energy sold. The following table details the annual change in electric operating revenues and energy costs as compared to the preceding fiscal year (in thousands):
Increase (Decrease) From Prior Year ----------------------------------- 1999 1998 ---- ---- Electric operating revenues: Retail..................................................................... $(85,495) $ 21,513 Wholesale.................................................................. (19,496) 15,350 Other (including unbilled revenues)........................................ 79,741 (46,031) -------- -------- Total revenues............................................................ (25,250) (9,168) Fuel used in generation..................................................... (45,502) (40,972) Purchased power............................................................. 38,319 8,654 -------- -------- Net (decrease)increase in electric margin................................. $(18,067) $ 23,150 ======== ======== The following table compares electric Kwh sales by major customer classes. Millions of Kwh Sales % Change From Prior Year* --------------------- ------------------------ 1999 1998 1999 1998 ------ ------- ----- ---- Residential................................................................. 2,972 3,169 (6.2)% 6.1% Commercial and Industrial................................................... 10,786 11,418 (5.5) 2.6 Public Authority............................................................ 521 630 (17.2) 8.1 ------ ------- Total Retail.............................................................. 14,279 15,217 (6.2) 3.6 Wholesale................................................................... 8,465 8,075 4.8 15.3 ------ ------- Total....................................................................... 22,744 23,292 (2.4) 7.3 ====== =======
* Percentages are calculated using unrounded amounts. Electric operating revenues decreased $25.3 million or 2.7% in 1999 when compared to 1998, primarily due to lower retail Kwh sales (6.2%), lower revenues related to the recovery of fuel costs (totaling approximately $68.9 million) and the $16.9 million settlement for a 1985 FERC rate case settlement recorded in 1998 (see Note 10. Regulatory Matters in Item 8. Financial Statements and Supplementary Data.). Higher unbilled revenue of $41.4 million and higher deferred fuel revenue of approximately $51.4 million offset these decreases. The decrease in Kwh sales was primarily the result of the hot dry weather which occurred in the summer of 1998 serving to increase air conditioning and irrigation loads in 1998. A portion of the decrease in Kwh sales resulted from a change in the billing cycle of various customers, which is offset by the higher level of unbilled revenues. Electric operating revenues decreased $9.2 million or 1.0% in 1998, when compared to 1997, primarily due to lower deferred fuel revenues attributable to the pass through to customers of lower fuel costs, the recognition in 1997 of revenues associated with the anticipated recovery of the Thunder Basin judgment and rate reductions for guaranteed PSCo/SPS Merger savings, $5.8 million in 1998, compared to $1.5 million in 1997. This decrease was offset, in part, by higher electric sales due to the hot dry weather during the summer of 1998 and a 1.4% increase in customer growth and additional revenues of approximately $16.9 million recorded in connection with the settlement of the 1985 FERC rate case as discussed above. Fuel used in generation expense decreased $45.5 million or 10.5% in 1999, when compared to 1998, primarily due to lower coal and gas costs for the current period and a 5.2% decrease in generation levels with an increase in purchased power to supply required service to retail customers. The decrease in coal costs is primarily due to negotiations with a new supplier in mid-1998 and lower transportation costs. Cost of natural gas used in other generation decreased $3.9 million during 1999 primarily due to lower generation at Maddox Station combustion turbine unit and more efficiencies incorporated at Cunningham Station combustion turbine unit. 67 Fuel used in generation expense decreased $41.0 million or 8.7% in 1998, when compared to 1997, primarily due to lower prices of coal and natural gas offset, in part, by increased generation levels required to serve retail and wholesale customers. The decrease in coal costs was primarily due to the expiration of a coal supply contract in 1997 and negotiation with a new supplier in mid-1998 and lower transportation costs. The cost of natural gas increased due to generation at the new Cunningham Station combustion turbine unit which came on-line May 1998. Purchased power increased $38.3 million in 1999 when compared to 1998, due to an increase in capacity costs of $17.7 million related to new purchase power contracts and an increase in wholesale purchases from utilities. Purchased power increased $8.7 million during 1998, when compared to the same period in 1997, primarily due to an increase in spot market prices and an increase in demand requirements resulting from increased wholesale and retail sales. SPS generates substantially all of its power for sale to its firm retail and wholesale customers and sells non-firm energy as the market demands. Similarly, SPS purchases low-cost non-firm energy when available and as needed to meet customer requirements. SPS has fuel cost adjustment mechanisms which recognize the majority of the effects of changes in fuel used in generation and purchased power costs and allow recovery of such costs on a timely basis. As a result, the changes in revenues associated with these mechanisms in 1999 and 1998, when compared to the respective preceding year, had little impact on net income. The recovery of fuel and purchase power costs is discussed further in Note 10. Regulatory Matters in Item 8. Financial Statements and Supplementary Data. Other Operating Revenues Other operating revenues decreased $18.9 million in 1998, when compared to 1997, due to the August 1, 1997, sale of Quixx and UE, as discussed above. Other operating revenues in 1997 include only seven months of Quixx and UE operations. Non-Fuel Operating Expenses Other operating and maintenance remained flat in 1999 when compared to 1998, primarily due to lower pension and benefit costs offset by higher operating and maintenance costs. Operating and maintenance costs increased in 1999 primarily due to new long term transmission contracts, increased wholesale activity, increased tree trimming costs after the January 1999 ice storm and higher maintenance costs at Maddox combustion turbine Station. Other operating and maintenance expenses decreased $28.1 million in 1998 as compared to 1997. Excluding the seven months of expenses recognized in 1997 for UE and Quixx and the $12.1 million Thunder basin judgement costs, other operating and maintenance expenses decreased $2.4 million. This decrease is primarily due to lower maintenance costs at the Company's power plants and a decrease in employee benefit costs. Depreciation and amortization expense decreased $2.6 million in 1999, and increased $8.3 million in 1998, primarily due to $7.6 million of additional depreciation expense recorded in 1998, in connection with the settlements related to the 1985 FERC rate case and the depreciation of property additions. Income taxes decreased $6.3 million in 1999 and increased $16.9 million in 1998, as compared to the prior year, primarily due to changes in pre-tax income. Other Income and Deductions Other income and deductions-net increased $1.8 million in 1999, as compared to 1998, primarily due to the absence of PSCo/SPS Merger and business integration expenses in 1999 ($1.2 million expensed in 1998). Other income and deductions increased $34.2 million in 1998, as compared to 1997, primarily due to the 1997 write-off of the investments in the Carolina Energy Project, which totaled approximately $16.1 million (see Note 4. Acquisitions and Divestitures in Item 8. Financial Statements and Supplementary Data), the lower PSCo/SPS Merger and business integration expenses in 1998 ($14.2 million) and lower income and deductions 68 attributable to Quixx and UE. Higher interest income was recognized in 1998 related to the note receivable from NC Enterprises for the sale of Quixx and UE. Interest Charges Interest charges increased $3.1 million in 1999, as compared to 1998, primarily due to higher long-term debt costs, resulting from the issuance of $100 million in new debt in March of 1999 and a decrease in the allowance for funds used during construction of approximately $2.3 million resulting from higher allowance for funds used during construction-equity ($1.0 million). The new debt issuance was used in part to pay down short-term borrowings, thus lowering other interest expense ($2.7 million), pending the retirement of $90 million of long-term debt in December 1999. Interest charges increased $1.2 million in 1998 primarily due to higher interest costs on short-term debt used for general corporate requirements. Liquidity and Capital Resources Prospective Capital Requirements The estimated cost as of December 31, 1999, of the construction programs of SPS and other capital requirements for the years 2000, 2001 and 2002 are shown in the table below (in millions):
2000 2001 2002 ----- ----- ----- Electric Production............................................ $ 27 $ 23 $ 28 Transmission.......................................... 34 57 69 Distribution.......................................... 22 25 28 General.................................................. 8 7 7 ----- ----- ----- Total construction expenditures....................... 91 112 132 Less: AFDC............................................... 4 4 1 Add: Sinking funds and debt maturities and refinancings.. - 4 4 ----- ----- ----- Total capital requirements............................... $ 87 $ 112 $ 135 ===== ===== =====
The construction programs of SPS are subject to continuing review and modification. The capital requirements for the electric transmission primarily represent the construction of the tie line to connect SPS' and PSCo's systems. In particular, actual construction expenditures may vary from the estimates due to deregulation and changes in electric system projected load growth, the desired reserve margin and the availability of purchased power, as well as alternative plans for meeting SPS's long-term energy needs. In addition, SPS's ongoing evaluation of asset acquisition and divestiture opportunities to support corporate strategies and future requirements to address restructuring and to install emission control equipment may impact actual capital requirements (see Note 10. Regulatory Matters and Note 11. Commitments and Contingencies - Environmental Issues in Item 8. Financial Statements and Supplementary data). Capital Sources At December 31, 1999, SPS estimates that its 2000-2002 capital requirements, as summarized above, and the payment of common stock dividends to NCE will be met with a combination of funds from external sources and funds from operations. SPS may meet its external capital requirements through capital contributions by NCE, the issuance of secured or unsecured long-term and short- term debt, and the sale of other securities. 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 SPS. 69 Item 8. Financial Statements and Supplementary Data (SPS) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO SOUTHWESTERN PUBLIC SERVICE COMPANY: We have audited the accompanying balance sheets and statements of capitalization of Southwestern Public Service Company (a New Mexico corporation) as of December 31, 1999 and 1998, and the related statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 1999. 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 Southwestern Public Service Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Denver, Colorado, February 15, 2000. 70 SOUTHWESTERN PUBLIC SERVICE COMPANY BALANCE SHEETS (Thousands of Dollars) December 31, 1999 and 1998
ASSETS 1999 1998 ---------- ---------- Property, plant and equipment, at cost: Electric............................................................... $2,802,077 $2,665,115 Construction in progress............................................... 95,477 121,407 ---------- ---------- 2,897,554 2,786,522 Less: accumulated depreciation......................................... 1,123,739 1,057,183 ---------- ---------- Total property, plant and equipment................................... 1,773,815 1,729,339 ---------- ---------- Investments, at cost: Notes receivable from affiliate (Note 1)............................... 119,036 119,036 Other.................................................................. 5,946 5,591 ---------- ---------- Total investments..................................................... 124,982 124,627 ---------- ---------- Current assets: Cash and temporary cash investments.................................... 1,532 1,350 Accounts receivable, less reserve for uncollectible accounts ($682 at December 31, 1999; $1,695 at December 31, 1998)....................... 83,928 76,190 Accrued unbilled revenues.............................................. 44,631 9,373 Recoverable electric energy costs...................................... 1,948 - Materials and supplies, at average cost................................ 18,035 16,970 Fuel inventory, at average cost........................................ 2,292 2,293 Current portion of accumulated deferred income taxes (Note 14)......... 70 6,113 Prepaid expenses and other............................................. 4,254 5,248 ---------- ---------- Total current assets.................................................. 156,690 117,537 ---------- ---------- Deferred charges: Regulatory assets (Note 1)............................................. 101,419 111,971 Prepaid pension asset.................................................. 40,087 24,611 Unamortized debt expense............................................... 9,605 8,767 Other.................................................................. 12,778 13,012 ---------- ---------- Total deferred charges................................................ 163,889 158,361 ---------- ---------- $2,219,376 $2,129,864 ========== ==========
The accompanying notes to financial statements are an integral part of these financial statements. 71 SOUTHWESTERN PUBLIC SERVICE COMPANY BALANCE SHEETS (Thousands of Dollars) December 31, 1999 and 1998 CAPITAL AND LIABILITIES
1999 1998 ---------- ---------- Common stock.............................................................. $ 353,099 $ 348,402 Retained earnings......................................................... 408,284 389,818 ---------- ---------- Total common equity..................................................... 761,383 738,220 SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS (Note 6).. 100,000 100,000 Long-term debt (Note 7)................................................... 605,875 530,618 ---------- ---------- 1,467,258 1,368,838 ---------- ---------- Noncurrent liabilities: Employees' postretirement benefits other than pensions (Note 13)......... 6,086 5,941 Employees' postemployment benefits (Note 13)............................. 4,940 3,571 ---------- ---------- Total noncurrent liabilities............................................ 11,026 9,512 ---------- ---------- Current liabilities: Notes payable and commercial paper (Note 8).............................. 177,746 85,162 Note payable to affiliates (Note 8)...................................... - 9,000 Long-term debt due within one year....................................... - 90,113 Accounts payable......................................................... 76,560 64,275 Dividends payable........................................................ 20,963 20,007 Recovered electric energy costs.......................................... - 18,760 Customers' deposits...................................................... 5,833 5,904 Accrued taxes............................................................ 23,486 37,646 Accrued interest......................................................... 17,223 12,273 Other.................................................................... 26,857 18,011 ---------- ---------- Total current liabilities............................................... 348,668 361,151 ---------- ---------- Deferred credits: Unamortized investment tax credits....................................... 4,969 5,219 Accumulated deferred income taxes (Note 14).............................. 376,245 380,655 Other.................................................................... 11,210 4,489 ---------- ---------- Total deferred credits.................................................. 392,424 390,363 ---------- ---------- Commitments and contingencies (Notes 10 and 11)........................... ---------- ---------- $2,219,376 $2,129,864 ========== ==========
The accompanying notes to financial statements are an integral part of these financial statements. 72 SOUTHWESTERN PUBLIC SERVICE COMPANY STATEMENTS OF CAPITALIZATION (Thousands of Dollars, Except Per Share Information) December 31, 1999 and 1998
1999 1998 ---------- ---------- Common shareholder's equity: Common stock, $1 par value, authorized 200 shares in 1999 and in 1998, outstanding 100 shares in 1999 and in 1998...................................................... $ - $ - Paid in capital.................................................................................. 353,099 348,402 Retained earnings................................................................................ 408,284 389,818 ---------- ---------- Total common shareholder's equity............................................................... 761,383 738,220 ---------- ---------- Preferred stock (Note 5): $1 par value, 10 million shares authorized, no shares outstanding................................ - - SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS, 4 million shares outstanding, 7.85% (Note 5)..................... 100,000 100,000 ---------- ---------- Long-term debt (Note 6): First Mortgage Bonds: 6-7/8% due December 1, 1999...................................................................... - 90,000 7-1/4% due July 15, 2004......................................................................... 135,000 135,000 6-1/2% due March 1, 2006......................................................................... 60,000 60,000 8-1/4% due July 15, 2022......................................................................... 36,000 40,000 8-1/5% due December 1, 2022...................................................................... 89,000 100,000 8-1/2% due February 15, 2025..................................................................... 60,267 70,000 Unsecured Senior A Notes: 6.2% due March 1, 2009........................................................................... 100,000 - Pollution control obligations, securing pollution control revenue bonds: Not collateralized by First Mortgage Bonds: 5.2% (converted to fixed rate at June 9, 1999 and variable rate of 4.30% at December 31, 1998) due July 1, 2011............................................................................... 44,500 44,500 Variable rate (4.70% and 4.15% effective December 31, 1999 and 1998), due July 1, 2016.......... 25,000 25,000 5-3/4% series, due September 1, 2016............................................................ 57,300 57,300 Less: funds held by Trustee...................................................................... (168) (168) Other............................................................................................. - 112 Unamortized discount and premium-net.............................................................. (1,024) (1,013) ---------- ---------- 605,875 620,731 Less: maturities due within one year.............................................................. - 90,113 ---------- ---------- Total long-term debt............................................................................ 605,875 530,618 ---------- ---------- Total capitalization.............................................................................. $1,467,258 $1,368,838 ========== ==========
The accompanying notes to financial statements are an integral part of these financial statements. 73 SOUTHWESTERN PUBLIC SERVICE COMPANY STATEMENTS OF INCOME (Thousands of Dollars) Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 --------- --------- --------- Operating revenues: Electric................................................................... $925,937 $951,187 $960,355 Other...................................................................... - - 18,928 -------- -------- -------- 925,937 951,187 979,283 Operating expenses: Fuel used in generation.................................................... 386,625 432,127 473,099 Purchased power............................................................ 61,474 23,155 14,501 Other operating & maintenance expenses..................................... 138,429 138,679 166,761 Depreciation and amortization (Note 10).................................... 75,946 78,592 70,331 Taxes (other than income taxes)............................................ 49,290 47,259 46,515 Income taxes (Note 14)..................................................... 59,399 65,696 48,795 -------- -------- -------- 771,163 785,508 820,002 -------- -------- -------- Operating income............................................................ 154,774 165,679 159,281 Other income and deductions: Interest income (Note 16).................................................. 9,633 9,616 4,579 PSCo/SPS merger expenses................................................... - (1,208) (15,427) Write-off of investment in Carolina Energy Project (Note 4)................ - - (16,052) Miscellaneous income and deductions - net.................................. (263) (797) 298 -------- -------- -------- 9,370 7,611 (26,602) Interest charges: Interest on long-term debt................................................. 50,018 46,471 46,356 Other interest............................................................. 6,256 8,925 7,444 Allowance for borrowed funds used during construction...................... (2,689) (4,943) (4,546) Dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS............ 7,850 7,850 7,850 -------- -------- -------- 61,435 58,303 57,104 -------- -------- -------- Net income.................................................................. $102,709 $114,987 $ 75,575 ======== ======== ========
The accompanying notes to financial statements are an integral part of these financial statements. 74 SOUTHWESTERN PUBLIC SERVICE COMPANY STATEMENTS OF SHAREHOLDER'S EQUITY (Thousands of Dollars, Except Share Information) Year ended December 31, 1999, 1998 and 1997
Common Stock, $1 par value Retained -------------------------- Shares Amount Paid in Capital Earnings Total ------ ------ --------------- -------- ----- Balance at January 1, 1997...................... 40,917,908 $ 40,918 $307,484 $383,350 $731,752 Net income...................................... - - - 75,575 75,575 Dividends declared Common stock, prior to August 1, 1997 Merger.. - - - (63,845) (63,845) Common stock, to NCE.......................... - - - (45,092) (45,092) Merger with PSCo Exchange of common shares for NCE stock....... (40,917,808) (40,918) 40,918 - - ----------- ---------- -------- -------- -------- Balance at December 31, 1997.................... 100 - 348,402 349,988 698,390 Net income...................................... - - - 114,987 114,987 Dividends declared, common stock to NCE......... - - - (75,157) (75,157) ----------- ---------- -------- -------- -------- Balance at December 31, 1998.................... 100 - 348,402 389,818 738,220 Net income...................................... - - - 102,709 102,709 Dividends declared, common stock to NCE......... - - - (84,243) (84,243) Contribution of capital by NCE.................. - - 4,697 - 4,697 ----------- ---------- -------- -------- -------- Balance at December 31, 1999.................... 100 $ - $353,099 $408,284 $761,383 =========== ========== ======== ======== ========
Authorized shares of common stock were 200 at December 31, 1999, 1998 and 1997. The accompanying notes to financial statements are an integral part of these financial statements. 75 SOUTHWESTERN PUBLIC SERVICE COMPANY STATEMENTS OF CASH FLOWS (Thousands of Dollars) Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 --------- --------- --------- Operating activities: Net income............................................................. $ 102,709 $ 114,987 $ 75,575 Adjustments to reconcile net income to net cash provided by operating activities (Note 1): Depreciation and amortization........................................ 78,085 83,103 76,929 Write-off of investment in Carolina Energy Project (Note 4).......... - - 16,052 Amortization of investment tax credits............................... (250) (250) (250) Deferred income taxes................................................ 15,922 (8,600) 3,587 Allowance for equity funds used during construction.................. (1,040) - (5) Change in accounts receivable........................................ (7,738) 20,358 (39,842) Change in inventories................................................ (1,064) (625) 301 Change in other current assets....................................... (36,212) 27,300 (3,061) Change in accounts payable........................................... 12,285 (43,190) 45,683 Change in other current liabilities.................................. (19,195) 31,699 (10,000) Change in deferred amounts........................................... (14,283) 30,309 (48,934) Change in noncurrent liabilities..................................... 1,514 3,266 1,003 Other................................................................ - 92 (727) --------- --------- --------- Net cash provided by operating activities........................... 130,733 258,449 116,311 Investing activities: Construction expenditures.............................................. (118,834) (92,218) (118,550) Allowance for equity funds used during construction.................... 1,040 - 5 Cost of disposition of property, plant and equipment................... (2,396) (2,897) (2,371) Proceeds from the sale of Quixx and UE, net of cash disposed (Note 1).. - - (29,567) Purchase of other investments.......................................... (355) (673) (4,639) Sale of other investments.............................................. - 820 - --------- --------- --------- Net cash used in investing activities............................... (120,545) (94,968) (155,122) Financing activities: Proceeds from sale of long-term debt................................... 99,846 - - Redemption of long-term debt........................................... (114,846) (179) (14,986) Short-term borrowings - net............................................ 83,584 (85,242) 100,564 Contribution of capital by NCE......................................... 4,697 - - Dividends on common stock (Notes 5 and 16)............................. (83,287) (77,696) (86,391) --------- --------- --------- Net cash used in financing activities............................... (10,006) (163,117) (813) --------- --------- --------- Net increase (decrease) in cash and temporary cash investments...... 182 364 (39,624) Cash and temporary cash investments at beginning of year............ 1,350 986 40,610 --------- --------- --------- Cash and temporary cash investments at end of year.................. $ 1,532 $ 1,350 $ 986 ========= ========= =========
The accompanying notes to financial statements are an integral part of these financial statements. 76 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 1. Summary of Significant Accounting Policies (NCE, PSCo and SPS) Business, Utility Operations and Regulation NCE is a registered holding company under PUHCA and its domestic utility subsidiaries (PSCo, SPS and Cheyenne) are engaged principally in the generation, purchase, transmission, distribution and sale of electricity and in the purchase, transportation, distribution and sale of natural gas. Both the Company and its subsidiaries are subject to the regulatory provisions of the PUHCA. The utility subsidiaries are subject to regulation by the FERC and state utility commissions in Colorado, Texas, New Mexico, Wyoming, Kansas and Oklahoma. Over 90% of the Company's revenues are derived from its regulated utility operations. Regulatory Assets and Liabilities The Company's regulated subsidiaries prepare their financial statements in accordance with the provisions of Statement of Financial Accounting Standards No. 71 ("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 rate making process, there will be a corresponding increase or decrease in revenues. Accounting under SFAS 71 is appropriate as long as 1) rates are established by or subject to approval by independent, third party regulators, 2) rates are designed to recover an enterprise's cost-of-service and 3) in view of the demand for service, it is reasonable to assume that rates are set at levels that will recover costs and can be collected from customers. The Company believes its utility subsidiaries continue to be subject to rate regulation. The Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus in Issue No. 97-4, "Deregulation of the Pricing of Electricity" ("EITF 97-4") indicating that when deregulatory legislation is passed or when a rate order (whichever is necessary to effect change in the jurisdiction) that contains sufficient detail for an enterprise to reasonably determine how the transition plan will affect the separable portion of its business whose pricing is being deregulated is issued, the enterprise should stop applying SFAS 71 to that separable portion of its business. While legislation has been enacted in Texas and New Mexico, there are several unresolved issues that will significantly impact how and when deregulation related to the generation portion of the business, will be implemented by SPS. It is expected that SPS will discontinue the application of SFAS 71 related to the generation portion of the business when the provisions of EITF 97-4 have been met, which may occur in the year 2000. In the event that a portion of a subsidiaries' operations is no longer subject to the provisions of SFAS 71, as a result of a change in regulation or the effects of competition, the Company's subsidiaries could be required to write-off their regulatory assets, determine any impairment to other assets resulting from deregulation and write-down any impaired assets to their estimated fair value, which could have a material adverse effect on NCE's, PSCo's and/or SPS's financial position, results of operations or cash flows. 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following regulatory assets are reflected in the Company's consolidated balance sheets (in thousands):
1999 NCE PSCo SPS -------- -------- -------- Income taxes (Note 14)........................ $123,241 $ 59,011 $ 64,829 Nuclear decommissioning costs................. 63,835 63,835 - Employees' postretirement benefits other than pensions (Note 13)............... 53,321 50,570 2,751 Employees' postemployment benefits (Note 13).. 23,374 23,018 - Demand-side management costs.................. 35,614 24,211 11,403 Unamortized debt reacquisition costs.......... 31,492 14,284 16,671 Other......................................... 7,088 1,322 5,765 -------- -------- -------- Total....................................... $337,965 $236,251 $101,419 ======== ======== ======== 1998 NCE PSCo SPS -------- -------- -------- Income taxes (Note 14)........................ $148,499 $ 69,868 $ 79,116 Nuclear decommissioning costs................. 69,490 69,490 - Employees' postretirement benefits other than pensions (Note 13)............... 57,350 54,461 2,889 Employees' postemployment benefits (Note 13).. 24,888 24,416 - Demand-side management costs.................. 37,160 31,984 5,176 Unamortized debt reacquisition costs.......... 33,138 15,769 16,808 Other......................................... 11,107 3,124 7,982 -------- -------- -------- Total....................................... $381,632 $269,112 $111,971 ======== ======== ========
The regulatory assets of the Company's regulated subsidiaries that are currently being recovered as of December 31, 1999 and 1998 are reflected in rates charged to customers. The recovery of regulatory assets over the next three years is estimated to exceed $140 million. Refer to the discussion below or the Notes to Consolidated Financial Statements included herein for a more detailed discussion regarding recovery periods. Effective July 1, 1993, PSCo began collecting from customers the costs approved by the CPUC for the decommissioning of Fort St. Vrain. This recoverable amount totaled approximately $124.4 million (plus a 9% carrying cost). Such amount, which is being collected over a twelve-year period, represented the inflation-adjusted estimated remaining cost of decommissioning activities not previously recognized as expense at the time of CPUC approval. PSCo is recovering approximately $13.9 million per year from its customers, including carrying costs. The Company and its subsidiaries adopted accrual accounting for postemployment benefits under SFAS 112 in 1994 (see Note 13. Employee Benefits - Postemployment Benefits). The costs of these benefits were historically recorded on a pay-as-you go basis and, accordingly, PSCo and Cheyenne recorded regulatory assets in anticipation of obtaining future rate recovery of these costs. PSCo and Cheyenne subsequently requested rate recovery of these costs on a jurisdictional basis before applicable federal and state regulatory agencies. PSCo recovered its FERC jurisdictional portion of these costs during 1996 to 1998 and Cheyenne received WPSC approval to recover its portion of these costs. PSCo requested approval to recover its Colorado retail gas jurisdictional portion ($8.9 million balance at December 31, 1995) in a 1996 retail rate case and its retail electric jurisdictional portion ($14.1 million balance at December 31, 1996) in the electric department earnings test filing for 1997. In the 1996 rate case, the CPUC allowed recovery of postemployment benefit costs on an accrual basis, but denied PSCo's request to amortize the regulatory asset. PSCo appealed this decision to the Denver District Court arguing the CPUC's decision was not based on substantial evidence, disregarded prior CPUC precedent allowing recovery of the amortization of similar costs, and failed to state a valid rationale to support a disallowance of these legitimate costs of service. In 1998, the CPUC approved a settlement agreement in connection with the electric department earnings test filing for 1997, which deferred the final determination of the regulatory treatment of the electric jurisdictional costs pending the outcome of PSCo's appeals on the gas rate case. On December 16, 1999, the Denver District Court affirmed the decision by the CPUC. The District Court based its decision primarily 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) on the absence of a provision in SFAS 112 allowing for a transition obligation to be established and amortized. PSCo believes the District Court fatally misconstrued the ratemaking significance of this fact. On January 31, 2000, PSCo filed a Notice of Appeal with the Colorado Supreme Court and expects a final decision on this matter during 2000. PSCo continues to believe that it will ultimately be allowed to recover this regulatory asset. If PSCo is unsuccessful in its appeal, all unrecoverable amounts totaling approximately $23 million will be written off. Certain costs associated with the DSM programs of PSCo and SPS are deferred and amortized to expense in accordance with the approved regulatory treatment. These costs will be recovered over the next five years. PSCo's costs are recoverable 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 and expensed as incurred. 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. Recovered/Recoverable Purchased Gas and Electric Energy Costs -Net The Company's utility subsidiaries have adjustment mechanisms in place which currently provide for the recovery of certain purchased gas and electric energy costs. These cost adjustment tariffs may increase or decrease the level of costs recovered through base rates and are revised periodically, as prescribed by the appropriate regulatory agencies, for any difference between the total amount collected under the clauses and the recoverable costs incurred (see Note 10. 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. PSCo is earning a return on these investments based on its weighted average cost of debt in accordance with a CPUC rate order. Non-utility Subsidiaries and International Investments The Company's non-utility subsidiaries are principally involved in energy- related businesses including the following: engineering, design and construction management, non-regulated energy services, including energy marketing and trading, the management of real estate and certain life insurance policies, the financing of certain current assets of PSCo and investments in cogeneration facilities, electric wholesale generators and a foreign utility company. The Company's international investments are subject to regulation in the countries in which such investments are made (see Note 3. Investment in Yorkshire Power). Financial statements of foreign subsidiaries are translated into U.S. dollars at current rates, except for revenues, costs and expenses, which are translated at average current rates during each reporting period. Consolidation and Financial Statement Presentation The Company follows the practice of consolidating the accounts of its majority owned and controlled subsidiaries. The Company recognizes equity in income from its unconsolidated investments accounted for under the equity method of accounting. All significant intercompany items and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year's presentation. Effective August 1, 1997, following the receipt of all required state and Federal regulatory approvals, PSCo and SPS merged in a tax-free "merger of equals" transaction and became wholly-owned subsidiaries of NCE. Each outstanding share of PSCo common stock was canceled and converted into the right to receive one share of NCE common stock, and each outstanding share of SPS common stock was canceled and converted into the right to receive 0.95 of one share of NCE common stock. The Merger was accounted for as a pooling of interests. Effective with the PSCo/SPS Merger, certain utility and non-utility subsidiaries were transferred within NCE's 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) common controlled subsidiaries. The common stock of Quixx and UE, former SPS subsidiaries, were transferred through the sale by SPS of the common stock of such subsidiaries at net book value, aggregating approximately $119.0 million, to NC Enterprises in exchange for notes payable of NC Enterprises. Subsidiaries of PSCo (Cheyenne, WGI, e prime and Natural Fuels) were transferred by a declaration of a dividend of the subsidiaries' stock, at net book value, aggregating approximately $49.9 million, to NCE. NCE subsequently made a capital contribution of the e prime and Natural Fuels common stock, at net book value, aggregating approximately $29.5 million, to NC Enterprises. Revenue Recognition The Company's utility subsidiaries accrue for estimated unbilled revenues for services provided after the meters were last read on a cycle billing basis through the end of each month. Risk Management The Company and its subsidiaries have initiated the utilization of a variety of energy contracts, both financial and commodity based, in the energy trading and energy non-trading operations to reduce their exposure to commodity price risk. These contracts consist mainly of commodity futures and options, index or fixed price swaps and basis swaps. The Company and its subsidiaries adopted Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities" ("EITF 98-10"), effective January 1, 1999. EITF 98-10 requires gains or losses resulting from market value changes on energy trading contracts to be recorded in earnings. The initial adoption of EITF 98-10 had no impact on the net income of NCE, PSCo or SPS. For the year ended December 31, 1999, NCE recognized net gains of $312,000 and PSCo recognized net losses of $206,000 for market value changes on energy trading contracts. SPS does not currently have any trading activities. Revenues and purchased energy costs associated with trading activities are presented net on the income statement in electric and gas revenues. Certain prior year amounts have been reclassified for comparative purposes. Energy contracts are also utilized by the Company and its subsidiaries in non-trading operations to reduce commodity price risk. Hedge accounting is applied only if the contract reduces the price risk of the underlying hedged item and is designated as a hedge at its inception. Gains and losses related to qualifying hedges of firm commitments or anticipated transactions are deferred and recognized as a component of purchased power or cost of gas sold when settlement occurs. If, subsequent to the inception of the hedge, the underlying transactions are no longer likely to occur, the related gains and losses are recognized currently in income (see Note 9. Financial Instruments - Risk Management for further discussion of the Company's risk management activities). Comprehensive Income The Company and its subsidiaries adopted SFAS No. 130, "Reporting Comprehensive Income," effective January 1, 1998. This statement establishes standards for the reporting and display of comprehensive income (net income plus all other changes in net assets from non-owner sources) and its components in financial statements. Other comprehensive income for NCE and PSCo was reported in the consolidated Statements of Shareholders' Equity and consists of foreign currency translation adjustments related to the investment in Yorkshire Power. Basic and Diluted Earnings Per Share Basic earnings per share is based upon the weighted average common shares outstanding during the year. Diluted earnings per share reflects the potential dilution that could occur if securities or other agreements to issue common stock were exercised or converted into common stock. Diluted earnings per share is based upon the weighted average common and common equivalent shares outstanding during each year. Employee stock options are the Company's only common stock equivalents. There are no other potentially dilutive securities. 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Company's reported basic and diluted earnings per share for 1999 and 1997 were the same. The impact on 1998 reported earnings per share information is detailed below:
For the year ended December 31, 1998 -------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ------------ ------------- --------- (in thousands) Basic EPS Net income......................... $ 341,957 111,859 $ 3.06 ========= Effect of Dilutive Securities: Common stock options............... - 149 ----------- ------- Diluted EPS Net income and assumed conversion.. $ 341,957 112,008 $ 3.05 =========== ======= =========
Approximately 2,127,550 common stock options were outstanding during 1999, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common stock. Income Taxes The Company and its subsidiaries file consolidated Federal and consolidated and separate state income tax returns. Income taxes are allocated to the subsidiaries based on separate company computations of taxable income or loss. Investment tax credits have been deferred and are being amortized over the service lives of the related property. Deferred taxes are provided on temporary differences between the financial accounting and tax bases of assets and liabilities using the tax rates which are in effect at the balance sheet date (see Note 14. Income Taxes). Stock-based Compensation The Company uses the intrinsic value based method of accounting for its stock-based compensation plan (see Note 13. Employee Benefits - Incentive Compensation). Temporary Cash Investments and 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. At December 31, 1999, approximately $7.5 million of cash balances are restricted for operational uses as they have been committed for investments in cogeneration projects. Income Taxes and Interest (Excluding Amounts Capitalized) Paid (in thousands):
NCE 1999 1998 1997 -------- -------- -------- Income taxes................................. $128,327 $135,776 $ 99,938 Interest..................................... $257,621 $249,405 $230,507 PSCo 1999 1998 1997 -------- -------- -------- Income taxes, including amounts paid to NCE.. $ 98,641 $114,340 $ 75,439 Interest..................................... $203,105 $188,443 $172,470
81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SPS 1999 1998 1997 -------- -------- -------- Income taxes, including amounts paid to NCE.. $ 51,117 $ 69,111 $ 37,752 Interest..................................... $ 53,819 $ 55,739 $ 56,486
Non-cash Transactions and Other: Shares of NCE's common stock in 1999 and 1998 and PSCo's common stock in 1997 (200,880 in 1999, 222,387 in 1998 and 250,058 in 1997), valued at the market price on date of issuance (approximately $8 million for 1999 and $10 million for 1998 and 1997), were issued to a savings plan of the Company. The estimated issuance values were recognized in other operating expenses during the respective preceding years. Effective July 1, 1999, the Company sold all of the outstanding common stock of Texas-Ohio Gas, Inc. (see Note 4. Acquisitions and Divestitures). The changes in current assets, current liabilities and deferred amounts for period prior to this sale are reflected in operating activities on the NCE Consolidated Condensed Statement of Cash Flows. Effective December 31, 1999, Natural Fuels formed two newly organized limited liability companies: Natural Fuels Company LLC ("NATCO") and Natural Station Equipment LLC ("STATCO"). The interest in STATCO was transferred to NC Enterprises. NC Enterprises then transferred 100% of the common stock of Natural Fuels to NCE by means of a declaration of a dividend of the shares of Natural Fuels, and NCE then made a capital contribution of such shares to PSCo. PSCo merged Natural Fuels into a newly formed limited liability company, Colorado Natural Fuels, LLC, with NATCO as a subsidiary. Effective March 31, 1998, PSCo sold its common stock investment in NCI to NC Enterprises, an NCE subsidiary. PSCo received as consideration a 20-year promissory note from NC Enterprises in the amount of approximately $292.6 million (see Note 3. Investment in Yorkshire Power). Stock issuances and the dividend of subsidiaries' stock in connection with the PSCo/SPS Merger discussed above were non-cash financing and investing activities and are not reflected in the consolidated statements of cash flows. Property and Depreciation Property, plant and equipment is stated at original cost. Replacements and capital improvements, representing units of property, are capitalized. Maintenance and repairs of property and replacements of items of property determined to be less than a unit of property are charged to operations as maintenance expense. The cost of units of property retired, together with cost of removal, less salvage, is charged to accumulated depreciation. Depreciation expense, for financial accounting purposes, is computed on the straight-line basis based on the estimated service lives and costs of removal of the various classes of property. Depreciation expense, expressed as a percentage of average depreciable property, for NCE, PSCo and SPS ranged from approximately 2.7%-2.9% for the years ended December 31, 1999, 1998 and 1997. For income tax purposes, the Company and its subsidiaries use accelerated depreciation and other elections provided by the tax laws. Allowance for Funds Used During Construction AFDC, as defined in the system of accounts prescribed by the FERC, represents the net cost during the period of construction of borrowed funds used for construction purposes and a reasonable rate on funds derived from other sources. AFDC does not represent current cash earnings. The Company's regulated subsidiaries capitalize AFDC as a part of the cost of utility plant. 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Gas in Underground Storage (NCE and PSCo) Gas in underground storage is accounted for under the last-in, first-out ("LIFO") cost method. The estimated replacement cost of gas in underground storage at December 31, 1999 and 1998, exceeded the LIFO cost by approximately $0.4 million and $13.0 million, respectively. Cash Surrender Value of Life Insurance Policies (NCE and PSCo) The following amounts related to COLI policies, issued by one major insurance company, are recorded as a component of Investments, at cost, on the consolidated balance sheets (in thousands):
1999 1998 -------- -------- Cash surrender value of contracts............ $518,602 $461,752 Borrowings against contracts................. 514,504 458,104 -------- -------- Net investment in life insurance contracts.. $ 4,098 $ 3,648 ======== ========
Refer to Note 11. "Commitments and Contingencies", for discussion of certain tax matters. 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. 2. Proposed Merger with Northern States Power Company (NCE, PSCo and SPS) On March 24, 1999, NCE and NSP, entered into the NCE/NSP Merger Agreement providing for a strategic business combination of NCE and NSP. Pursuant to the NCE/NSP Merger Agreement, NCE will be merged with and into NSP. NSP will be the surviving corporation in the merger and the holding company for the combined assets and operations. NSP will be renamed Xcel Energy Inc. ("Xcel Energy"). Concurrently with the closing of the NCE/NSP Merger, NSP will contribute all of its utility assets, other than shares that it owns in subsidiaries, to a newly formed wholly-owned subsidiary. At the same time, the new subsidiary will assume all of NSP's liabilities associated with the assets that it receives in the contribution. If difficulties arise in obtaining the approvals and consents required to transfer NSP's utility assets to a new utility subsidiary, NCE and NSP may negotiate a mutually acceptable alternative. Subject to the terms of the NCE/NSP Merger Agreement, at the time of the NCE/NSP Merger, each share of NCE common stock, par value $1.00 per share ("NCE Common Stock") (other than certain shares to be canceled), together with any associated purchase rights, will be converted into the right to receive 1.55 shares of Xcel Energy common stock, par value $2.50 per share ("Xcel Energy Common Stock"). Cash will be paid in lieu of any fractional shares of Xcel Energy Common Stock which holders of NCE Common Stock would otherwise receive. Based on outstanding common stock of NCE and NSP at December 31, 1999, the NCE/NSP Merger would result in the common shareholders of NCE owning 54% of the common equity of Xcel Energy and the common shareholders of NSP owning 46% of the common equity of Xcel Energy. The NCE/NSP Merger is expected to be a tax- free stock-for-stock exchange for shareholders of both companies and to be accounted for as a pooling-of-interests. It is anticipated that Xcel Energy will initially adopt the NCE dividend payment level, adjusted for the exchange ratio, resulting in a pro forma dividend of $1.50 per share on an annual basis, following completion of the NCE/NSP Merger. The actual dividend level will be dependent upon the combined company's results of operations, financial position, cash flows and other factors, and will be evaluated by the Board of Directors of Xcel Energy. 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NCE and NSP estimate regulated cost savings of approximately $1.1 billion, net of merger costs and costs to achieve the savings, in the first 10 years after the transaction is completed. Nonrecurring costs directly attributable to the NCE/NSP Merger are being deferred. Assuming the business combination is accounted for as a pooling-of-interests, these costs will be expensed upon the consummation of the NCE/NSP Merger. It is anticipated that the Company's utility subsidiaries will recover a portion of these merger costs through future rates. The shareholders of the Company and NSP approved the Agreement and Plan of Merger in June 1999. Additionally, consummation of the NCE/NSP Merger is subject to certain closing conditions, including, among others, approval or completion of regulatory review by certain state utility regulators, the SEC under the PUHCA, the FERC, the Nuclear Regulatory Commission, the Federal Communications Commission and expiration or termination of the waiting period applicable to the NCE/NSP Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR"). Applications or submissions to the state utility regulators, where required, and the FERC were completed in July 1999. In general, such filings propose the sharing of cost savings among customers and shareholders for up to five years. The required authorizations from the state utility regulators in Kansas, Oklahoma and Wisconsin have been obtained. In Arizona, the staff recommended approval of the NCE/NSP Merger and a final order is expected by the end of the first quarter of 2000. In New Mexico, the application was not disputed and hearings were completed in January 2000. A final order approving the NCE/NSP Merger in New Mexico is expected by the end of the first quarter of 2000. In Minnesota, agreements have been reached with various interested parties which will allow for regulatory review in March 2000 and a final order is expected by the end of the second quarter of 2000. Hearings have been scheduled during the first quarter of 2000. In Colorado, settlement agreements supporting the NCE/NSP Merger were filed with the CPUC in January 2000. A hearing was held in February 2000 and the CPUC approved the NCE/NSP Merger. A final order is pending. In North Dakota, Texas and Wyoming, orders are expected by the end of the second quarter of 2000. In January 2000, the FERC issued its order granting unconditional approval of the NCE/NSP Merger without requiring further hearings (see to Note 10. Regulatory Matters for further discussion of NCE/NSP Merger rate proceedings). In February 2000, filings required under the PUHCA were made with the SEC and as required under HSR. NCE and NSP also have each agreed to certain undertakings and limitations regarding the conduct of their respective businesses prior to the closing of the transaction. The NCE/NSP Merger is expected to be completed by mid-2000. A merger integration team, consisting of executives from each company, was formed and is overseeing merger-related activities and the future integration of operations of NCE and NSP. The senior executives and organization of Xcel Energy Inc. has been announced and merger integration plans have been submitted to the merger integration team. It is Management's intention that the combined company will begin realizing certain savings upon the consummation of the NCE/NSP Merger. The following unaudited summarized pro forma financial information gives effect to the NCE/NSP Merger as if it had occurred at December 31, 1999 for balance sheet information and at January 1, 1998 for income statement information. This financial information should be read in conjunction with the historical financial statements and related notes of NCE and NSP, which are included in the Annual Reports on Form 10-K of the respective companies. These summarized pro forma amounts do not include any of the estimated cost savings expected to result from the NCE/NSP Merger. Such cost savings, net of the costs incurred to achieve such savings and to complete the merger transaction, are subject to regulatory review and approval. However, the pro forma amounts for NCE and NSP include approximately $20 million and $25 million, respectively, of deferred nonrecurring merger costs as of December 31, 1999, mainly those directly attributable to the merger transaction. Assuming the business combination is accounted for as a pooling-of-interests, these costs will be expensed upon the consummation of the NCE/NSP Merger. The pro forma income statement information amounts do not reflect any of these costs. The pro forma balance sheet information has been adjusted to reflect a write-off of the deferred costs and a related reduction of retained earnings. 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The unaudited summarized pro forma financial information has been prepared using information provided by NSP. This information does not necessarily indicate what the combined company's financial position or operating results would have been if the merger had been completed on the assumed completion dates and does not necessarily indicate future operating results of the combined company. Unaudited Summarized Pro Forma Balance Sheet information as of December 31, 1999 (in millions):
NSP NCE Adjustments Pro Forma ------ ------ ----------- --------- Property, plant & equipment- net.. $4,451 $6,261 $ 2,087 $12,799 Current assets.................... 1,034 1,027 - 2,061 Other assets...................... 4,283 1,034 (2,132) 3,185 ------ ------ ------- ------- Total assets.................... $9,768 $8,322 $ (45) $18,045 ====== ====== ======= ======= Common equity..................... $2,558 $2,733 $ (45) $ 5,246 Preferred securities.............. 305 294 - 599 Long-term debt.................... 3,454 2,374 - 5,828 ------ ------ ------- ------- Total capitalization............ 6,317 5,401 (45) 11,673 Current liabilities............... 1,826 1,657 - 3,483 Other liabilities................. 1,625 1,264 - 2,889 ------ ------ ------- ------- Total equity and liabilities.... $9,768 $8,322 $ (45) $18,045 ====== ====== ======= =======
The unaudited pro forma balance sheet information at December 31, 1999 reflects reporting adjustments to conform the presentation of nonregulated property (in property, plant and equipment). Unaudited Summarized Pro Forma Income Statement information for the years ended December 31 (in millions, except per share data):
1999 NSP NCE Adjustments Pro Forma ------ ------ ----------- --------- Revenues.......................... $2,869 $3,375 $ 625 $ 6,869 Operating income.................. 343 642 237 1,222 Net income........................ 224 347 - 571 Earnings available for common..... 219 347 - 566 Basic and diluted earnings per share...................... $ 1.43 $ 3.01 - $ 1.70 1998 Revenues.......................... $2,819 $3,478 $ 298 $ 6,595 Operating income.................. 364 651 195 1,210 Net income........................ 282 342 - 624 Earnings available for common..... 277 342 - 619 Basic earnings per share.......... $ 1.84 $ 3.06 $ 1.91 Diluted earnings per share...................... $ 1.84 $ 3.05 - $ 1.91
The unaudited pro forma income statement information for the years ended December 31, 1999 and 1998 reflect reporting adjustments to conform the presentation of nonregulated revenues and equity earnings in operating revenues. 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 3. Investment in Yorkshire Power (NCE and PSCo) Investment Yorkshire Power, a joint venture equally owned by NCI and a subsidiary of AEP, acquired indirectly all of the outstanding ordinary shares of Yorkshire Electricity, a U.K. regional electricity company effective April 1, 1997 for approximately $362 million. NCI accounts for its investment in Yorkshire Power using the equity method. Yorkshire Power's results of operations include 100% of Yorkshire Electricity's results since the acquisition date. NCI's equity in earnings of Yorkshire Power is 50%, the same as its ownership share. Yorkshire Electricity's main business is the distribution and supply of electricity and the supply of natural gas. Effective March 31, 1998, PSCo sold its common stock investment in NCI to NC Enterprises, a NCE subsidiary. NCI's primary investment is Yorkshire Power. PSCo received as consideration a 20-year promissory note from NC Enterprises in the amount of approximately $292.6 million. Annual interest payments are required for the first three years followed by principal and interest payments for the remaining seventeen years. The interest rate on the note is 7.02%. In October 1998, NCE made a capital contribution of $100 million to NC Enterprises, which was used to reduce the principal balance of the promissory note to PSCo. The balance of the promissory note at December 31, 1999 and 1998 was $192.6 million. NCE intends to make additional capital contributions to NC Enterprises to provide the necessary cash flow requirements to make payments on the promissory note to PSCo. NCI's investment in Yorkshire Power at December 31, 1999 and 1998 was approximately $367 million and $333 million, respectively. Summarized balance sheet information for Yorkshire Power as of December 31, 1999 and 1998, is presented below (in millions):
1999 1998 ------ ------ Assets: Property, plant and equipment.................. $1,666 $1,602 Current assets................................. 450 552 Goodwill (net)................................. 1,461 1,547 Other assets................................... 289 295 ------ ------ $3,866 $3,996 ====== ====== Capitalization and Liabilities: Common shareholders' equity.................... $ 725 $ 655 Long-term debt and trust preferred securities.. 2,031 2,121 Other non-current liabilities.................. 442 413 Current liabilities............................ 668 807 ------ ------ $3,866 $3,996 ====== ======
86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Summarized income statement information for NCE for the years ended December 31, 1999 and 1998, for NCE and PSCo for the period from the date of acquisition, April 1, 1997 to December 31, 1997 and for PSCo for the 3 months ended March 31, 1998 is presented below (in millions):
NCE ---------------------------- PSCo ----------------- 1999 1998 1997 1998 -------- -------- -------- ------ Yorkshire Power: Operating revenues...................... $2,334.8 $2,281.7 $1,492.9 $663.2 -------- -------- -------- ------ Operating income........................ 300.9 324.9 202.3 65.5 -------- -------- -------- ------ Income before extraordinary item........ 89.8 76.9 69.8 6.9 -------- -------- -------- ------ Extraordinary item - U.K. windfall tax.. - - (221.1) - -------- -------- -------- ------ Net income (loss)....................... $ 89.8 $ 76.9 $ (151.3) $ 6.9 ======== ======== ======== ====== NCI's equity in earnings (losses): Equity in earnings of Yorkshire Power... $ 44.9 $ 38.5 $ 34.9 $ 3.5 Extraordinary item - U.K. windfall tax.. - - (110.6) - -------- -------- -------- ------ $ 44.9 $ 38.5 $ (75.7) $ 3.5 ======== ======== ======== ======
Distribution and Supply Price Proposals In August 1999, the Office of Gas and Electricity Markets ("Ofgem"), the body appointed by the U.K. government to regulate the gas and electricity industries in the U.K., published draft price proposals for the U.K.'s regional electricity distribution businesses that would be effective for the five-year period beginning April 1, 2000 and provide for price reductions of 15% to 20% in Yorkshire Power's distribution revenues. In October 1999, Ofgem issued an update to its August proposals which provided for a 15% reduction in Yorkshire Power's distribution revenues and a further 8% transfer of costs to Yorkshire Power's electricity supply business. Additionally, in October 1999, Ofgem issued draft electricity supply price proposals. The proposals provided for a supply price cap for domestic U.K. consumers, which would apply for two years from April 2000 until March 2002 and would not apply to small industrial and commercial customers, where the market was sufficiently competitive. These supply proposals for Yorkshire Power provided for a real price reduction of approximately 10.7% on the standard domestic tariff and a nominal price freeze from April 2001 ending in March 2002. In December 1999, Ofgem published its final price proposals on both the distribution and the supply businesses. The final proposals for Yorkshire Power's distribution business were substantially the same as the prior Ofgem proposals. The final proposal for Yorkshire Power's supply business differ principally from the prior proposal in that Ofgem's final proposal provided for a real price reduction of 3.6%, as compared to 10.7% in the October 1999 proposal. On December 20, 1999, Yorkshire Power indicated its intention to accept the final proposals. Yorkshire Power believes that the supply prices established in the competitive market may require Yorkshire to charge supply prices for customers it wishes to retain who are subject to supply price controls which are lower than the maximum prices established by Ofgem. If Yorkshire Power charges such lower prices, the result will be a further reduction in supply revenues beyond that mandated by Ofgem. In response to Ofgem's final proposals and the increasing competition in the supply business, Yorkshire Power's management announced on January 18, 2000 the adoption of an aggressive program of reducing controllable costs. Significant features of this program include reductions in capital expenditures, staff reductions, outsourcing of certain functions and consolidations of facilities. Yorkshire Power intends to aggressively pursue this cost reduction program and is evaluating additional cost reduction measures to further mitigate the impact of the future final distribution and supply price reductions. Should Yorkshire Power be unable to reduce costs or 87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) grow revenues to the extent required to offset the effect of the price proposals, the Company's equity earnings from its investment in Yorkshire Power will be reduced, which could be significant, in comparison to its current level of earnings. Additionally, earnings continue to be impacted by the changes in the pricing and purchase of bulk electric power. Future earnings during the first and fourth quarter of 2000 are expected to exceed the second and third quarter earnings. Investment in Ionica and Sale of Generation In the second quarter of 1998, Yorkshire Power recognized an impairment of its investment in Ionica, a wireless telecommunications company, upon the May 1998, announcement by Ionica that negotiations for release of lines of credit from existing providers of bank finance had been unsuccessful. In November 1998, Ionica was placed into receivership and an administrator was appointed to oversee its operations and distribute its remaining assets. The impairment, reflecting a write down to fair market value, was offset, in part, by an unrelated tax adjustment. These two items reduced NCI's equity earnings by approximately $16 million. The investment in Ionica was subsequently sold with no further adverse financial impact. In the fourth quarter of 1998, Yorkshire Power recognized a gain on the sale of its generation assets. This included the sale of its 75% interest in Regional Power Generators, Ltd., which owned a 272- megawatt combined cycle, gas fired plant located in North Lincolnshire, England and the sale of other generation capacity. Proceeds from these sales were used to reduce the debt of Yorkshire Power and this gain increased NCI's equity in earnings by approximately $21 million. U.K. Windfall Tax In July 1997, the U.K. government enacted a windfall tax on certain privatized business entities, payable in two installments with the first in December 1997 and the second in December 1998. The windfall tax was a retroactive adjustment to the privatization value based on post-privatization profits during the 1992 to 1995 period. During the third quarter of 1997, Yorkshire Power recorded an extraordinary charge of approximately $221 million (135 million pounds sterling) for this windfall tax. The Company's share of this tax was approximately $110.6 million. Pro Forma Financial Information NCE's unaudited pro forma financial information for the year ended December 31, 1997, has been prepared assuming that Yorkshire Power was acquired on January 1, 1997. NCE's 1997 reported net income before the extraordinary U.K Windfall Tax is $261.5 million or $2.50 basic earnings per share. NCE's 1997 pro forma net income before the extraordinary item is $247.9 million or $2.37 basic earnings per share. The pro forma adjustments included in the determination of the pro forma results are: 1) equity in losses of Yorkshire Power, net of U.S. tax benefits, totaling $10.1 million (based on the historical earnings of Yorkshire Electricity prior to the acquisition, which included $17.9 million of after-tax write-offs of certain computer development costs, acquisition expenses and deregulation costs and adjustments for the estimated effects of purchase accounting) and 2) interest expense, net of tax totaling $3.5 million on debt associated with the investment in Yorkshire Power. PSCo's unaudited pro forma financial information for the year ended December 31, 1998 has been prepared assuming that NCI was sold to NC Enterprises, effective January 1, 1998. PSCo's 1998 reported net income is $200.1 million and PSCo's 1998 pro forma net income is $200.5 million. The pro forma adjustments included in the determination of the pro forma results are: 1) the exclusion of NCI's net income for the three months ended March 31, 1998 totaling $2.8 million and 2) the inclusion of interest income, net of tax, from the promissory note to PSCo from NC Enterprises totaling $3.2 million. 4. Acquisitions and Divestitures Sale of Texas-Ohio Gas, Inc. (NCE) Effective July 1, 1999, the Company sold all of the outstanding common stock of Texas-Ohio Gas, Inc., a gas marketing company, including all retail gas marketing contracts serving customers in the northeast region of 88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) the United States. Certain operations were retained and transferred to e prime and its subsidiaries. This sale did not have a significant impact on the Company's financial position, results of operations or cash flows. Acquisition of Planergy (NCE) Effective April 1, 1998, the Company acquired all of the outstanding common stock of Falcon Seaboard Energy Services, Inc. ("Planergy") and assumed other outstanding debt. Planergy includes Planergy, Inc. and Planergy Services, Inc. and is primarily engaged in energy consulting, energy efficiency management, conservation programs and mass-market services. Such acquisition was accounted for using the purchase method and the acquired assets and liabilities were valued at their estimated fair market values as of the date of acquisition. Planergy has been consolidated as a subsidiary of NC Enterprises in the Company's consolidated financial statements. Carolina Energy Limited Partnership Investment (NCE and SPS) The Carolina Energy Partnership, a waste-to-energy cogeneration facility, was originally scheduled to be completed in 1997, but was halted pending an independent analysis of the project's engineering and financial viability. The banks providing debt financing to the project withheld funds for continued construction. Quixx, UE, other equity owners, senior creditors and the construction contractor were unable to restructure the project on mutually agreeable terms and the senior creditors took possession of the assets of the facility. In June 1997, Quixx and UE wrote-off their respective net investments in this partnership of approximately $13.6 million and $2.4 million. 5. Capital Stock (NCE, PSCo and SPS) Shareholder Rights In connection with PSCo/SPS Merger, the common stock shareholders received a dividend of one right for each common share held on July 31, 1997. Each right represents the right to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock at a price of $100 per one one-hundredth share. Additionally, the Board of Directors created a Series A Junior Participating Preferred Stock, $1 par value, and reserved 2.6 million shares for issuance upon exercise of the Rights. In the event any person or group acquires 10% or more of the Company's common stock, the holders of the rights generally will be entitled to receive, upon exercise, common stock of the Company having a value equal to two times the exercise price of the right. The Board of Directors may, at its option after a person or group acquires 10% or more of the Company's common stock, exchange all or part of the rights for shares of the Company's common stock. In the event that the Company is acquired in a merger or other business combination or 50% or more of the Company's assets or earning power is sold or transferred, the holders of the rights have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the right. The Company may redeem the rights at a price of $0.001 per right at any time prior to the tenth day following the date any person or group acquires 10% or more of the Company's common stock. The rights expire 10 years after the record date, unless earlier redeemed or exchanged by the Company. Common Stock Issuances In November 1998, NCE issued 2.5 million shares of common stock. The net proceeds totaling $117.0 million were used for general corporate purposes and the retirement of short-term debt. In December 1997, NCE issued 5.9 million shares of common stock. The net proceeds totaling approximately $251.4 million were used for general corporate purposes, including the retirement of short-term debt and a capital contribution to PSCo. PSCo used such proceeds to retire short-term debt. 89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Preferred Stock of NCE NCE has 20 million shares of preferred stock authorized. At December 31, 1999 and 1998, the Company has not issued any of the preferred stock. Preferred Stock of Subsidiaries PSCo has 10 million shares of cumulative preferred stock, $0.01 par value authorized. This preferred stock may be issued from time to time in such series and having such designations, preferences, limitations and relative rights as the Board of Directors may determine. At December 31, 1999 and 1998, PSCo has not issued any of this preferred stock. SPS has 10 million shares of cumulative preferred stock, $1.00 par value authorized. This preferred stock may be issued from time to time in such series and having such designations, preferences, limitations and relative rights as the Board of Directors may determine. At December 31, 1999 and 1998, SPS has not issued any of this preferred stock. 6. PSCo and SPS Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debentures (NCE, PSCo and SPS) In May 1998, PSCo Capital Trust I, a wholly-owned trust of PSCo, issued 7,760,000 shares of its 7.60% Trust Originated Preferred Securities for $194 million. The sole asset of the trust is $200 million principal amount of PSCo's 7.60% Deferrable Interest Subordinated Debentures, due June 30, 2038. Holders of the securities are entitled to receive quarterly dividends at an annual rate of 7.60% of the liquidation preference value of $25. The securities are redeemable at the option of PSCo on and after May 11, 2003 at 100% of the principal amount outstanding plus accrued interest. In addition to PSCo's obligations under the Subordinated Debentures, PSCo has agreed, pursuant to a guarantee issued to the trust and the provisions of the trust agreement establishing the trust, to guarantee, on a subordinated basis, payment of distributions on the preferred securities (but not if the trust does not have sufficient funds to pay such distributions) and to pay all of the expenses of the trust (collectively, the "Back-up Undertakings"). Considered together, the Back-up Undertakings constitute a full and unconditional guarantee by PSCo of the trust obligations under the preferred securities. The proceeds from the sale of the 7.60% Trust Originated Preferred Securities were used to redeem all $181.8 million of PSCo's outstanding preferred stock on June 10, 1998, and for general corporate purposes. In October 1996, Southwestern Public Service Capital I, a wholly-owned trust of SPS, issued $100 million of its 7.85% Trust Preferred Securities, Series A. The sole asset of the trust is $103 million principal amount of SPS's 7.85% Deferrable Interest Subordinated Debentures, Series A due September 1, 2036. The securities are redeemable at the option of SPS on and after October 21, 2001 at 100% of the principal amount plus accrued interest. In addition to SPS's obligations under the Subordinated Debentures, SPS has agreed, pursuant to a guarantee issued to the trust, the provisions of the trust agreement establishing the trust and a related expense agreement, to guarantee, on a subordinated basis, payment of distributions on the preferred securities (but not if the trust does not have sufficient funds to pay such distributions) and to pay all of the expenses of the trust. Considered together, the Back-up Undertakings constitute a full and unconditional guarantee by SPS of the trust obligations under the preferred securities. The proceeds from the sale were used to reduce short-term debt. 90 Notes to Consolidated Financial Statements - (Continued) 7. Long-Term Debt of Subsidiaries (NCE, PSCo and SPS)
1999 1998 ----------- ----------- (in thousands) First Mortgage Bonds: 6-7/8% due and retired December 1, 1999...................................................... $ - $ 90,000 6.00% due January 1, 2001.................................................................... 102,667 102,667 7-7/8% due April 1, 2003..................................................................... 4,000 4,000 6.00% due April 15, 2003..................................................................... 250,000 250,000 8-1/8% due March 1, 2004..................................................................... 100,000 100,000 5-7/8% due March 1, 2004, retired............................................................ - 21,500 7-1/4% due July 15, 2004..................................................................... 135,000 135,000 6-3/8% due November 1, 2005.................................................................. 134,500 134,500 6-1/2% due March 1, 2006..................................................................... 60,000 60,000 7-1/8% due June 1, 2006...................................................................... 125,000 125,000 5-5/8% due April 1, 2008..................................................................... 18,000 18,000 7-3/8% due November 1, 2009, retired......................................................... - 27,250 5-1/2% due June 1, 2012...................................................................... 50,000 50,000 5-7/8% due April 1, 2014..................................................................... 61,500 61,500 5.1% due January 1, 2019..................................................................... 21,500 - 5.1% due January 1, 2019..................................................................... 27,250 - 9-7/8% due July 1, 2020...................................................................... 70,000 75,000 Variable rate (5.60% and 4.05% at December 31, 1999 and 1998) due September 1, 2021.......... 7,000 7,000 8-3/4% due March 1, 2022..................................................................... 148,000 150,000 8-1/4% due July 15, 2022..................................................................... 36,000 40,000 8.20% due December 1, 2022................................................................... 89,000 100,000 7-1/4% due January 1, 2024................................................................... 110,000 110,000 7.50% due January 1, 2024.................................................................... 8,000 8,000 8.50% due February 15, 2025.................................................................. 60,267 70,000 Variable rate (5.60% and 4.05% at December 31, 1999 and 1998) due March 1, 2027.............. 10,000 10,000 Unsecured Senior A Notes, 6.2%, due March 1, 2009............................................ 100,000 - Unsecured Senior A Notes, 6.78%, due July 15, 2009........................................... 200,000 - Secured Medium-Term Notes, 6.02% - 9.25%, due March 15, 1999 - March 5, 2007................. 256,500 296,500 Other secured long-term debt 13.25%, due in installments through October 1, 2016............... 30,298 30,755 Pollution control obligations, securing pollution control revenue bonds: Not collateralized by First Mortgage Bonds: Variable rate (5.20% and 4.30% at December 31, 1999 and 1998), due July 1, 2011............ 44,500 44,500 Variable rate (5.65% and 4.15% effective at December 31, 1999 and 1998), due July 1, 2016.. 25,000 25,000 5-3/4% series, due September 1, 2016....................................................... 57,300 57,300 Less: funds held by Trustee:................................................................. (168) (168) Unsecured Medium-Term Notes: 5.86% due May 30, 2000..................................................................... 100,000 100,000 Capital lease obligations, 4.21% - 11.21% due in installments through May 31, 2025............. 56,627 39,751 Other.......................................................................................... 20,620 6,284 Unamortized discount and premium - net......................................................... (8,022) (5,629) ---------- ---------- 2,510,339 2,343,710 Less: maturities due within one year............................................................ 136,218 138,165 ---------- ---------- $2,374,121 $2,205,545 ========== ==========
The First Mortgage Bonds include all debt (including First Collateral Trust Bonds) issued by the Company's utility subsidiaries under various mortgage indentures. Substantially all properties of the Company's utility subsidiaries, other than expressly excepted property, are subject to the liens securing the First Mortgage Bonds. Additionally, the SPS Indenture provides for certain restrictions on the payment of dividends by SPS. The Red River Authority of Texas has issued certain obligations, based on long-term installment sale agreements executed by SPS, that relate to the pollution control facilities installed at SPS's coal-fueled generating units. SPS's payments under the pollution control obligations are pledged to secure the Red River Authority Pollution Control Revenue Bonds. 91 Notes to Consolidated Financial Statements - (Continued) The annual maturities and sinking fund requirements during the five years subsequent to December 31, 1999 are (in thousands):
Year Maturities Sinking Fund Requirements Total ---- ---------- ------------------------- ----- NCE 2000 $136,218 $ 760 $136,978 2001 141,864 760 142,624 2002 17,703 2,240 19,943 2003 282,747 2,240 284,987 2004 282,911 2,180 285,091 PSCo 2000 $132,823 $ 700 $133,523 2001 141,864 700 142,564 2002 17,703 2,180 19,883 2003 282,747 2,180 284,927 2004 147,911 2,180 150,091 SPS 2000 $ - $ - $ - 2001 - - - 2002 - - - 2003 - - - 2004 135,000 - 135,000
The sinking fund requirements relate to PSCo and Cheyenne and they expect to satisfy substantially all of their sinking fund obligations in accordance with the terms of their respective indentures through the application of property additions. SPS has no significant sinking fund requirements. 8. Short-term Borrowing Arrangements (NCE, PSCo and SPS) Notes Payable and Commercial Paper Information regarding notes payable and commercial paper for the years ended December 31, 1999 and 1998 is as follows (in thousands, except interest rates):
1999 1998 -------- -------- NCE Notes payable to banks..................... $ 20,000 $ - Commercial paper........................... 613,527 524,394 -------- -------- $633,527 $524,394 ======== ======== Weighted average interest rate at year end.. 6.08% 5.57% PSCo Commercial paper........................... 355,631 402,795 Note payable to affiliate (NCE)............ 561 - -------- -------- $356,192 $402,795 ======== ======== Weighted average interest rate at year end.. 6.09% 5.72% SPS Commercial paper........................... $177,746 $ 85,162 Note payable to affiliate (UE)............. - 9,000 -------- -------- $177,746 $ 94,162 ======== ======== Weighted average interest rate at year end.. 5.89% 5.50%
92 Notes to Consolidated Financial Statements - (Continued) Bank Lines of Credit and Compensating Bank Balances At December 31, 1999, NCE had $325 million in credit facilities with several banks: a $100 million facility expiring November 22, 2000 and a $225 million facility expiring August 11, 2002. The facilities are used primarily to support the issuance of commercial paper by NCE. As of December 31, 1999, NCE had used $81.0 million of the total capacity available under these committed lines, $80.2 million of commercial paper and $0.8 million for a Letter of Credit issued under the NCE facility. PSCo and its subsidiaries have entered into a credit facility with several banks providing $300 million in committed bank lines of credit. The credit facility, which is used primarily to support the issuance of commercial paper by PSCo and PSCCC, alternatively provides for direct borrowings thereunder. 1480 Welton, Inc. and PSRI are provided access to the credit facility with direct borrowings guaranteed by PSCo. The facility expires November 17, 2000. Additionally, PSCo has a credit facility, which provides $300 million in committed lines of credit and expires on June 23, 2000. SPS has two credit facilities which provide $250 million in committed bank lines of credit, each with a commitment termination date of February 25, 2000. As of December 31, 1999, PSCo had used $355.6 million and SPS had used $181 million of the total capacity available under their respective committed lines of credit. Borrowings permitted under the committed bank lines of credit totaled $617.6 million at December 31, 1999. Arrangements by the Company and its subsidiaries for committed lines of credit are maintained by a combination of fee payments and compensating balances. NCE, PSCo and SPS may borrow under uncommitted preapproved lines of credit upon request; however, the banks have no firm commitment to make such loans. NCE arrangements for uncommitted bank lines of credit totaled $20 million at December 31, 1999, of which all were used. Individual PSCo arrangements for uncommitted bank lines of credit totaled $150 million at December 31, 1999, none of which were used or outstanding. 9. Financial Instruments (NCE, PSCo and SPS) Fair Value of Financial Instruments The following tables present the carrying amounts and fair values of the Company's and subsidiaries' significant financial instruments at December 31, 1999 and 1998. The carrying amount of all other financial instruments approximates fair value. SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
1999 1998 ------------------------- ----------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ------------- ----------- ---------- NCE (in thousands) Investments, at cost................................................ $ 26,171 $ 21,797 $ 35,885 $ 35,256 PSCo and SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS and PSCo....................................................... 294,000 253,240 294,000 308,250 Long-term debt of subsidiaries...................................... 2,510,339 2,370,884 2,343,710 2,434,249 PSCo Investments, at cost................................................ $ 20,286 $ 17,976 $ 30,355 $ 31,324 PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo.... 194,000 168,000 194,000 204,000 Long-term debt...................................................... 1,854,782 1,778,534 1,687,611 1,590,226 SPS Investments, at cost................................................ $ 5,885 $ 3,820 $ 5,530 $ 3,932 SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS..... 100,000 85,240 100,000 104,250 Long-term debt...................................................... 605,875 592,350 620,731 661,823
93 Notes to Consolidated Financial Statements - (Continued) 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 fair value of the PSCo and SPS obligated mandatorily redeemable preferred securities and long-term debt are based on quoted market prices of the same or similar instruments. Since PSCo, SPS and Cheyenne are subject to regulation, any gains or losses related to the difference between the carrying amount and the fair value of these financial instruments are not expected to be realized by the Company's shareholders. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1999 and 1998. These fair value estimates have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair values may differ significantly from the amounts presented herein. Off-Balance-Sheet Financial Instruments NCE has entered in to a construction contract guarantee which assures Quixx's performance under its engineering, procurement, and construction contract with Borger Energy Associates, L.P. ("BEA"). Quixx, which owns 45% of BEA, is constructing a 230 Mw cogeneration facility at a Phillips Petroleum site near Borger, Texas. The maximum aggregate amount of this guarantee at December 31, 1999 was $88.4 million. This maximum amount decreases to $25.0 million at commercial operation of the facility, currently estimated in March 2000, and remains in effect for a period of no longer than 24 months before expiring. Based upon the current status of construction of the facility, this guarantee is not expected to have any financial impact on NCE. As of December 31, 1999, NCE had $147.9 million of guarantees outstanding to e prime. These guarantees were made to facilitate e prime's gas marketing and trading activities. In connection with an agreement for the sale of electric power, SPS guaranteed certain obligations of a customer totaling $32 million at December 31, 1999. These obligations related to the construction of certain utility property that, in the event of default by the customer, would revert to SPS. Young Storage entered into a $30.7 million Credit Agreement with various lending institutions on March 26, 1999, with a stated maturity date of March 31, 2014. As support for the loan, NCE has provided a letter of credit for $830,720 to fulfill debt service reserve requirements under the loan. This loan refinanced the initial $32 million credit facility originally entered into on June 27, 1995, which was incurred for the development and construction of an underground natural gas storage facility in northeastern Colorado. Separately, NCE has guaranteed up to $4.5 million to cover costs of expenses related to the project. NC Enterprises had $10 million of guarantees outstanding for New Century Cadence as of December 31, 1999. These guarantees relate to the capital requirements and operations of Cadence Network LLC, in which New Century Cadence is a 33.3% partner. Risk Management Energy Financial Contracts - Trading The Company and its subsidiaries use the mark-to-market method of accounting for energy trading activities (see Note 1. Summary of Significant Accounting Policies - Risk Management). The following table displays the mark-to-market values of the energy trading financial instruments of the Company and its subsidiaries at December 31, 1999 and 1998 and the average value for the periods then ended. 94 Notes to Consolidated Financial Statements - (Continued)
Assets Liabilities --------------------------- ----------------------- Net Notional Average Dec. 31 Average Dec. 31 Amount Value Value Value Value ------ ----- ----- ----- ----- 1999 (in thousands) (in thousands) Natural Gas (Mmbtus) 19,686 $3,941 $6,366 $3,693 $5,110 Power (Mwhs) - 230 - 211 - 1998 Natural Gas (Mmbtus) 30,000 $ 335 $ 467 $ 344 $ 489 Power (Mwhs) 61,800 149 426 256 795
PSCo did not hold any energy trading financial instruments at December 31, 1999 and the average mark-to-market value of energy trading financial instruments during the year then ended was insignificant for both assets and liabilities. SPS did not hold any energy trading financial instruments at December 31, 1999. In addition, PSCo and SPS did not hold any energy trading financial instruments at December 31, 1998. Energy Financial Contracts - Other than Trading Various energy financial instruments are used by NCE and its subsidiaries as hedging mechanisms against future contractual energy related obligations. The weighted average maturity of these instruments is less than one year. At December 31, 1999, the Company, as part of e prime's retail gas marketing business, held notional long volumetric positions of approximately 7.0 million Mmbtus of natural gas related to these financial instruments which had related unrealized losses of approximately $1.4 million. At December 31, 1998, e prime held notional long volumetric positions of approximately 14.2 million Mmbtus of natural gas related to these financial instruments which had related unrealized losses of approximately $6.4 million. In addition, PSCo and SPS did not hold any energy financial instruments at December 31, 1999. Financial Derivatives - Interest Rates SPS has an interest rate swap agreement, which, in effect, fixes the interest rate on a $25 million notional amount of tax exempt bonds at 6.435%. Amounts paid or received under this agreement are accrued as interest rates change and are recognized over the life of the agreement as an adjustment to interest expense. SPS is exposed to interest rate risk in the event of nonperformance by counterparties; however, SPS does not anticipate such nonperformance. Credit Risk In addition to the risks discussed above, NCE and its subsidiaries are exposed to credit risk in its risk management activities. Credit risk relates to the risk of loss resulting from the nonperformance of a counterparty of its contractual obligations. As the Company continues to expand its gas and power marketing and trading activities, the Company's exposure to credit risk and counterparty default may increase. NCE and its subsidiaries maintain credit policies intended to minimize overall credit risk. NCE and its subsidiaries conduct standard credit review for all of its counterparties. The Company employs additional credit risk control mechanisms when appropriate, such as letters of credit, parental guarantees and standardized master netting agreements that allow for offsetting of positive and negative exposures. The credit exposure is monitored and, when necessary, the activity with a specific counterparty is limited until credit enhancement is provided. 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. 95 Notes to Consolidated Financial Statements - (Continued) 10. Regulatory Matters (NCE, PSCo and SPS) Electric Utility Matters PSCo Performance Based Regulatory Plan (PBRP) PSCo's base electric rates are based on traditional cost of service ratemaking principles. The CPUC established a performance based regulatory plan in connection with the CPUC's decision to approve the PSCo/SPS Merger. The major components of this regulatory plan include the following: . 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:
Electric Department Sharing of Excess Earnings ------------------------------ Return on Equity Customers Shareholders ------------------- --------- ------------ 11-12% 65% 35% 12-14% 50% 50% 14-15% 35% 65% over 15% 100% 0%
. a QSP which provides for refunds to customers if PSCo does not achieve certain performance measures relating to electric reliability, customer complaints and telephone response to inquiries; and . an ICA which provides for the sharing of energy costs and savings relative to an annual target cost/delivered Kwh. PSCo has recorded an estimated customer refund obligation under the earnings test for the calendar years 1997 to 1999. In the spring of each year following the measurement period, PSCo filed its proposed rate adjustment under the PBRP. The CPUC conducts proceedings to review and approve these rate adjustments annually. Since July 1998, PSCo has been refunding amounts related to the sharing of earnings in excess of 11% return on equity to customers. PSCo has recorded customer refund obligations for its earnings test of approximately $15 million for 1997, $8 million for 1998, and a preliminary estimate of $17 million for 1999. Final determinations of amounts to be refunded for 1998 and 1999 have not been made. In 1999, PSCo did not achieve all of the minimum service performance measures under the QSP, due in part to circumstances outside of its control. PSCo recorded an estimated refund obligation of approximately $3.6 million in 1999. The potential maximum refund obligation under the QSP for 1999 is approximately $8.0 million. Additionally, PSCo agreed to freeze base electric rates after the PSCo/SPS Merger rate reductions for the period through December 31, 2001 with the flexibility to make certain other rate changes, including those necessary for the recovery of DSM, QF capacity costs and decommissioning costs. The freeze in base electric rates does not prohibit PSCo from filing a general rate case or deny any party the opportunity to initiate a complaint or show cause proceeding. PSCo Wholesale - FERC On March 30, 1999, PSCo received authorization from the FERC to engage in market-based wholesale power sales. The authorization allows PSCo to sell energy to e prime, subject to certain conditions, as well as to third parties. SPS 1997 Merger Related Rate Reductions Under the various regulatory commission approvals, SPS is required to provide credits to customers over five years for one-half of the measured non- fuel operation and maintenance expense savings associated with the PSCo/SPS 96 Notes to Consolidated Financial Statements - (Continued) Merger. SPS will provide guaranteed minimum annual credits to retail customers of $3 million in Texas, $100,000 in Oklahoma and $10,000 in Kansas and $1.5 million to wholesale customers. Under a settlement reached with the NMPRC, effective December 30, 1998, SPS discontinued the merger savings credit of $1.2 million per year with the implementation of new retail rates in New Mexico as discussed below. SPS Electric Cost Adjustment Mechanisms Substantially all fuel and purchased power costs are recoverable from utility customers, as determined on a jurisdictional basis, using approved cost adjustment mechanisms. Texas The PUCT's regulations require periodic examination of SPS's fuel and purchased power costs, the efficiency of the use of such fuel and purchased power, fuel acquisition and management policies and purchase power commitments. SPS is required to file an application for the Commission to retrospectively review, at least every three years, the operations of a utility's electricity generation and fuel management activities. In June 1998, SPS filed its reconciliation for the generation and fuel management activities totaling approximately $690 million, for the period from January 1995 through December 1997. For this same period, SPS had approximately $21.4 million in under- recovered fuel costs associated with the Texas retail jurisdiction. SPS has entered into a settlement agreement with the General Counsel of the PUCT, which, if approved, would provide for the recovery of substantially all fuel costs. The final outcome of this fuel reconciliation proceeding is pending. Various parties in the proceedings are contesting the settlement agreement, which includes the recovery of the Thunder Basin costs discussed below. Hearings were held in October 1999. It is anticipated that a decision will be issued during the first quarter of 2000. SPS was named as a defendant in a case entitled Thunder Basin Coal Co. vs. Southwestern Public Service Co. In November 1994, the jury returned a verdict in favor of Thunder Basin and awarded damages of approximately $18.8 million. SPS appealed the judgment and, in January 1997, that Court found in favor of Thunder Basin and upheld the judgment. In February 1997, SPS recorded the liability for the judgment including interest and court costs. The amount of approximately $22.3 million was paid in April 1997. During 1996 and 1997, SPS obtained conditional approval from the FERC to collect portions of the Thunder Basin judgment from wholesale customers and the NMPRC issued an order granting recovery of the New Mexico retail jurisdictional portion of the judgment. In May 1997, SPS filed a request with the PUCT to surcharge under-collected fuel and purchased power expenses, which included $9.1 million of the Thunder Basin judgment. The PUCT issued a decision, which denied recovery of the judgment through a surcharge on the grounds that the costs were not classified as fuel costs. In 1997, SPS expensed approximately $12.1 million of the Texas retail jurisdictional portion of the Thunder Basin judgment and recognized an equal amount as deferred revenue in anticipation of future recovery through the pending fuel reconciliation proceeding. SPS believes that recovery of the Thunder Basin costs for the Texas retail jurisdiction will be approved in the pending fuel reconciliation proceeding. Under the PUCT regulations, a utility may recover eligible fuel expenses or fuel-related expenses, which result in benefits to customers that exceed the costs that customers would otherwise have to pay. The Thunder Basin costs resulted in total net savings to customers of approximately $8.5 million, with approximately $4.6 million net savings attributable to Texas retail jurisdictional customers. In the previously discussed proposed settlement agreement with the General Counsel's office at the PUCT, the General Counsel has agreed with SPS's proposed recovery of the Thunder Basin costs. Effective in April 1999, the PUCT authorized SPS to reduce its fixed fuel factor for SPS's Texas retail jurisdiction, by approximately $44 million on an annual basis. This rate reduction and fuel cost refund are primarily due to lower coal transportation costs between SPS's coal supplier and the railroad company that began in late 1998. The PUCT also authorized SPS to refund its over collected fuel costs for the period January 1998 through 97 Notes to Consolidated Financial Statements - (Continued) January 1999. This one-time $16 million fuel refund, including interest, was applied to the monthly billings during April 1999. New Mexico The NMPRC regulations provide for a fuel and purchased power cost adjustment clause and a fixed annual fuel factor for SPS's New Mexico retail jurisdiction. SPS files monthly and annual reports of its fuel and purchased power costs with the NMPRC, which include the current over/under fuel collection calculation, plus interest. In addition, SPS revises its fixed fuel factor annually to recover projected fuel and purchase power costs as well as any over/under fuel cost balance for the current year. SPS is required to petition for a change in the fixed fuel factor if the over/under recovery balance reaches $5 million. New Mexico's over/under calculation, plus interest, is similar to the Texas fixed fuel factor calculation. SPS Rate Cases New Mexico In November 1997, the NMPRC issued an order investigating SPS's rates. In the order, the NMPRC determined that because of the rapid changes occurring in the electric industry, the NMPRC would require rate case filings by the major electricity suppliers who have not adopted a plan to provide retail open access and customer choice of suppliers. SPS made a compliance filing in May 1998, which proposed a $1.7 million annual rate reduction for certain retail customers in New Mexico and incorporated the $1.2 million guaranteed minimum annual credits, discussed above. In October 1998, SPS entered into an uncontested stipulation agreement settling the rate investigation case. As part of this settlement, SPS instituted a $6 million annual reduction in base rates (discontinuing the $1.2 million in guaranteed minimum annual credits) for certain retail customers. Additionally, SPS implemented full normalization in its accounting for income taxes with recovery of the New Mexico jurisdictional portion of the tax regulatory asset over 16.8 years. On November 30, 1998, the NMPRC approved the stipulation and the new rates became effective December 30, 1998. Wholesale - FERC In 1989, the FERC issued its final order regarding a 1985 wholesale rate case. SPS appealed certain portions of that order that related to recognition of rates for the reduction of the federal income tax rates from 46% to 34%. The United States Court of Appeals remanded the case, directing the FERC to reconsider SPS's claim. Negotiated settlements with certain customers were reached, and approved by the FERC, in 1993 and 1995, with SPS receiving approximately $10 million, including interest. Settlement agreements were reached with the two remaining customers during 1998 and approved by the FERC. For the year ended December 31, 1998, SPS recorded $16.9 million of additional revenues and $7.6 million of additional depreciation expense. On November 9, 1999, SPS filed with the FERC a transmission rate case to increase electric transmission rates annually by approximately $1 million, with an effective date of January 1, 2000. Hearings are scheduled to begin in August 2000. Cheyenne Rate Case On August 13, 1999, Cheyenne filed a combined gas and electric rate case with the WPSC requesting a $3.6 million annual increase in combined electric and gas base rates. This followed the expiration of the two-year moratorium on filing rate cases agreed to in connection with the WPSC approval of the PSCo/SPS Merger. Hearings were held in January 2000 and the WPSC approved annual electric and gas base rate increases of $2.1 million and $1.2 million, respectively, effective March 1, 2000, based on a 12% return on equity. 98 Notes to Consolidated Financial Statements - (Continued) Deregulation Legislation (NCE and SPS) New Mexico On April 8, 1999, New Mexico enacted the Electric Utility Restructuring Act of 1999, which allows customer choice for residential, small commercial and educational customers beginning January 1, 2001. All remaining customers will be allowed customer choice on January 1, 2002. Customers of a municipal utility and customers of a distribution cooperative utility will be afforded choice only if the respective utility elects to participate. The legislation provides for recovery of no less than 50% of stranded costs for all utilities as quantified by the NMPRC. Transition costs must be approved by the NMPRC prior to being recovered through a non-by-passable wires charge, which must be included in a transition plan filing. All public electric utilities operating in New Mexico must initially file a transition plan with the NMPRC by March 1, 2000. Before January 1, 2001, SPS must separate its utility operations into at least two segments: a) energy generation services and b) transmission and distribution (including retail operations) services either by the creation of separate affiliates that may be owned by a common holding company or by the sale of assets to one or more third parties. A regulated company will be prohibited from providing unregulated services. In January 2000, SPS petitioned and received approval from the NMPRC to postpone filing its transition plan until June 1, 2000. Additionally, SPS requested that the NMPRC postpone the beginning of customer choice for certain retail customers until June 1, 2001 and postpone the completion of SPS's corporate separation until January 1, 2002. The NMPRC has directed New Mexico utilities and interested parties to comment on the SPS's postponement of customer choice for certain customers and corporate separation within 60 days. Texas On June 18, 1999, an electric utility restructuring act ("SB-7") was passed in Texas, which allows for retail competition for most areas of the state beginning January 1, 2002. The legislation requires, among other things, a rate freeze for all customers, effective September 1, 1999 until January 1, 2002, together with an annual earnings test; a 6% rate reduction for those residential and small commercial customers who choose not to switch suppliers at the start of retail competition; the unbundling of business activities, costs and rates relating to generation, transmission and distribution and retail services; reductions in NOx and SO2 emissions and the recovery of stranded costs. The PUCT can delay the date for retail competition if a power region is unable to offer fair competition and reliable service during pilot projects which begin for all utilities on June 1, 2001 for 5% of the utility's combined load of all customer classes. SB-7 specifically addresses competition in the Texas Panhandle, where SPS operates, recognizing that certain transmission constraints exist within the region that require full retail customer choice to develop on a more structured schedule than the rest of the state. SPS must file a transition to competition plan with the PUCT by December 1, 2000. SPS, with no estimated net stranded costs, must direct any excess earnings indicated in the annual earnings tests during the period January 1, 1999 through December 31, 2001 to improvements in transmission and distribution facilities, to capital expenditures to improve air quality or to accelerate the amortization of regulatory assets (subject to PUCT approval). Additionally, the Texas legislation requires that no generation company can own and control more than 20% of the installed capacity located in or capable of delivering electricity to a power region. Utilities owning more than 400 Mw must auction entitlements to at least 15% of the utility's installed generation capacity used for providing electric services to Texas retail customers. The capacity entitlement auctions are to continue for 5 years or until 40% of the utility's residential and small commercial customers served prior to the start date of competition are served by non-affiliated companies. The legislation includes several possible remedies to market power abuses. These provisions are not immediately applicable to SPS due to the existing transmission constraints and market power issues in the Panhandle region. As required by SB-7, SPS filed a business separation plan on January 10, 2000 for the unbundling of business activities relating to 1) power generation, 2) transmission and distribution and 3) retail electric provider 99 Notes to Consolidated Financial Statements - (Continued) services. In its filing, SPS proposed a functional separation into these business units effective January 1, 2002 and a complete legal separation by January 1, 2007 in an effort to minimize the costs of restructuring. All competitive energy services will be separate by September 1, 2000 and on or before the start of retail competition, NCE will establish a customer care company, which will provide customer services for all of its operating activities. SPS has signed a letter of intent to transfer functional control of its electric transmission system to the Midwest Independent System Operator, Inc. ("MISO"), a regional transmission organization that will operate the transmission system of multiple owners in the central United States. Also, included in this filing was SPS's proposed code of conduct and compliance manual. In general, SPS is committing to separate into distinct businesses and to operate in an arm's length manner so that the transactions between affiliated entities and regulated entities do not confer any unduly competitive advantages on NCE's businesses as compared to non-affiliates. Hearings on the separation plan are scheduled to take place during the first quarter of 2000. SPS is required to file a rate case on April 1, 2000 to set the rates for the transmission and distribution services, which are to be unbundled and implemented on January 1, 2002. The Company intends to request recovery of all the jurisdictional costs associated with this restructuring and is continuing to evaluate the effect of these filings on SPS. In connection with the NCE/NSP Merger approval proceedings, the Company filed supplemental testimony with the PUCT in October 1999 outlining its plan to address the various provisions of SB-7. In general, the plan presented by the Company provides for the transfer of ownership or control of 595 Mw of generating capacity (either through capacity entitlement auction or divesting) to other competitors and the addition of transmission lines to import an additional 400 Mw from other geographic regions. The major components of this plan not discussed above in the business separation plan filing, include the following: . auction entitlements (409 Mw or 15 percent of installed generation capacity) to capacity owned and controlled by SPS, that is dedicated to serving Texas retail customers, by January 1, 2002 and the Company would continue to own and operate the capacity, but competitors would have the right to dispatch the power; . divest 186 Mw of SPS-area generating capacity by January 1, 2002 in order to further reduce market dominance; . implement a pilot program for retail access for at least 5 percent of its Texas retail load in June 2001 and to expand the pilot program to 20% of customer load in 2002. The SPS plan is designed to address the market power issues related to the deregulation legislation and would promote further competition before the end of 2006 by allowing only competitors to build new plants in the region between now and then, by adding even more transmission lines, and possibly by further divesting some generation. Hearings on the NCE/NSP Merger are scheduled to begin in March 2000 and the final order is expected in the second quarter of 2000. NCE/NSP Merger Rate Filings The Company and its utility subsidiaries filed applications or submissions with its state utility regulators, where required, and the FERC to obtain approvals of the NCE/NSP Merger. In general, the filings propose the sharing of cost savings among customers and shareholders. In January 2000, the FERC issued its order granting unconditional approval of the NCE/NSP Merger without requiring further hearings. Hearings are scheduled with various state regulators during the first quarter of 2000 and final orders related to these proceedings are expected by the end of the second quarter of 2000. In Texas, the Company is actively pursuing settlement discussions to resolve critical issues in both its merger and restructuring proceedings. The Company can not predict the outcome of these proceedings at this time. Following is a brief summary of these merger rate proceedings in Colorado and New Mexico. Colorado On January 31, 2000, PSCo, the CPUC Staff, the OCC and substantially all other parties to the proceeding filed a stipulation and agreement recommending approval of the merger with the following major conditions: 100 Notes to Consolidated Financial Statements - (Continued) . PSCo will reduce its retail electric rates by $11 million annually for the two-year period from July 1, 2000 through June 30, 2002; . PSCo will file a combined electric and gas rate case in early 2002 with new rates anticipated to be effective January 1, 2003; . merger costs will be capped at $30 million and amortized for ratemaking purposes over the period July 1, 2000 to December 31, 2003; . the PBRP and the QSP currently in effect will continue through 2006 with modifications to cap the electric department earnings at 10.5% return on equity for 2002, no earnings sharing in 2003 since new base rates would have recently been established, and an increase in potential refunds if quality standards are not met, including a QSP for natural gas operations. The CPUC held hearings on this matter and approved the NCE/NSP Merger. A final order is pending. New Mexico In January 2000, the NMPRC held hearings on the NCE/NSP Merger. The application was not contested by staff or intervenors in the case. The examiner requested that SPS draft a recommended decision. In summary, SPS proposed the following regulatory plan for the period July 1, 2000 through December 31, 2004: . guaranteed merger savings credits of $65,000 per month; . an equal sharing of the net non-fuel operating and maintenance savings among retail customers and shareholders; . a 50% recovery of merger related transaction and transition costs; . retention of the current fuel recovery mechanism to pass along fuel cost savings to retail customers. . SPS will not pass along any negative rate impacts of the NCE/NSP Merger. The Company estimates that SPS's New Mexico retail customers will receive approximately $4.0 million of merger savings over period ending December 31, 2004. A final order approving the NCE/NSP Merger is expected by the end of the first quarter or early second quarter of 2000. Financial Reporting Considerations The Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus in Issue No. 97-4, "Deregulation of the Pricing of Electricity" ("EITF 97-4") indicating that when deregulatory legislation is passed or when a rate order (whichever is necessary to effect change in the jurisdiction) that contains sufficient detail for an enterprise to reasonably determine how the transition plan will affect the separable portion of its business whose pricing is being deregulated is issued, the enterprise should stop applying SFAS 71 to that separable portion of its business. While legislation has been enacted in Texas and New Mexico, there are several unresolved issues that will significantly impact how and when deregulation related to the generation portion of the business, will be implemented by SPS. It is expected that SPS will discontinue the application of SFAS 71 related to the generation portion of the business when the provisions of EITF 97-4 have been met, which may be in the year 2000. Gas Utility Matters PSCo Rate Cases In November 1998, PSCo filed a retail gas rate case with the CPUC requesting an annual increase in rates of approximately $23.4 million. The request for a rate increase reflects revenues for additional plant investment, a 12.0% return on equity and the recovery of incremental year 2000 costs (see Note 11. Commitments and Contingencies - Year 2000 Issue). On June 8, 1999, the CPUC approved an increase in base rates of approximately $15 million with an 101 Notes to Consolidated Financial Statements - (Continued) 11.25% return on equity, effective July 1, 1999. PSCo was also allowed recovery of certain environmental costs. Prudently incurred year 2000 costs will be recovered under a separate mechanism beginning in 2000. On June 5, 1996, PSCo filed a retail rate case with the CPUC requesting an annual increase in its jurisdictional gas department revenues equal to approximately $34 million. In early 1997, the CPUC approved an overall increase of approximately $18 million with an 11.25% return on equity, effective February 1, 1997 and as modified on May 15, 1997. The CPUC disallowed the recovery of certain postemployment benefit costs under SFAS 112 and imputed anticipated merger related savings net of costs (associated with the PSCo/SPS Merger) related to the gas business (see Note 1. Summary of Significant Accounting Policies). During 1997, PSCo filed a petition with the Denver District Court appealing the CPUC's decision. On December 16, 1999 the Denver District Court affirmed the CPUC disallowance of SFAS 112 costs. PSCo filed a petition with the Colorado Supreme Court on January 31, 2000 to appeal the Denver District Court's decision. In the event that PSCo is not successful in its appeal(s), including pursuing regulatory recovery, these amounts will be written off. PSCo Unbundling and Deregulation of the Retail Natural Gas Supply Business On April 26, 1999, the Colorado legislature approved a bill, which allows natural gas public utilities to voluntarily submit plans to the CPUC to open their markets and enable customers to choose their natural gas supplier. This bill was signed by the Governor on June 6, 1999. Currently, PSCo provides a traditional bundled gas service with rates designed for the recovery of actual gas costs through the GCA and for providing transportation and delivery services. Delivery of natural gas will continue to be regulated, with delivery companies required to offer nondiscriminatory pipeline access to competitors. PSCo will continue to be subject to the reporting requirements of SFAS 71 as a regulated distribution company. PSCo has not filed a plan to open its natural gas supply business to competition and continues to evaluate its business opportunities for doing so. 11. Commitments and Contingencies (NCE, PSCo and SPS) Environmental Issues The Company and its subsidiaries are subject to various environmental laws, including regulations governing air and water quality, the storage of natural gas and the storage and disposal of hazardous or toxic wastes. The Company and its subsidiaries assess, on an ongoing basis, measures to ensure compliance with laws and regulations related to air and water quality, hazardous materials and hazardous waste compliance and remediation activities. Changes to environmental regulations, interpretations or enforcement policies may impact the future construction and operation of the Company's electric generation, transmission and distribution systems and gas transportation, storage and distribution systems. Environmental Site Cleanup PSCo has been or is currently involved with the cleanup of contamination from certain hazardous substances. In many situations, PSCo is pursuing or intends to pursue insurance claims and believes it will recover some portion of these costs through such claims. Additionally, where applicable, PSCo is pursuing, or intends to pursue, recovery from other PRPs and through the rate regulatory process. To the extent any costs are not recovered through the options listed above, PSCo would be required to recognize an expense for such unrecoverable amounts. Under CERCLA, the EPA identified low level, widespread contamination from hazardous substances at the Barter Metals Company ("Barter") properties located in central Denver. Because it was identified as a PRP, PSCo completed the cleanup of this site at a cost of approximately $9 million. In January 1996, in a lawsuit by PSCo against its insurance providers, the Denver District Court entered final judgment in favor of PSCo in the amount of $5.6 million for certain cleanup costs at Barter. Several appeals and cross appeals were filed by one of the insurance providers and PSCo. In September 1999, the Colorado Supreme Court held that the trial court should have allocated the damages and self- insured retentions over the entire period the facilities were in operation. Although the Colorado Supreme Court remanded the judgement to the trial court for additional proceedings, it suggested that its ruling may reduce PSCo's available 102 Notes to Consolidated Financial Statements - (Continued) recovery to approximately $1.4 million. PSCo requested recovery of environmental costs of approximately $7.7 million related to Barter over four years, in its proposed Performance Based Regulatory Plan for calendar years 1998-2001 (see Note 10. Regulatory Matters). PSCo has identified several other sites where clean up of hazardous substances may be required. While potential liability and settlement costs are still under investigation and negotiation, PSCo believes that the resolution of these matters will not have a material adverse effect on PSCo's financial position, results of operations or cash flows. PSCo will pursue the recovery of all significant costs incurred for such projects through insurance claims and/or the rate regulatory process. Other Environmental Matters Under the Clean Air Act Amendments of 1990 ("CAAA"), coal-fueled power plants are required to reduce SO2 and NOx emissions to specified levels through a phased approach. The Company expects to meet the Phase II emission standards placed on SO2 and NOx through the combination of: (1) the use of low sulfur coal, (2) the operation of air quality control equipment on certain generation facilities and (3) allowances issued by the EPA and purchased from other companies. PSCo has obtained all necessary conditions to proceed with its plans to spend approximately $211 million on its Denver and Boulder Metro area coal- fueled power plants to further reduce such emissions below the required regulatory levels discussed above. The cost of this emission control equipment will be recovered through rates from Colorado customers under a separate rate schedule when this equipment is placed in service. Hayden Steam Electric Generating Station In May 1996, PSCo and the other joint owners of Hayden Station reached an agreement resolving violations alleged in complaints filed by a conservation organization, the CDPHE and the EPA against the joint owners. PSCo is the operator and owns an average undivided interest of approximately 53% of the station's two generating units. In connection with the settlement, the joint owners of the Hayden station were required to install emission control equipment of approximately $130 million (PSCo's portion is approximately $70 million). This equipment was installed and became operational on Units 1 and 2 during 1998 and 1999 as scheduled and required under the settlement. Additionally, the settlement included stipulated future penalties for failure to comply with specified SO2 and NOx emission levels. Based on current operations, management anticipates that it will be able to operate the units as planned. Craig Steam Electric Generating Station In October 1996, a conservation organization filed a complaint in the U. S. District Court pursuant to provisions of the Federal Clean Air Act (the "Act") against the joint owners of the Craig Steam Electric Generating Station located in western Colorado. Tri-State Generation and Transmission Association, Inc. is the operator of the Craig station and PSCo owns an undivided interest (acquired in April 1992) in each of two units at the station totaling approximately 9.7%. The plaintiff alleged that the station violated Clean Air Act requirements related to opacity. 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 parties, the EPA and the CDPHE have entered into mediation in an attempt to resolve all air quality matters related to the facility. Resolution of this matter may require the installation of additional emission control equipment. Management does not believe that any potential liability, the future impact of this litigation on plant operations, or any related cost will have a material adverse impact on PSCo's financial position, results of operations or cash flows. 103 Notes to Consolidated Financial Statements - (Continued) Fuel Purchase Requirements Coal Purchases and Transportation PSCo and SPS have in place various long-term contracts for the purchase and transportation of coal (and with respect to SPS, the processing of coal for deliveries to its bunkers) which are used in the generation of electricity. These contracts expire on various dates through 2017 and at December 31, 1999, the total estimated obligations, based on 1999 prices, for PSCo were approximately $821.7 million and for SPS were approximately $891.4 million. Gas Purchases and Transportation PSCo and Cheyenne have long-term contracts for the purchase, firm transportation and storage of natural gas. These contracts, excluding the thirty-year contract with Young Storage which has been accounted for as a capital lease, are primarily used to support distribution of natural gas and the majority of these contracts expire on various dates through 2004. At December 31, 1999, PSCo has minimum annual obligations under such contracts of approximately $170 million in 2000 declining thereafter for a total estimated commitment of approximately $467 million. The combined PSCo and Cheyenne minimum annual obligation at December 31, 1999, under such contracts is approximately $173 million in 2000 declining thereafter for a total estimated commitment of approximately $471 million. SPS does not have any long-term contracts with minimum obligations. Purchased Power PSCo, SPS and Cheyenne have entered into agreements with utilities, QFs and other energy suppliers for purchased power to meet system load and energy requirements, replace generation from company-owned units under maintenance and during outages, and meet operating reserve obligations. PSCo and SPS have various pay-for-performance contracts with QFs having expiration dates through the year 2024. In general, these contracts provide for capacity payments, subject to the QFs meeting certain contract obligations, and energy payments based on actual power taken under the contracts. The capacity and energy costs are recovered through base rates and other cost recovery mechanisms. Additionally, the Company's regulated utilities have long-term purchased power contracts with various regional utilities expiring through 2018. Total capacity and energy payments associated with such contracts for NCE were $528 million, $490 million and $477 million; for PSCo such payments were $436 million, $439 million and $452 million; and, for SPS such payments were $61 million, $23 million and $15 million in 1999, 1998 and 1997, respectively. At December 31, 1999, the estimated future payments for capacity that NCE, PSCo and SPS are obligated to purchase, subject to availability, are as follows (in thousands):
Regional QFs & Other Utilities Total ----------- ---------- ---------- NCE 2000................. $ 172,410 $ 167,710 $ 340,120 2001................. 188,459 143,021 331,480 2002................. 179,055 131,950 311,005 2003................. 167,678 120,982 288,660 2004................. 149,520 110,515 260,035 2005 and thereafter.. 1,041,725 908,384 1,950,109 ---------- ---------- ---------- Total............... $1,898,847 $1,582,562 $3,481,409 ========== ========== ==========
104 Notes to Consolidated Financial Statements - (Continued)
PSCo 2000................. $ 156,193 $ 157,627 $ 313,820 2001................. 172,045 143,021 315,066 2002................. 162,340 131,950 294,290 2003................. 150,683 120,982 271,665 2004................. 132,182 110,515 242,697 2005 and thereafter.. 771,324 908,384 1,679,708 ---------- ---------- ---------- Total............... $1,544,767 $1,572,479 $3,117,246 ========== ========== ========== SPS 2000................. $ 16,217 $ 1,321 $ 17,538 2001................. 16,414 - 16,414 2002................. 16,715 - 16,715 2003................. 16,995 - 16,995 2004................. 17,338 - 17,338 2005 and thereafter.. 270,401 - 270,401 ---------- ---------- ---------- Total............... $ 354,080 $ 1,321 $ 355,401 ========== ========== ==========
Historically, all minimum coal, coal transportation, natural gas and purchased power requirements have been met. System Purchase Option SPS and the City of Las Cruces, New Mexico ("the City") entered into a System Purchase Option and Rate Agreement in August 1994, which grants the City the option to sell to SPS the electric utility system serving the City (including distribution, subtransmission and transmission facilities), which the City plans to acquire from El Paso Electric Company ("EPE") by purchase or through condemnation proceedings. The agreement has a three-year term beginning at the time the City acquires the facilities and ending no later than January 1, 2002. The purchase price which would be paid by SPS would be equal to the amount required to retire all outstanding debt incurred by the City in acquiring the facilities plus the City's reasonable costs in acquiring the facilities. SPS has the right to terminate the agreement if, in SPS's sole discretion, it determines that any proposed condemnation award is excessive or upon the occurrence of certain other events. The agreement also provides that, if the City abandons or dismisses condemnation proceedings as a consequence of SPS's termination of the agreement, SPS will reimburse the City for one-half of its reasonable litigation expenses and for any of EPE's damages and litigation expenses that the City is obligated to pay by final court order. The City has filed a suit in State District Court to condemn the electric distribution facilities of EPE. Other The Company and its subsidiaries have commitments related to the purchase of materials, plant and equipment additions, DSM expenditures and other various items resulting from the normal course of business. Tax Matters PSRI, a subsidiary of PSCo, owns and manages permanent life insurance policies on certain past and present employees. These COLI policies were entered into prior to July 1, 1986. In 1996, Congress passed legislation to phase out the tax benefits with certain COLI policies, however, PSRI's policies were grandfathered under this legislation. In August 1998, the IRS issued a Notice of Proposed Adjustment proposing to disallow the 1993 and 1994 deductions of interest expense related to policy loans on the COLI policies totaling approximately $54.6 million. A Request for Technical Advice from the IRS National Office with respect to the proposed adjustment is pending. Management is vigorously contesting this issue. PSRI has not recorded any provision for income tax or interest expense related to this matter and has continued to take deductions for interest expense related to policy 105 Notes to Consolidated Financial Statements - (Continued) loans on its income tax returns for subsequent years. Management believes that PSRI's tax deduction of interest expense on life insurance policy loans was in full compliance with IRS regulations and believes that the resolution of this matter will not have a material adverse impact on NCE's or PSCo's financial position, results of operations or cash flows. Year 2000 Issue The Y2K issue was a result of a universal programming standard that records dates as six digits, e.g., mm/dd/yy, using only the last two digits for the year. Any automated system software or firmware that uses two-digit fields could understand the year 2000 as the year 1900 if the issue was not corrected. This situation was not limited to computers; it had the potential to affect many systems, components and devices which have embedded computer chips and which may be date sensitive. The company's most critical systems that required evaluation and remediation were power generation and distribution systems, telecommunications systems, energy trading systems and billing systems. In 1997, the Company established the NCE Year 2000 Program to oversee all corporate-wide Y2K initiatives. The NCE Year 2000 Program was successful in preparing the Company and its subsidiaries for the Year 2000. The Year 2000 transition event resulted in no material adverse impact to the operations of the Company and occurred with no Y2K related disruption to the Company's ability to provide service to customers. The NCE Year 2000 Program was successful in correcting all potential Y2K failure points identified in its critical automated systems to maintain service to its customers and to mitigate legal and financial risks. The Company anticipates no additional risks to its business operations as a result of the Y2K issue. On New Year's eve, all emergency centers and corporate facilities were staffed and prepared in accordance with the Y2K Program's Contingency Plans. Implementation of these plans was successful and there was no need to implement any emergency actions. The Company anticipates no need to implement this same level of contingent preparedness for any remaining Year 2000 issues, including February 29, 2000 (Leap year). Company operations will address remaining Year 2000 critical dates with a heightened sense of awareness on the part of on-duty personnel. NCE will also participate in monitoring activities as defined by the North American Electric Research Council. The Company incurred costs of approximately $5.8 million in 1999 and $8.7 million in 1998 and prior years in operating and capital expenditures to modify its computer software, hardware and other automated systems used in operations enabling proper data processing relating to the year 2000 and beyond. Furthermore, the Company spent approximately $12.0 million in 1999 and $6.6 million in 1998 and prior years in operating and capital expenditures for the accelerated replacement of certain non-compliant IT systems. PSCo and SPS incurred the majority of these costs. A significant portion of the costs incurred to address the Company's Y2K issues represented the redeployment of existing information technology resources. The table below details the actual costs incurred during 1998 and prior periods; the actual costs incurred during 1999; remaining costs to be incurred and total project costs. The remaining costs to be incurred consists primarily of labor costs incurred during the December 31, 1999 and January 1, 2000 rollover period, and costs associated with preparation of final reports and compiling records of NCE Year 2000 Program. 106 Notes to Consolidated Financial Statements - (Continued)
Estimated Remaining Actual Costs Actual Costs Costs to be Total Project 1998 and Prior 1999 Incurred Costs -------------- ------------ ----------- ------------- (in millions) Operating expenses........ $ 8.0 $ 4.3 $1.2 $13.5 Capital for automated system components...... 0.7 1.5 - 2.2 IT replacement projects: Operating.............. 0.2 0.7 - 0.9 Capital................ 6.4 11.3 - 17.7 ----- ----- ----- ----- Total................ $15.3 $17.8 $1.2 $34.3 ===== ===== ===== =====
The NCE Year 2000 Program has monitored the performance of its key suppliers following the Y2K transition and has not experienced any disruption in the ability to procure necessary goods or services. Key suppliers include third parties, with which the Company has material business relationships including interconnected utilities, telecommunications service providers, fuel and water suppliers, equipment suppliers, leased facilities, financial institutions, and large customers. Leasing Program The Company's subsidiaries lease various equipment and facilities used in the normal course of business, some of which are accounted for as capital leases. Expiration of the capital leases range from 2000 to 2025. The net book value of property under capital leases was $56.6 million and $56.5 million for NCE and PSCo, respectively at December 31, 1999 and $39.8 million and $39.6 million for NCE and PSCo, respectively, at December 31, 1998. Assets acquired under capital leases are recorded as property at the lower of fair-market value or the present value of future lease payments and are amortized over their actual contract term in accordance with practices allowed by regulators. The related obligation is classified as long-term debt. Executory costs are excluded from the minimum lease payments. The majority of the operating leases are under a leasing program that has initial noncancellable terms of one year, while the remaining leases have various terms. These leases may be renewed or replaced. No material restrictions exist in these leasing agreements concerning dividends, additional debt, or further leasing. Rental expense for 1999, 1998 and 1997 was $13.8 million, $15.5 million and $36.2 million, respectively, for NCE; $10.4 million, $12.2 million and $31.1 million, respectively, for PSCo; and $2.3 million, $2.4 million and $4.3 million, respectively, for SPS. Estimated future minimum lease payments at December 31, 1999, are as follows (in thousands):
Capital Leases NCE PSCo -------- -------- 2000............................................. $ 8,516 $ 8,455 2001............................................. 8,242 8,242 2002............................................. 7,881 7,881 2003............................................. 7,567 7,567 2004............................................. 7,365 7,365 All years thereafter............................. 98,957 98,957 -------- -------- Total future minimum lease payments.......... 138,528 138,467 Less amounts representing interest........... 81,901 81,902 -------- -------- Present value of net minimum lease payments.. $ 56,627 $ 56,565 ======== ========
107 Notes to Consolidated Financial Statements - (Continued)
Operating Leases NCE PSCo SPS ------- ------- ------ 2000..................................... $11,243 $ 8,012 $2,200 2001..................................... 6,114 3,297 1,864 2002..................................... 1,335 347 35 2003..................................... 1,171 245 30 2004..................................... 924 206 30 All years thereafter..................... 7,659 7,294 30 ------- ------- ------ Total future minimum lease payments.. $28,446 $19,401 $4,189 ======= ======= ======
Employee Matters The Company and its subsidiaries are engaged in certain employment related litigation and intend to contest, or are actively contesting, all such claims, and believe that the ultimate outcome will not have a material adverse impact on the financial position, results of operations or cash flows of the Company or its subsidiaries. Union Contracts PSCo The current Collective Bargaining Agreement was extended during 1999 for three years from June 1, 2000 through May 31, 2003 with wage increases of 3.5%, 3.25% and 3.5% beginning on the pay period closest to June 1, in each year of the agreement 2000, 2001 and 2002, respectively. Approximately 1,911 employees, or 65% of PSCo's total workforce at December 31, 1999, are represented by the International Brotherhood of Electrical Workers, ("IBEW"), Local 111. SPS The current Collective Bargaining Agreement was extended during 1999 for three years from November 1, 1999 through October 31, 2002 with wage increases of 3.5% beginning on the pay period closest to November 1, in each year of the agreement, 1999, 2000 and 2001 respectively. Approximately 784 employees, or 62% of SPS's workforce at December 31, 1999, are represented by the IBEW, Local 602. 12. Jointly-Owned Electric Utility Plants (NCE and PSCo) The Company's investments in jointly-owned plants (PSCo participation) and its ownership percentages as of December 31, 1999, are (in thousands):
Plant Construction in Accumulated Work in Service Depreciation Progress Ownership % -------- ------------ ------------ ----------- Hayden Unit 1................................... $ 77,594 $ 33,943 $ 586 75.50 Hayden Unit 2................................... 58,478 37,473 16,576 37.40 Hayden Common Facilities........................ 29,907 1,395 2,484 53.10 Craig Units 1 & 2............................... 57,710 27,927 - 9.72 Craig Common Facilities Units 1,2 & 3........... 20,810 7,747 52 6.47-9.72 Transmission Facilities, Including Substations.. 81,391 26,025 289 42.0-73.0 -------- ------------ ------------ $325,890 $134,510 $ 19,987 ======== ============ ============
These assets include approximately 320 Mw of net dependable generating capacity. PSCo is responsible for its proportionate share of operating expenses (reflected in PSCo's and the Company's consolidated statements of income) and construction expenditures. The increase in plant in service in 1999 and the construction work in progress amounts for Hayden Unit 1, Hayden Unit 2 and Hayden Common Facilities, include construction expenditures for installing emission control equipment for these facilities as discussed in Note 11. 108 Notes to Consolidated Financial Statements - (Continued) 13. Employee Benefits (NCE, PSCo and SPS) Pensions The Company and its subsidiaries maintain tax qualified noncontributory defined benefit pension plans which cover substantially all employees. At December 31, 1999, there were 5,610, 2,845 and 1,209 NCE, PSCo and SPS employees, respectively, participating in these plans. NCE, as the plan sponsor, has overall responsibility for directly allocating such costs of each individual plan to each of the participating employers. This allocation was determined by the plans' actuary based on benefit obligations for active participants. Plan assets are held in a master trust. Plan assets are stated at fair value and are comprised primarily of corporate debt and equity securities, a real estate fund and government securities held either directly or in commingled funds. The Company's funding policy is to contribute annually, at a minimum, the amount necessary to satisfy the IRS funding standards. A comparison of the actuarially computed benefit obligation and plan assets at December 31, 1999 and 1998, is presented in the following table (in thousands).
Change in Benefit Obligation 1999 1998 ---------- ---------- Obligation at January 1................... $1,013,791 $ 991,973 Service cost.............................. 27,253 23,902 Interest cost............................. 68,190 66,735 Plan amendments *......................... - (60,014) Actuarial (gain)loss...................... (119,721) 52,416 Benefit payments.......................... (66,735) (61,221) ---------- ---------- Obligation at December 31................. $ 922,778 $1,013,791 ========== ========== Change in Fair Value of Plan Assets Fair value of plan assets at January 1.... $1,238,921 $1,131,270 Actual return on plan assets.............. 172,470 168,872 Benefit payments.......................... (66,735) (61,221) ---------- ---------- Fair value of plan assets at December 31.. $1,344,656 $1,238,921 ========== ========== Funded Status Funded status at December 31.............. $ 421,878 $ 225,130 Unrecognized transition asset............. (23,634) (30,871) Unrecognized prior-service credit......... (29,718) (33,073) Unrecognized gain......................... (298,727) (120,838) ---------- ---------- NCE prepaid pension asset................. $ 69,799 $ 40,348 ========== ========== PSCo prepaid pension asset................ $ 26,786 $ 15,089 ========== ========== SPS prepaid pension asset................. $ 40,087 $ 24,611 ========== ==========
* Effective July 1, 1998, a new cash balance plan was established by NCE. The NCE board of directors approved amendments to the existing pension plans and the plan assets and obligation for all non-bargaining unit employees were transferred into this plan.
1999 1998 ----- ----- Significant assumptions: Discount rate 8.00% 6.75% Expected long-term increase in compensation level 4.00% 4.00%
Cumulative variances between actual experience and assumptions for costs and returns on assets, outside of a 10% corridor of the greater of plan assets and obligations, are amortized over the average remaining service lives of employees in the plans. 109 Notes to Consolidated Financial Statements - (Continued) The components of net periodic pension cost (credit) are as follows (in thousands):
NCE 1999 1998 1997 - --- --------- --------- --------- Service cost.................................................... $ 27,253 $ 23,902 $ 18,418 Interest cost................................................... 68,190 66,735 68,327 Expected return on plan assets.................................. (111,482) (103,928) (89,567) Curtailment..................................................... - - 126 Amortization of transition asset................................ (7,238) (7,238) (7,238) Amortization of prior-service cost (credit)..................... (3,355) (464) 2,431 Amortization of net gain........................................ (2,820) (2,880) (2,395) --------- --------- --------- NCE net periodic pension cost (credit).......................... $ (29,452) $ (23,873) $ (9,898) ========= ========= ========= PSCo net periodic pension cost (credit)......................... $ (11,697) $ (5,093) $ 2,318 ========= ========= ========= SPS net periodic pension cost (credit).......................... $ (15,476) $ (15,175) $ (10,968) ========= ========= ========= 1999 1998 1997 --------- --------- --------- Significant assumptions: Discount rate................................................. 6.75% 7.0% 7.5-8.0% Expected long-term increase in compensation level............. 4.0% 4.0% 4.25-6.0% Expected weighted average long-term rate of return on assets.. 10.0% 9.5% 9.75%
Additionally, the Company maintains noncontributory defined benefit supplemental retirement income plans ("Supplemental Plan") for certain qualifying executive personnel. The Supplemental Plan benefits are paid out of/or funded through the Company's general fund. Defined Contribution Plans The Company and its subsidiaries maintain defined contribution plans which cover substantially all employees. Total contributions to these plans by the Company and its subsidiaries were approximately $10 million in 1999 and $12 million in 1998 and 1997. Postretirement Benefits Other Than Pensions The Company and its subsidiaries provide certain postretirement health care and life insurance benefits for substantially all employees who reach retirement age while working for the Company. PSCo, SPS, NCS and other NCE affiliates participate in these plans. NCE, as the plan sponsor, will continue to reflect the costs of these plans in accordance with SFAS 106 and directly allocate such costs to each of the participating employers. The cost of these benefits were historically recorded on a pay-as-you-go basis prior to the adoption of SFAS 106 in 1993, which required accrual accounting. These costs are accrued over the years that an employee renders service to the Company. The Company is amortizing the transition obligations for these plans over a period of 20 years. 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. PSCo adopted SFAS 106 based on a level of expense determined in accordance with the CPUC. PSCo transitioned to full accrual accounting for OPEB costs between January 1, 1993 and December 31, 1997, consistent with the accounting requirements for rate regulated enterprises. The Colorado jurisdictional OPEB costs deferred during the transition period are being amortized to expense on a straight line basis over the 15 year period from 1998 to 2012. Additionally, certain state agencies, which regulate the Company's utility subsidiaries, have issued guidelines related to the recovery or funding of OPEB costs. SPS is required to fund SFAS 106 costs for Texas and New Mexico jurisdictional amounts collected in rates and PSCo and Cheyenne are required to fund SFAS 106 costs in irrevocable external trusts which are dedicated to the payment of these postretirement benefits. 110 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) A comparison of the actuarially computed benefit obligation and plan assets at December 31, 1999 and 1998, is presented in the following table (in thousands):
1999 1998 --------- --------- Change in Benefit Obligation Obligation at January 1....................................... $ 397,195 $ 376,685 Service cost.................................................. 4,484 4,917 Interest cost................................................. 26,399 26,503 Plan amendments............................................... - (14,346) Actuarial (gain) loss......................................... (13,850) 20,310 Benefit payments.............................................. (20,704) (16,874) --------- --------- Obligation at December 31..................................... $ 393,524 $ 397,195 ========= ========= Change in Fair Value of Plan Assets Fair value of plan assets at January 1........................ $ 146,228 $ 112,324 Actual return on plan assets.................................. 7,999 14,158 Employer contributions........................................ 21,313 26,928 Employee contributions........................................ 1,291 535 Benefit payments.............................................. (10,262) (7,717) --------- --------- Fair value of plan assets at December 31...................... $ 166,569 $ 146,228 ========= ========= Funded Status Funded status at December 31.................................. $ 226,955 $ 250,967 Unrecognized transition obligation............................ (197,571) (212,648) Unrecognized prior-service credit............................. 12,073 13,588 Unrecognized gain............................................. 16,139 9,825 --------- --------- NCE accrued benefit cost...................................... $ 57,596 $ 61,732 ========= ========= PSCo accrued benefit cost..................................... $ 51,080 $ 55,537 ========= ========= SPS accrued benefit cost...................................... $ 6,086 $ 5,941 ========= ========= 1999 1998 --------- --------- Significant assumptions: Discount rate 8.0% 6.75% Expected long-term increase in compensation level 4.0% 4.0%
The components of net periodic postretirement benefit cost are as follows (in thousands):
NCE 1999 1998 1997 - --- --------- --------- -------- Service cost................................................................................. $ 4,484 $ 4,917 $ 6,121 Interest cost................................................................................ 26,399 26,503 26,537 Expected return on plan assets............................................................... (12,504) (10,767) (8,078) Curtailment.................................................................................. - - 3,323 Amortization of transition obligation........................................................ 15,077 15,076 14,992 Amortization of prior-service cost (credit).................................................. (1,515) (757) - Amortization of net gain..................................................................... - (786) (1,162) --------- --------- -------- Net periodic postretirement benefit costs.................................................... 31,941 34,186 41,733 OPEB expense recognized in accordance with current regulations............................... (35,970) (39,859) (36,351) --------- --------- -------- Increase (decrease) in regulatory asset (Note 1)............................................. (4,029) (5,673) 5,382 Regulatory asset at beginning of year........................................................ 57,350 63,023 57,641 --------- --------- -------- Regulatory asset at end of year.............................................................. $ 53,321 $ 57,350 $ 63,023 ========= ========= ======== PSCo 1999 1998 1997 - ---- --------- --------- -------- Net periodic postretirement benefit costs.................................................... $ 26,278 $ 26,044 $ 29,025 OPEB expense recognized in accordance with current regulations............................... (30,169) (31,578) (23,479) --------- --------- -------- Increase (decrease) in regulatory asset (Note 1)............................................. (3,891) (5,534) 5,546 Regulatory asset at beginning of year........................................................ 54,461 59,995 54,449 --------- --------- -------- Regulatory asset at end of year.............................................................. $ 50,570 $ 54,461 $ 59,995 ========= ========= ========
111 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SPS 1999 1998 1997 - --- -------- -------- -------- Net periodic postretirement benefit costs....................... $ 3,745 $ 3,295 $ 8,199 OPEB expense recognized in accordance with current regulations.. (3,883) (3,434) (8,363) ------- ------- -------- Increase (decrease) in regulatory asset (Note 1)................ (138) (139) (164) Regulatory asset at beginning of year........................... 2,889 3,028 3,192 ------- ------- -------- Regulatory asset at end of year................................. $ 2,751 $ 2,889 $ 3,028 ======= ======= ======== 1999 1998 1997 -------- -------- -------- Significant assumptions: Discount rate................................................. 6.75% 7.0% 7.5-8.0% Expected long-term increase in compensation level............. 4.0% 4.0% 4.0-6.0% Expected weighted average long-term rate of return on assets.. 9.5% 9.5% 9.75%
The assumed health care cost trend rate for 1999 is 8.0%, decreasing in 0.5% annual increments to 4.50% in 2006 and to 4.25% in 2007. A 1% increase in the assumed health care cost trend rate would have the following effects (in thousands):
NCE PSCo SPS ------------------------ ------------------------ ------------------------ 1% Increase 1% Decrease 1% Increase 1% Decrease 1% Increase 1% Increase ----------- ----------- ----------- ----------- ----------- ----------- Effect on total of service and interest cost components of net periodic postretirement benefit cost................................ $ 3,623 $ (2,902) $ 3,312 $ (2,690) $ 154 $ (135) Effect on the accumulated postretirement benefit obligation.......................... $37,374 $(30,926) $31,409 $(25,923) $4,347 $(3,647)
Postemployment Benefits The Company and its subsidiaries provide certain benefits to former or inactive employees after employment but before retirement (postemployment benefits). NCE and its subsidiaries currently record all postemployment benefits on an accrual basis in accordance with SFAS 112. The Company and its subsidiaries have recorded a liability of $32.8 million as of December 31, 1999 and $31.3 million as of December 31, 1998 using assumed discount rates of 8.0% and 6.75%, respectively. The costs of these benefits were historically recorded on a pay-as-you-go basis prior to the adoption of SFAS 112 in 1994, which required accrual accounting. See Note 1. Summary of Significant Accounting Policies - Regulatory Assets and Liabilities for further discussion on this matter. Incentive Compensation The Company and its subsidiaries have Incentive Compensation Plans ("Incentive Plans"), which provide for annual and long-term incentive awards for key employees. Approximately 5 million shares of common stock have been authorized for these Incentive Plans for the issuance of restricted shares and/or stock options, with certain vesting and/or exercise requirements. Cash and stock option awards were made under these plans during 1999, 1998 and 1997. The Company applies Accounting Principles Board Opinion No. 25 in accounting for its stock-based compensation and, accordingly, no compensation cost is recognized for the issuance of stock options as the exercise price of the options equals the fair-market value of the Company's common stock at the date of grant. Assuming compensation cost for the Company, PSCo and SPS had been determined consistent with SFAS 123 using the fair-value based method, the Company's net income would have been reduced by approximately $0.9 million, $1.1 million and $2.8 million in 1999, 1998 and 1997 respectively, which would have reduced earnings per share by approximately $0.01, $0.01 and $0.03, respectively. 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, 1999, 1998 and 1997 and changes during the years then ended is presented in the table below: 112 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NCE PSCo SPS ----------------------------------- ------------------------- ------------------------- Weighted- Weighted- Weighted- Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------------------- -------------- --------- -------------- --------- -------------- 1999 Outstanding at beginning of year 2,430,027 $ 43.07 Granted 1,001,500 31.46 Exercised 39,819 28.90 Forfeited 66,550 47.09 --------- Outstanding at end of year 3,325,158 39.66 ========= Exercisable at end of year 1,904,354 42.24 ========= Weighted-average fair value of options granted $ 5.42 1998 Outstanding at beginning of year 2,085,632 $ 41.10 Granted 570,200 47.55 Exercised 187,198 34.61 Forfeited 38,607 45.10 --------- Outstanding at end of year 2,430,027 43.07 ========= Exercisable at end of year 1,650,088 40.99 ========= Weighted-average fair value of options granted $ 4.40 1997 Outstanding at beginning of year (1) 477,783 $ 31.46 441,227 $31.38 38,480 $30.80 Granted 1,690,147 43.32 62,100 39.00 2,147 37.24 Exercised 78,647 30.34 40,404 29.57 3,666 30.81 Forfeited 3,651 33.41 3,651 33.41 - - Converted to NCE options (1) - - 459,272 32.56 36,961 32.70 --------- --------- --------- Outstanding at end of year 2,085,632 41.10 - - - - ========= ========= ========= Exercisable at end of year 431,071 32.66 - - - - ========= ========= ========= Weighted-average fair value of options granted $ 5.45 $ 4.23 $ 3.70
(1) Amounts reflect the conversion of SPS and PSCo stock options to NCE stock options in connection with the PSCo/SPS Merger. 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:
1999 1998 1997 --------- --------- --------- Expected option life.... 10 years 10 years 10 years Stock volatility......... 21.21% 13.80% 13.3% Risk-free interest rate.. 6.40% 5.08% 6.15% Dividend yield........... 5.44% 5.43% 5.4%
Additionally, NCE, PSCo and SPS have other plans, which provide for cash awards to all employees based on the achievement of corporate goals, of which certain goals were met in each of the last three years. The expenses accrued under the incentive programs for the years 1999, 1998 and 1997 are as follows (in millions):
1999 1998 1997 --------- --------- --------- NCE...................... $ 12.5 $ 11.3 $ 4.2 PSCo..................... 3.8 3.4 2.7 SPS...................... 2.4 1.9 1.1
In accordance with the terms of the Company's Incentive Plans, certain unexercisable stock options and dividend equivalents became exercisable or vested on the effective date of the PSCo/SPS Merger. The NCE Omnibus Incentive Plan, which was adopted in 1997, contains a change in control provision under which all stock-based awards, such as options will vest 100% and all cash-based awards will be paid out immediately in cash as if the performance objectives have been achieved through the effective date of a change in control. The NCE/NSP 113 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Merger does not constitute a change in control. When the NCE/NSP Merger is consummated, outstanding options will be converted to Xcel options at a rate of 1.55 Xcel options for every NCE option. 14. Income Taxes (NCE, PSCo and SPS) The provisions for income taxes for NCE, SPS and PSCo for the years ended December 31, 1999, 1998 and 1997 (in thousands):
1999 NCE PSCo SPS -------- -------- ------- Current income taxes: Federal............................................................... $ 79,920 $ 81,230 $44,072 State................................................................. 1,785 4,700 (345) -------- -------- ------- Total current income taxes............................................. 81,705 85,930 43,727 -------- -------- ------- Deferred income taxes: Federal............................................................... 35,324 13,998 15,380 State................................................................. 1,860 1,819 542 -------- -------- ------- Total deferred income taxes.......................................... 37,184 15,817 15,922 -------- -------- ------- Investment tax credits - net........................................... (5,499) (5,173) (250) -------- -------- ------- Total provision for income taxes....................................... $113,390 $ 96,574 $59,399 ======== ======== ======= 1998 NCE PSCo SPS -------- -------- ------- Current income taxes: Federal............................................................... $126,122 $ 91,122 $71,954 State................................................................. 8,448 8,176 2,592 -------- -------- ------- Total current income taxes............................................. 134,570 99,298 74,546 -------- -------- ------- Deferred income taxes: Federal............................................................... 5,433 6,014 (8,266) State................................................................. 815 1,078 (334) -------- -------- ------- Total deferred income taxes.......................................... 6,248 7,092 (8,600) -------- -------- ------- Investment tax credits - net........................................... (5,222) (4,896) (250) -------- -------- ------- Total provision for income taxes....................................... $135,596 $101,494 $65,696 ======== ======== ======= 1997 NCE PSCo SPS -------- -------- ------- Current income taxes: Federal............................................................... $ 82,337 $ 55,041 $43,401 State................................................................. 4,872 3,601 2,057 -------- -------- ------- Total current income taxes............................................. 87,209 58,642 45,458 -------- -------- ------- Deferred income taxes: Federal............................................................... 45,537 31,548 3,045 State................................................................. 6,674 5,842 542 -------- -------- ------- Total deferred income taxes.......................................... 52,211 37,390 3,587 -------- -------- ------- Investment tax credits - net........................................... (5,501) (5,219) (250) -------- -------- ------- Total provision for income taxes....................................... $133,919 $ 90,813 $48,795 ======== ======== =======
A reconciliation of the statutory U.S. income tax rates and the effective tax rates follows (in thousands):
1999 NCE PSCo SPS --------------- --------------- --------------- Tax computed at U.S. statutory rate on pre-tax accounting income............................................. $161,016 35.0% $105,295 35.0% $56,737 35.0% Increase (decrease) in tax from: Allowance for funds used during construction......................... (5,018) (1.2) (3,705) (1.2) (1,305) (0.8) Amortization of investment tax credits............................... (5,499) (1.2) (5,174) (1.7) (250) (0.2) State income taxes, net of Federal income tax benefit............... 2,077 0.5 4,237 1.4 76 - Cash surrender value of life insurance policies...................... (16,513) (3.6) (16,389) (5.4) (124) (0.1) Amortization of prior flow-through amounts........................... 13,240 2.9 10,750 3.6 2,457 1.5 Foreign tax credit................................................... (13,543) (2.9) - - - - International treaty tax relief...................................... (15,659) (3.4) - - - - Other-net............................................................ (6,711) (1.5) 1,560 0.4 1,808 1.2 -------- ---- -------- ---- ------- ---- Total income taxes.................................................... $113,390 24.6% $ 96,574 32.1% $59,399 36.6% ======== ==== ======== ==== ======= ====
114 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1998 NCE PSCo SPS ----------------- ----------------- ----------------- Tax computed at U.S. statutory rate on pre-tax accounting income.......................................... $169,010 35.0% $105,559 35.0% $ 63,239 35.0% Increase (decrease) in tax from: Allowance for funds used during construction......................... (6,072) (1.3) (4,315) (1.4) (1,730) (1.0) Amortization of investment tax credits............................... (5,221) (1.1) (4,896) (1.6) (250) (0.1) State income taxes, net of Federal income tax benefit............... 6,010 1.2 6,015 2.0 1,468 0.8 Cash surrender value of life insurance policies...................... (14,553) (3.0) (14,478) (4.8) (76) - Amortization of prior flow-through amounts........................... 12,325 2.6 10,750 3.6 1,541 0.9 Merger related costs - non-deductible................................ 1,482 0.3 - - 562 0.3 Foreign tax credit................................................... (15,457) (3.2) (1,363) (0.5) - - International treaty tax relief...................................... (12,806) (2.7) (1,129) (0.4) - - Other-net............................................................ 878 0.3 5,351 1.8 942 0.5 -------- ---- -------- ---- -------- ---- Total income taxes................................................. $135,596 28.1% $101,494 33.7% $ 65,696 36.4% ======== ==== ======== ==== ======== ==== 1997 NCE PSCo SPS ----------------- ----------------- ----------------- Tax computed at U.S. statutory rate on pre-tax accounting income.......................................... $142,506 35.0% $103,199 35.0% $ 43,529 35.0% Increase (decrease) in tax from: Allowance for funds used during construction......................... (2,220) (0.6) (2,222) (0.8) (2) - Amortization of investment tax credits............................... (5,501) (1.4) (5,219) (1.8) (250) (0.2) State income taxes, net of Federal income tax benefit............... 6,617 1.6 5,250 1.8 1,689 1.4 Cash surrender value of life insurance policies...................... (12,952) (3.2) (12,876) (4.4) (76) (0.1) Amortization of prior flow-through amounts........................... 12,364 3.0 10,758 3.7 1,610 1.3 Merger related costs - non-deductible................................ 8,274 2.0 4,921 1.7 3,352 2.7 Foreign tax credit................................................... (7,043) (1.7) (7,043) (2.4) - - International treaty tax relief...................................... (6,309) (1.4) (6,309) (2.1) - - Other-net............................................................ (1,817) (0.4) 354 0.1 (1,057) (0.9) -------- ---- -------- ----- -------- ----- Total income taxes................................................. $133,919 32.9% $ 90,813 30.8% $ 48,795 39.2% ======== ==== ======== ===== ======== =====
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). At December 31, 1999, PSCo and SPS are fully normalized for FERC jurisdictional purposes. For state jurisdictional purposes, PSCo is fully normalized in Colorado and Wyoming, and SPS is fully normalized in Texas, Oklahoma, and New Mexico (see Note 10. Regulatory Matters - SPS Electric Cost Adjustment Mechanisms). SPS is fully normalized to the extent allowed by its regulators in Kansas, with flow-through treatment of certain temporary differences. To give effect to temporary differences for which deferred taxes were not previously required to be provided, a regulatory asset was recognized. The regulatory asset represents temporary differences primarily associated with prior flow-through amounts and the equity component of allowance for funds used during construction, net of temporary differences related to unamortized investment tax credits and excess deferred income taxes that have resulted from historical reductions in tax rates (see Note 1. Summary of Significant Accounting Policies). The tax effects of significant temporary differences representing deferred tax liabilities and assets as of December 31, 1999 and 1998 are as follows (in thousands):
1999 NCE PSCo SPS ---------- -------- --------- Deferred income tax liabilities: Accelerated depreciation and amortization................... $ 810,677 $519,315 $282,176 Plant basis differences (prior flow-through)................ 123,724 114,187 49,926 Allowance for equity funds used during construction......... 72,641 42,811 29,734 Pensions.................................................... 33,258 39,277 (8,161) Other....................................................... 121,376 15,764 35,080 ---------- -------- -------- Total..................................................... 1,161,676 731,354 388,755 Deferred income tax assets: Investment tax credits...................................... 58,151 54,734 2,785 Contributions in aid of construction........................ 93,224 90,132 2,172 Other....................................................... 47,880 34,191 7,623 ---------- -------- -------- Total..................................................... 199,255 179,057 12,580 ---------- -------- -------- Net deferred income tax liability..................... $ 962,421 $552,297 $376,175 ========== ======== ========
115 Notes To Consolidated Financial Statements - (Continued)
1998 NCE PSCo SPS ---------- -------- --------- Deferred income tax liabilities: Accelerated depreciation and amortization.................... $ 762,538 $ 471,776 $ 280,949 Plant basis differences (prior flow-through)................. 150,210 98,208 52,383 Allowance for equity funds used during construction.......... 74,903 45,137 29,664 Pensions..................................................... 29,915 35,053 (6,648) Other........................................................ 114,456 64,045 36,169 ---------- --------- --------- Total.................................................... 1,132,022 714,219 392,517 Deferred income tax assets: Investment tax credits....................................... 61,912 58,315 2,925 Contributions in aid of construction......................... 87,685 84,720 2,172 Other........................................................ 33,147 24,461 12,878 ---------- --------- --------- Total.................................................... 182,744 167,496 17,975 ---------- --------- --------- Net deferred income tax liability..................... $ 949,278 $ 546,723 $ 374,542 ========== ========= =========
As of December 31, 1999, the consolidated group does not have any cumulative Federal or state tax credits which have not been realized. A valuation allowance has not been recorded as the Company expects that all deferred income tax assets will be realized in the future. The Company's management intends to reinvest indefinitely, its earnings from the foreign operations of Yorkshire Power. Accordingly, deferred income taxes have not been provided on any cumulative amount of unremitted earnings. 15. Business Segment Information (NCE, PSCo and SPS) NCE: NCE has three reportable segments: electric utility, gas utility and international. The electric utility segment consists primarily of the activities of the three regulated operating companies that provide wholesale and retail electric service in the states of Colorado, Texas, New Mexico, Wyoming, Kansas and Oklahoma. The gas utility segment consists primarily of the activities of three regulated operating companies providing retail gas service in the states of Colorado and Wyoming. The international segment consists of equity investments in foreign operations held by NCI since early 1997. Revenues from operating segments below the quantitative thresholds are included in the all other category. Those primarily include a company involved in non-regulated power and gas marketing activities throughout the United States; a company that invests in and develops cogeneration and energy related projects; a company that is engaged in engineering, design construction management and other miscellaneous services and a company engaged in energy consulting, energy efficiency management, conservation programs and mass market services. The accounting policies of the segments are the same as those described in Note 1, Summary of Significant Accounting Policies. NCE evaluates performance by each legal entity based on profit or loss generated from the product or service provided. NCE segment information is as follows (in thousands):
Eliminations/ Electric Gas All Unallocated Consolidated 1999 Utility Utility International Other Amounts * Total ---------- ---------- -------------- --------- ------------- ------------ Revenues: External customers............ $2,527,267 $ 669,514 $ - $ 178,649 $ - $3,375,430 Intersegment.................. 470 7,416 - 121,648 - 129,534 Electric margin................. 1,342,037 - - 72 - 1,342,109 Gas margin...................... - 262,189 - 10,231 7,416 279,836 Equity in earnings of unconsolidated subsidiaries... - - 44,908 (643) - 44,265 Interest charges and preferred Dividend requirements......... 178,643 36,162 714 20,204 (18,855) 216,868 Income Taxes.................... 155,528 15,904 (13,559) (30,348) (14,135) 113,390 Depreciation & amortization..... 223,936 47,349 182 9,446 280,913 Segment profit.................. 252,602 29,717 58,301 19,098 (13,121) 346,597 Segment assets.................. 5,189,591 1,057,069 367,408 520,403 1,187,521 8,321,992 Construction expenditures....... 514,814 107,287 - 91,904 - 714,005
116 Notes to Consolidated Financial Statements - (Continued)
1998 Revenues: External customers............ $2,622,970 $ 653,243 $ - $201,558 $ - $3,477,771 Intersegment.................. 316 5,281 - 75,209 - 80,806 Electric margin................. 1,339,202 - - 1,087 - 1,340,289 Gas margin...................... - 260,650 - 12,720 5,322 278,692 Equity in earnings of unconsolidated subsidiaries... - - 38,127 (2,026) - 36,101 Interest charges and preferred dividend requirements......... 153,462 28,589 745 15,530 6,473 204,799 Income taxes.................... 164,189 14,273 (15,817) (12,075) (14,974) 135,596 Depreciation & amortization..... 216,288 43,889 121 8,445 - 268,743 Segment profit.................. 278,726 29,859 51,978 9,396 (28,002) 341,957 Segment assets.................. 4,777,189 973,263 333,069 482,559 1,105,884 7,671,964 Construction expenditures....... 412,005 99,038 - 97,929 - 608,972 1997 Revenues: External customers............ $2,450,498 $ 640,248 $ - $193,868 $ - $3,284,614 Intersegment.................. 293 3,825 - 25,819 - 29,937 Electric margin................. 1,269,080 - - 987 - 1,270,067 Gas margin...................... - 268,423 - 4,882 - 273,305 Equity in earnings of unconsolidated subsidiaries... - - 35,499 (1,333) - 34,166 Interest charges and preferred dividend requirements......... 151,718 27,376 186 14,168 13,182 206,630 Income taxes.................... 146,621 18,555 (1,186) (26,875) (3,196) 133,919 Depreciation & amortization..... 193,877 39,833 89 9,279 243,078 Segment profit.................. 215,712 27,034 35,946 1,746 (18,951) 261,487 Segment assets.................. 4,770,091 1,060,633 290,845 90,401 1,109,696 7,321,666 Construction expenditures....... 365,219 105,894 - 4,384 - 475,497
* Certain financing costs have been allocated to the operating segments in 1999. PSCo: PSCo has three reportable segments: electric utility, gas utility and international (includes NCI through March 31, 1998). For 1999 and 1998, the electric utility segment consists primarily of the activities of PSCo's regulated operations that provide wholesale and retail electric service in the state of Colorado. For 1997 this segment also included a partial year of Cheyenne's regulated operations in the state of Wyoming. For 1999 and 1998, the gas utility segment consists primarily of the activities of PSCo's regulated gas operations in Colorado. For 1997, this segment also included a partial year of Cheyenne's regulated operations in the state of Wyoming and WGI's regulated operations in the states of Colorado and Wyoming. Revenues from operating segments below the quantitative thresholds are included in the all other category. Those segments primarily include a real estate company which owns certain real estate interests of PSCo, a company which owns and manages permanent life insurance policies on certain past and present employees and a finance company that finances certain of PSCo's current assets. The accounting policies of the segments are the same as those described in Note 1. Summary of Significant Accounting Policies. PSCo evaluates performance by each legal entity based on profit or loss generated from the product or service provided. PSCo segment information is as follows (in thousands):
Eliminations/ Electric Gas All Unallocated Consolidated 1999 Utility Utility International Other Amounts * Total ---------- ---------- ------------- --------- ------------- ------------ Revenues from external customers............... $1,561,052 $ 657,822 $ - $ 8,082 $ - $2,226,956 Electric margin................... 854,576 - - - - 854,576 Gas margin........................ - 263,144 - - - 263,144 Interest charges and preferred dividend requirements........... 115,607 35,301 - 19,010 (13,744) 156,174 Income taxes...................... 95,743 15,717 (14,886) 96,574 Depreciation & amortization....... 145,945 46,401 2,019 194,365 Segment profit.................... 155,330 29,289 - 19,646 - 204,265 Segment assets.................... 3,300,506 1,026,845 - 452,008 809,583 5,588,942 Construction expenditures......... 392,251 104,896 - 70,135 - 567,282
117 Notes to Consolidated Financial Statements - (Continued)
1998 Revenues from external customers................ $1,635,573 $ 640,064 $ - $ 8,449 $ - $2,284,086 Electric margin.................... 833,752 - - - - 833,752 Gas margin......................... - 259,510 - - - 259,510 Equity in earnings of Yorkshire Power.................. - - 3,446 - - 3,446 Interest charges and preferred dividend requirements............ 93,579 27,745 192 14,291 7,839 143,646 Income taxes....................... 97,924 13,997 427 (10,854) - 101,494 Depreciation & amortization........ 135,876 43,036 40 1,961 - 180,913 Segment profit..................... 166,066 29,207 2,799 15,015 (18,316) 194,771 Segment assets..................... 2,981,154 944,456 - 433,417 818,609 5,177,636 Construction expenditures.......... 313,825 95,692 - 95,210 - 504,727 1997 Revenues from external customers................ $1,474,747 $ 631,539 $ - $ 95,065 $ - $2,201,351 Electric margin.................... 792,274 - - 314 - 792,588 Gas margin......................... - 259,426 - 5,920 - 265,346 Equity in earnings of Yorkshire Power.................. - - 34,926 - - 34,926 Interest charges and preferred dividend requirements............ 92,684 26,980 186 13,885 14,219 147,954 Income taxes....................... 92,930 18,496 (1,186) (19,427) - 90,813 Depreciation & amortization........ 125,418 38,983 89 3,961 - 168,451 Segment profit..................... 137,899 25,813 35,946 14,091 (21,459) 192,290 Segment assets..................... 2,955,537 1,027,060 290,845 55,212 670,221 4,998,875 Construction expenditures.......... 246,015 103,957 - 2,301 - 352,273
* Certain financing costs have been allocated to the operating segments in 1999. SPS: SPS operates in the regulated electric utility industry providing wholesale and retail electric service in the states of Texas, New Mexico, Kansas and Oklahoma. Revenues from external customers were $925.9 million, $951.2 million and $979.3 million for the years ended December 31, 1999, 1998 and 1997, respectively. During the fiscal year ended December 31, 1997, operating results included the activities of Quixx and UE, subsidiaries that were subsequently transferred to NC Enterprises in connection with the PSCo/SPS Merger. These two segments did not meet any of the quantitative thresholds for determining reportable segments. 16. Transactions with Affiliates (PSCo and SPS) PSCo and SPS receive various administrative, management, environmental and other support services from NCS, which began operations on May 1, 1997 and construction services from UE. In addition, PSCo and SPS pay interest expense on any short-term borrowings from NCE. Dividends on common stock declared by PSCo and SPS are paid to NCE. PSCo sells firm and interruptible transportation services to e prime for gas delivered into the Denver/Pueblo operating area. PSCo purchases gas from e prime to service customers in the Denver/Pueblo operating area. PSCo also receives interest income from NC Enterprises on the note receivable related to the sale of NCI effective March 31, 1998 (see Note 3. Investment in Yorkshire Power). SPS receives interest income from NC Enterprises on the note receivable related to the sale of Quixx and UE as part of the PSCo/SPS Merger. The table below contains the various significant affiliate transactions among the companies and related parties for the years ended December 31, 1999, 1998 and 1997 (in thousands). 118 Notes to Consolidated Financial Statements - (Continued)
PSCo SPS -------------------------------- ----------------------------- 1999 1998 1997 1999 1998 1997 -------- -------- -------- ------- ------- ------- Gas revenues............... $ 7,416 $ 5,281 $ 3,825 $ - $ - $ - Cost of gas sold........... 2,102 - - - - - Operating expenses......... 166,619 197,862 108,096 68,866 63,108 36,317 Interest income............ 13,494 14,188 - 8,620 8,630 3,618 Interest expenses.......... 4,146 1,714 156 790 1,390 747 Dividends declared to NCE.. 183,428 188,845 76,093 84,243 75,157 45,092 Construction services...... 110,004 68,744 16,934 8,970 6,465 3,832
17. Quarterly Financial Data (Unaudited) (NCE, PSCo and SPS) The following summarized quarterly information for 1999 and 1998 is unaudited, but includes all adjustments (consisting only of normal recurring accruals) which the Company considers necessary for a fair presentation of the results for the periods. Information for any one quarterly period is not necessarily indicative of the results which may be expected for a twelve-month period due to seasonal and other factors (in thousands, except per share data).
NCE Three Months ended --------------------------------------------------- 1999 March 31 June 30 September 30 December 31 -------- ---------- --------- ------------ ----------- Operating revenues {1}........................... $ 914,695 $ 800,834 $ 812,887 $ 847,014 Operating income................................. 177,292 130,120 191,379 142,897 Net income....................................... 101,300 49,235 97,927 98,135 Earnings per share of common stock outstanding: Basic......................................... $ 0.88 $ 0.43 $ 0.85 $ 0.85 Diluted....................................... $ 0.88 $ 0.43 $ 0.85 $ 0.85 1998 -------- Operating revenues {1}........................... $ 916,017 $ 830,959 $ 872,884 $ 857,911 Operating income................................. 181,837 146,666 164,173 157,825 Net income....................................... 86,149 56,593 90,772 108,443 Earnings per share of common stock outstanding: Basic......................................... $ 0.78 $ 0.50 $ 0.82 $ 0.96 Diluted....................................... $ 0.78 $ 0.50 $ 0.82 $ 0.95 PSCo Three Months ended --------------------------------------------------- 1999 March 31 June 30 September 30 December 31 -------- ---------- --------- ------------ ----------- Operating revenues {1}........................... $ 638,870 $ 516,165 $ 484,200 $ 587,721 Operating income................................. 104,185 72,377 90,584 88,360 Net income....................................... 65,939 34,820 49,749 53,757 1998 -------- Operating revenues............................... $ 644,642 $ 504,598 $ 541,601 $ 593,245 Operating income................................. 99,846 63,266 76,834 92,072 Net income....................................... 68,897 30,908 44,015 56,283 SPS Three Months ended --------------------------------------------------- 1999 March 31 June 30 September 30 December 31 -------- ---------- --------- ------------ ----------- Operating revenues............................... $ 202,552 $ 224,114 $ 290,587 $ 208,684 Operating income................................. 35,369 36,472 55,913 27,020 Net income....................................... 23,391 22,835 42,534 13,949 1998 -------- Operating revenues............................... $ 199,732 $ 264,006 $ 284,648 $ 202,801 Operating income................................. 31,339 49,319 49,458 35,563 Net income....................................... 18,139 36,917 36,929 23,002
{1} In the second quarter of 1999, NCE and PSCo changed their income statement presentation for energy trading activities and began netting revenues and purchased energy costs related to their trading activities in electric and gas revenues, in accordance with EITF 98-10. The NCE and PSCo operating revenues for the quarter ended March 31, 1999 and 1998 have been restated for this change and reflect lower operating revenues than previously reported. For comparative purposes, the NCE March 31, 1999 and 1998 operating revenues have been reduced by $76,728 and $23,487, respectively, and the PSCo March 31, 1999 operating revenues have been reduced by $20,549. 119 SCHEDULE II NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Years Ended December 31, 1999, 1998 and 1997
Additions ------------------------- Balance at Charged Charged to Deductions Balance beginning to other from at end of period income accounts reserves(1) of year -------------------------------------------------------------- NCE (in thousands) Reserve deducted from related assets: Provision for uncollectible accounts: 1999............................... $ 4,842 $ 6,572 $ (31) $ 6,782 $ 4,601 ======== ======== ======== ======== ======== 1998............................... $ 5,355 $ 6,852 $ 41 $ 7,406 $ 4,842 ======== ======== ======== ======== ======== 1997............................... $ 6,623 $ 5,854 $ 79 $ 7,201 $ 5,355 ======== ======== ======== ======== ======== PSCo Reserve deducted from related assets: Provision for uncollectible accounts: 1999............................... $ 2,254 $ 6,225 $ 2 $ 5,948 $ 2,533 ======== ======== ======== ======== ======== 1998............................... $ 2,272 $ 5,593 $ (32) $ 5,579 $ 2,254 ======== ======== ======== ======== ======== 1997............................... $ 4,049 $ 5,193 $ (500) $ 6,470 $ 2,272 ======== ======== ======== ======== ======== SPS Reserve deducted from related assets: Provision for uncollectible accounts: 1999............................... $ 1,695 $ (160) $ (2) $ 851 $ 682 ======== ======== ======== ======== ======== 1998............................... $ 2,442 $ 400 $ (7) $ 1,140 $ 1,695 ======== ======== ======== ======== ======== 1997............................... $ 2,574 $ 661 $ (62) $ 731 $ 2,442 ======== ======== ======== ======== ========
(1) Uncollectible accounts written off or transferred to other parties. 120 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, ------------------------------------------------ 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (in thousands, except ratios) Fixed charges: Interest on long-term debt.............................. $120,563 $115,808 $114,460 $ 92,205 $ 85,832 Dividends on PSCo obligated mandatorily redeemable preferred securities.................................. 15,200 9,711 - - - Interest on borrowings against COLI contracts........... 58,611 51,664 46,082 40,160 34,717 Other interest.......................................... 26,525 20,849 24,117 17,238 23,392 Amortization of debt discount and expense less premium.. 4,543 4,274 3,987 3,621 3,278 Interest component of rental expense.................... 9,102 8,233 9,012 10,649 6,729 -------- -------- -------- -------- -------- Total................................................. $234,544 $210,539 $197,658 $163,873 $153,948 ======== ======== ======== ======== ======== Earnings (before fixed charges and taxes on income): Net income.............................................. $204,265 $200,103 $204,042 $190,346 $178,856 Fixed charges as above.................................. 234,544 210,539 197,658 163,873 153,948 Provisions for Federal and state taxes on income, net of investment tax credit amortization.............. 96,574 101,494 90,813 96,331 95,357 -------- -------- -------- -------- -------- Total................................................. $535,383 $512,136 $492,513 $450,550 $428,161 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges....................... 2.28 2.43 2.49 2.75 2.78 ======== ======== ======== ======== ========
121 EXHIBIT 12(b) SOUTHWESTERN PUBLIC SERVICE COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (not covered by Report of Independent Public Accountants)
Year Ended Trans- Year Ended December 31, ition August 31, ---------------------------- ------------------ 1999 1998 1997 Period 1996 1995 -------- -------- -------- -------- -------- -------- (in thousands, except ratios) Fixed charges: Interest on long-term debt.................................... $ 47,640 $ 44,220 $ 44,112 $15,556 $ 44,964 $ 40,645 Dividends on SPS obligated mandatorily redeemable preferred securities........................................ 7,850 7,850 7,850 1,526 - - Other interest................................................ 6,256 8,925 7,444 1,612 6,561 3,219 Amortization of debt discount and expense less premium........ 2,378 2,251 2,244 235 577 534 Interest component of rental expense.......................... 764 806 1,425 415 1,245 1,292 -------- -------- -------- ------- -------- -------- Total...................................................... $ 64,888 $ 64,052 $ 63,075 $19,344 $ 53,347 $ 45,690 ======== ======== ======== ======= ======== ======== Earnings (before fixed charges and taxes on income): Net income.................................................... $102,709 $114,987 $ 75,575 $19,137 $105,773 $119,477 Fixed charges as above........................................ 64,888 64,052 63,075 19,344 53,347 45,690 Provisions for Federal and state taxes on income, net of investment tax credit amortization................... 59,399 65,696 48,795 10,987 65,297 67,649 -------- -------- -------- ------- -------- -------- Total...................................................... $226,996 $244,735 $187,445 $49,468 $224,417 $232,816 ======== ======== ======== ======= ======== ======== Ratio of earnings to fixed charges................................ 3.50 3.82 2.97 2.56 4.21 5.10 ======== ======== ======== ======= ======== ========
122 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 (NCE, PSCo and SPS) Biographies concerning the directors of NCE are contained under ELECTION OF DIRECTORS in NCE's 2000 Proxy Statement, which is incorporated herein by reference. The following table sets forth certain information concerning the executive officers of NCE as of December 31, 1999. Information concerning directors and executive officers of PSCo and SPS has been omitted pursuant to General Instructions I(2)(c). NEW CENTURY ENERGIES, INC.
Name Age Occupation/Title Period - ---- --- ---------------- ------ Executive Officers - ------------------ Bill D. Helton (a) 61 Chairman of the Board, CEO and Director 1997-Present Chairman of the Board and Director 1997-Present Public Service Company of Colorado, Cheyenne Light, Fuel and Power Company, NC Enterprises, Inc. New Century Services, Inc., and e prime, inc. Chairman of the Board and Director, New Century- 1997-1999 Cadence, Inc. Director, Southwestern Public Service Company 1990-Present CEO, Southwestern Public Service Company 1990-1997 Chairman of the Board, Southwestern Public Service Company, 1991-Present Quixx Corporation and Utility Engineering Corporation Director, Quixx Corporation 1990-Present Chairman of the Board and Director, Quixx Power Services, Inc. 1993-Present Director, Utility Engineering Corporation 1989-Present Director, New Century International, Inc. 1998-Present Chairman of the Board and Director, New Century- 1998-1999 Centrus, Inc. Chairman of the Board and Director, 1998-Present New Century Energies Foundation Wayne H. Brunetti (b) 57 Vice Chairman, President, COO, and Director 1997-Present Vice Chairman and CEO, Public Service Company of 1997-Present Colorado and Cheyenne Light, Fuel and Power Company President and Director, Public Service Company of Colorado 1994-Present Vice Chairman, President, CEO, and Director, 1997-Present NC Enterprises, Inc. and New Century Services, Inc. Vice Chairman, President, CEO and Director, New 1997-1999 Century-Cadence, Inc. Chairman, 1480 Welton, Inc., Green and Clear Lakes 1997-Present Company, and WestGas InterState, Inc. Chairman, PSR Investments, Inc. and PS Colorado Credit 1997-1998 Corporation President and Director, 1480 Welton, Inc. 1996-Present Vice Chairman, CEO, and Director, Southwestern Public 1997-Present Service Company Director, Cheyenne Light, Fuel and Power Co., Green and 1994-Present Clear Lakes Company, and WestGas InterState, Inc. Director, PSR Investments, Inc. and PS Colorado Credit 1994-1998
123 Corporation Director, Young Gas Storage Company and e prime, inc. 1995-Present President and Director, Fuel Resources Development Co. 1995-Present President, Green and Clear Lakes Company and WestGas 1995-Present InterState, Inc. President, New Century International, Inc. 1997-1997 Director, New Century International, Inc. 1997-Present Chairman of the Board, New Century International, Inc. 1998-Present President, PSR Investments, Inc. and PS Colorado Credit 1996-1998 Corporation Director, Yorkshire Electricity Group plc, Yorkshire 1997-Present Holdings, plc and Yorkshire Power Group Limited Chairman of the Board, Cheyenne Light, Fuel and Power 1997-1997 Company and e prime, inc. Vice Chairman and Director, Quixx Corporation and Utility Engineering Corporation 1997-Present Vice Chairman, Yorkshire Holdings plc 1997-1998 Vice Chairman, e prime, inc. 1997-Present Vice Chairman, Yorkshire Electricity Group plc 1997-1998 Chairman of the Board, Yorkshire Electricity Group, plc 1998-Present Chairman of the Board and Director, Yorkshire Power 1998-Present Group Limited, Yorkshire Holdings plc Chairman of the Board and Director 1998-1999 Planergy (Delaware) Inc., Planergy Energy Services Corporation, Planergy New York, Inc., Planergy Power II, Inc., Planergy Services USA, Inc., Planergy Services of California, Inc., Planergy Services of Houston, Inc., Planergy Services of Texas, Inc., Planergy Services, Inc., Planergy, Inc., Cogeneration Capital Associates Incorporated, The Planergy Group, Inc. President and Director, New Century Energies Foundation 1998-Present Vice Chairman, Director, President and CEO, New Century- 1998-Present Centrus, Inc. Director, New Century O&M Services, Inc. 1998-Present Director, New Century WYCO, Inc. 1999-Present Richard C. Kelly (e) 53 Executive Vice President and Chief Financial Officer 1997-Present President, Treasurer, and Director 1995-1997 Executive Vice President and Director, Public Service 1997-Present Company of Colorado and Southwestern Public Service Company Chief Financial Officer, Public Service Company of 1997-1998 Colorado and Southwestern Public Service Company Senior Vice President, Public Service Company of Colorado 1990-1997 Treasurer, Public Service Company of Colorado 1986-1997 Executive Vice President and Director, NC Enterprises, Inc. 1997-Present and New Century Services, Inc. Treasurer, Fuel Resources Development Co., Green and 1994-Present Clear Lakes Company and WestGas InterState, Inc. Treasurer, 1480 Welton, Inc. and Cheyenne Light, Fuel and 1994-1998 Power Company Director, Texas-Ohio Pipeline, Inc., 1996-Present and e prime Networks, Inc. Director, Quixx Corporation, Utility Engineering Corporation, 1997-Present
124 Yorkshire Electricity Group plc, Yorkshire Holdings plc and Yorkshire Power Group Limited Director, 1480 Welton, Inc. 1989-Present Director, Cheyenne Light, Fuel and Power Company 1990-Present Vice President, Fuel Resources Development Co. 1990-Present Director, Fuel Resources Development Co. 1991-Present Director, Green and Clear Lakes Company and Natural Fuels 1990-Present Corporation Director, New Century International, Inc. 1997-Present Secretary, New Century International, Inc. 1997-1998 Chairman of the Board, New Century-Cadence, Inc. 1999-Present Treasurer, New Century-Cadence, Inc. 1997-1999 Director, New Century-Cadence, Inc. 1997-Present Director, PSR Investments, Inc. 1986-Present Vice President, PSR Investments, Inc. 1986-1998 Director, PS Colorado Credit Corporation 1987-Present Vice President, PS Colorado Credit Corporation 1987-1998 Director, WestGas InterState, Inc. 1993-Present Director, Young Gas Storage Company and e prime inc. 1995-Present Vice President and Treasurer, Young Gas Storage Company 1995-1998 Secretary, Treasurer and Director, e prime Energy Marketing, 1997-Present Inc. President and CEO, e prime inc. 1997-Present Chairman and Director, e prime Florida, Inc. and e prime 1999-Present Georgia, Inc. Vice President and Treasurer, e prime, inc. 1995-1997 Chairman of the Board, Texas-Ohio Pipeline, Inc. 1997-Present Chairman of the Board, Young Gas Storage Company 1998-Present Chief Financial Officer, New Century Services, Inc., 1998-Present WestGas InterState, Inc. and Green and Clear Lakes Company Director, Planergy (Delaware), Inc., Planergy Energy 1998-Present Services Corporation, Planergy Services USA, Inc., Planergy Services of California, Inc., Planergy Services of Houston, Inc., Planergy Services of Texas, Inc., Planergy Services, Inc., Planergy, Inc., Cogeneration Capital Associates Incorporated Vice President and Director, Planergy New York, Inc., 1998-Present Planergy Power II, Inc., The Planergy Group, Inc. President and Director, NCE Communications, Inc. 1996-Present (formerly e prime Telecom, Inc.) Treasurer, New Century-Centrus, Inc. 1998-Present Director, New Century-Centrus, Inc. 1998-1999 Treasurer and Director, New Century Energies Foundation 1998-Present Management Committee Representative, ep3, L.P. 1996-Present Director, ep3, L.P. 1998-Present Treasurer and Corporate Secretary, e prime Networks, Inc. 1998-Present Paul J. Bonavia (c) 48 Senior Vice President and General Counsel 1997-Present General Counsel, 1480 Welton, Inc., Green and Clear Lakes 1998-Present Company, NC Enterprises, Inc., PSR Investments, Inc., PS Colorado Credit Corporation, WestGas InterState, Inc. Senior Vice President and General Counsel, Cheyenne Light, 1998-Present Fuel and Power Company, New Century Services, Inc.,
125 Public Service Company of Colorado and Southwestern Public Service Company President, General Counsel and Director, New Century 1998-Present International, Inc. Director, Yorkshire Power Group Limited, Yorkshire Holdings 1998-Present plc and Yorkshire Electricity Group plc Brian P. Jackson (d) 41 Senior Vice President Finance and Administrative Services 1997-Present Treasurer, Chief Financial Officer and Director, 1480 Welton, Inc., NC Enterprises, 1998-Present Inc. and Cheyenne Light, Fuel and Power Company Treasurer and Chief Financial Officer, NCE 1998-Present Communications, Inc. and New Century International, Inc. Chairman of the Board, President, Chief Financial 1998-Present Officer, and Director, PSR Investments, Inc. and PS Colorado Credit Corporation Chairman of the Board, New Century-Centrus, Inc. 1999-Present Treasurer, Planergy (Delaware), Inc., Planergy Energy 1998-Present Services Corporation, Planergy Limited, Planergy New York, Inc., Planergy Power II, Inc., Planergy Services USA, Inc., Planergy Services of California, Inc., Planergy Services of Houston, Inc., Planergy Services of Texas, Inc., Planergy Services, Inc., Planergy, Inc., The Planergy Group, Inc., Cogeneration Capital Associates Incorporated Treasurer 1999-Present Treasurer, Public Service Company of Colorado, 1999-Present Southwestern Public Service Company, New Century Services, Inc., New Century O&M Services, Inc., e prime Florida, Inc. and e prime Georgia, Inc. Treasurer and Vice President, New Century-Cadence, Inc. 1999-Present Director, New Century-Centrus, Inc. 1998-Present Treasurer and Director, New Century WYCO, Inc. 1999-Present Treasurer and Director, e prime, inc. 1998-Present Vice President, WestGas Interstate, Inc. 1999-Present Senior Vice President and Chief Financial Officer, 1998-Present Southwestern Public Service Company Senior Vice President, Chief Financial Officer and 1998-Present Director, Public Service Company of Colorado Senior Vice President, New Century Services, Inc. 1998-Present Management Committee Representative, Centrus, LLP 1998-Present Teresa S. Madden 43 Controller 1997-Present Secretary 1997-1998 Controller, Public Service Company of Colorado, Southwestern 1997-Present Public Service Company and New Century Services, Inc. Secretary, Public Service Company of Colorado and New 1997-1998 Century Services, Inc. Assistant Secretary, Southwestern Public Service Company 1997-1998 Director, Yorkshire Power Group Limited, Yorkshire Holdings 1997-1998 plc and Yorkshire Electricity Group plc Secretary, Fuel Resources Development Co. 1997-Present Secretary, NC Enterprises, Inc., WestGas InterState, Inc., 1997-1998 e prime, inc., Cheyenne Light, Fuel and Power Company, New Century-Cadence, Inc. and Texas-Ohio Pipeline, Inc. Manager of Corporate Accounting, Public Service Company 1990-1997
126 of Colorado Assistant Secretary, Public Service Company of Colorado 1995-1997 and e prime, inc. Assistant Secretary, 1480 Welton, Inc., PSR Investments, Inc., 1991-1998 PS Colorado Credit Corporation, Assistant Secretary, Cheyenne Light, Fuel and Power 1991-1997 Company and Fuel Resources Development Co. Controller, 1480 Welton, Inc., Cheyenne Light, Fuel 1998-Present and Power Company, Green and Clear Lakes Company, NC Enterprises, Inc., New Century International, Inc., PSR Investments, Inc., PS Colorado Credit Corporation, and WestGas InterState, Inc. Assistant Secretary, Yorkshire Electricity Group plc, Yorkshire 1998-Present Holdings plc, and Yorkshire Power Group Limited David M. Wilks 53 Executive Vice President and Director, Public Service Company 1997-Present of Colorado and New Century Services, Inc. Executive Vice President and Director, New Century-Cadence, 1997-1998 Inc. Director, Cheyenne Light, Fuel and Power Company 1997-Present Director, Southwestern Public Service Company, Quixx Power 1995-Present Services, Inc., Utility Engineering Corporation and Quixx Corporation President and Chief Operating Officer, Southwestern Public 1995-Present Service Company Senior Vice President, Southwestern Public Service Company 1991-1995 Director, WestGas InterState, Inc. and Young Gas Storage 1998-Present Company Vice President and Director, New Century Energies Foundation 1998-Present Chairman, President and Director, New Century O&M 1999-Present Services Inc. Chairman, President, CEO and Director, New Century 1999-Present WYCO, Inc. Cathy J. Hart (f) 50 Secretary 1998-Present Secretary, 1480 Welton, Inc., Cheyenne Light, Fuel and Power 1998-Present Company, Cogeneration Capital Associates Incorporated, Green and Clear Lakes Company, NC Enterprises, Inc., New Century International, Inc., New Century Services, Inc., New Century-Cadence, Inc., New Century-Centrus, Inc., PSR Investments, Inc., PS Colorado Credit Corporation, Planergy (Delaware), Inc., Planergy Energy Services Corporation, Planergy Limited, Planergy New York, Inc., Planergy Power II, Inc., Planergy Services USA, Inc., Planergy Services of California, Inc., Planergy Services of Houston, Inc., Planergy Services of Texas, Inc., Planergy Services, Inc., Planergy, Inc., Public Service Company of Colorado, Texas-Ohio Pipeline, Inc., The Planergy Group, Inc., WestGas InterState, Inc., Young Gas Storage Company and e prime, Inc. Secretary, NCE Communications, Inc., New Century 1999-Present O&M Services, Inc., New Century WYCO, Inc., e prime Florida, Inc. and e prime Georgia, Inc. Assistant Secretary, Southwestern Public Service Company 1998-Present Manager, Corporate Communications, Public Service 1993-1996
127 Company of Colorado Tom Petillo (g) 55 Executive Vice President, New Century Services, Inc. 1998-Present President and Director, New Century International, Inc. 1997-1998 Executive Vice President, Public Service Company of Colorado and Southwestern Public Service Company 1998-Present Chairman of the Board and Director, Planergy Limited 1998-Present Senior Vice President Planergy New York, Inc. and 1998-1999 Planergy, Inc. Vice President, Cogeneration Capital Associates 1998-1999 Incorporate, Planergy (Delaware), Inc., Planergy Energy Services Corporation, Planergy Services USA, Inc., Planergy Services of California Inc., Planergy Services of Houston, Inc., Planergy Services of Texas, Inc., Planergy Services, Inc. Director, Cogeneration Capital Associates Incorporated, 1998-Present Planergy (Delaware), Inc., Planergy Energy Services Corporation, Planergy Services USA, Inc., Planergy Services of California, Inc., Planergy Services of Houston, Inc., Planergy Services of Texas, Inc. Planergy Services, Inc., Planergy, Inc. and Planergy New York, Inc. President, Planergy Power II, Inc. and The Planergy Group, Inc. 1998-1999 Director, Planergy Power II, Inc. and The Planergy Group, Inc. 1998-Present Chairman of the Board, Planergy (Delaware) Inc., 1999-Present Planergy Energy Services Corporation, Planergy New York, Inc., Planergy Power II, Inc., Planergy Services USA, Inc., Planergy Services of California, Inc., Planergy Services of Houston, Inc., Planergy Services of Texas, Inc., Planergy Services, Inc., Planergy, Inc., Cogeneration Capital Associates Incorporated, The Planergy Group, Inc. President and CEO, New Century-Cadence, Inc. 1999-Present Executive Vice President, New Century-Cadence, Inc. 1998-1999 Director, New Century-Cadence, Inc. 1998-Present Director, e prime Florida, Inc. and e prime Georgia, Inc. 1999-Present Vice President and Director, New Century-Centrus, Inc. 1998-1999 Henry H. Hamilton 61 Executive Vice President and Director, Southwestern Public 1997-Present Service Company, Public Service Company of Colorado and New Century Services, Inc. Vice President of Production, Southwestern Public Service 1987-1997 Company Director, Quixx Power Services, Inc. 1993-Present Chairman of the Board and President 1998-1999 KES Montego, Inc., Quixx Borger Cogen, Inc., Quixx Carolina, Inc., Quixx Mustang Station, Inc., Quixx WPP94, Inc. and Quixxlin Corp. Director, KES Montego, Inc., Quixx Borger Cogen, Inc., 1998-Present Quixx Carolina, Inc., Quixx Mustang Station, Inc., Quixx WPP94, Inc. and Quixxlin Corp. President, CEO, COO and Director, Quixx Corporation 1998-1999 President and CEO, Quixx Power Services, Inc. 1998-Present Vice President, Quixx Carolina, Inc., 1999-Present
128 Quixx Power Services, Inc., Quixx WPP94, Inc. KES Montego, Inc., Quixx Borger Cogen, Inc., Quixx Mustang Station, Inc. and Quixxlin Corp. Director, Utility Engineering Corporation 1998-Present CEO, Borger Funding Corporation 1998-Present
There are no family relationships between executive officers or directors of the registrants. There are no arrangements or understandings between the executive officers individually and any other person with reference to their being selected as officers of each registrant. All executive officers of each registrant are elected annually by the respective Board of Directors. (a) Mr. Helton will retire as Chairman and CEO effective March 1, 2000 and Mr. Brunetti has been elected to succeed Mr. Helton. (b) Mr. Brunetti was Executive Vice President of Florida Power & Light Company from 1987 through May 1991. (c) Mr. Bonavia was Of Counsel at LeBoeuf, Lamb, Greene & MacRae, LLP from March 1997 through December 1997 and Senior Vice President at Dominion Resources, Inc. from 1991 through February 1997. Also, Mr. Bonavia is a member of the audit and finance committee of Yorkshire Electricity Group plc. (d) Mr. Jackson was named Treasurer of New Century Energies, Inc. effective January 1, 1999. Mr. Jackson was employed by Arthur Andersen LLP from 1980 through November 1997. He was a partner with the firm from 1994 through 1997. (e) Mr. Kelly is Chairman of the audit committee and a member of the finance committee of Yorkshire Electricity Group plc. (f) Ms. Hart was self-employed as communications and marketing consultant, Sydney, Australia and Denver, Colorado from June 1996 through June 1998. (g) Mr. Petillo was Director and President, Qualtec Quality Services, Inc. from August 1992 through October 1995 and Senior Vice President of Florida Power & Light Company from June 1991 through December 1995. Item 11. Executive Compensation Information concerning executive compensation for NCE is contained under Compensation Of Executive Officers And Directors in NCE's 2000 Proxy Statement, which information is incorporated herein by reference. Information concerning executive compensation for PSCo and SPS has been omitted pursuant to General Instruction I(2)(c). Item 12. Security Ownership of Certain Beneficial Owners and Management Information concerning the security ownership of the directors and officers of NCE is contained under Election Of Directors in NCE's 2000 Proxy Statement, which information is incorporated herein by reference. Information concerning the security ownership of the directors and officers of PSCo and SPS is omitted pursuant to General Instruction I(2)(c). Item 13. Certain Relationships and Related Transactions Information concerning relationships and related transactions of the directors and officers of NCE is contained under Certain Relationships And Related Transactions in NCE's 2000 Proxy Statement, which information is incorporated herein by reference. PSCo and SPS have no information concerning relationships and related transactions required to be disclosed. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial Statements, Financial Statement Schedules, and Exhibits: (1) Financial Statements and Reports of Independent Public Accountants on the financial statements for NCE, PSCo and SPS are listed under Item 8. herein. 129 (2) Financial Statement Schedules. Reports of Independent Public Accountants as to Schedules for NCE, PSCo and SPS are included in the Reports of Independent Public Accountants for each registrant. (3) Exhibits. Exhibits for NCE, PSCo and SPS are listed in Index to Exhibits below. (b) Reports on Form 8-K: No Form 8-K reports were filed since the end of the third quarter of 1999. 130 EXPERTS The consolidated balance sheets of New Century Energies, Inc. and its subsidiaries as of December 31, 1999 and 1998, the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999, and the related financial statement schedule, included in this Annual Report on Form 10-K, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. The consolidated balance sheets and statements of capitalization of Public Service Company of Colorado and its subsidiaries as of December 31, 1999 and 1998, the related consolidated statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 1999, and the related financial statement schedule, included in this Annual Report on Form 10-K, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. The balance sheets and statements of capitalization of Southwestern Public Service Company as of December 31, 1999 and 1998, the related statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 1999, and the related financial statement schedule, included in this Annual Report on Form 10-K, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. 131 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 New Century Energies, Inc.'s previously filed Registration Statement (Form S-8, File No. 333-28639) pertaining to the Omnibus Incentive Plan; New Century Energies, Inc.'s Registration Statement (Form S-3, File No. 333-28637) pertaining to the Dividend Reinvestment and Cash Payment Plan; New Century Energies, Inc.'s Registration Statements (Forms S-3, File Nos. 333-40361 and 333-6407) pertaining to the registration of NCE Common Stock and New Century Energies, Inc.'s Registration Statement (Form S-8, File No. 333-58117) pertaining to the NCE Employee Investment Plan and NCE Employees' Savings and Stock Ownership Plan. As independent public accountants, we hereby consent to the incorporation by reference of our report included in this Form 10-K, into Public Service Company of Colorado's previously filed Registration Statement (Form S-3, File No. 33-62233) pertaining to the Automatic Dividend Reinvestment and Common Stock Purchase Plan; Public Service Company of Colorado's Registration Statement (Form S-3, File No. 33-37431), as amended on December 4, 1990, pertaining to the shelf registration of Public Service Company of Colorado's First Mortgage Bonds; Public Service Company of Colorado's Registration Statement (Form S-8, File No. 33-55432) pertaining to the Omnibus Incentive Plan; Public Service Company of Colorado's Registration Statement (Form S-3, File No. 33-51167) pertaining to the shelf registration of Public Service Company of Colorado's First Collateral Trust Bonds; Public Service Company of Colorado's Registration Statement (Form S-3, File No. 33-54877) pertaining to the shelf registration of Public Service Company of Colorado's First Collateral Trust Bonds and Cumulative Preferred Stock and Public Service Company of Colorado's Registration Statement (Form S-3, File No. 333-81791) pertaining to the shelf registration of Public Service Company of Colorado's Senior Debt Securities. As independent public accountants, we hereby consent to the incorporation by reference of our report included in this Form 10-K, into Southwestern Public Service Company's previously filed Registration Statement (Form S-3, File No. 333-05199) pertaining to Southwestern Public Service Company's Preferred Stock and Debt Securities; Southwestern Public Service Company's Registration Statement (Form S-8, File No. 33-27452) pertaining to Southwestern Public Service Company's 1989 Stock Incentive Plan and Southwestern Public Service Company's Registration Statement (Form S-8, File No. 33-57869) pertaining to Southwestern Public Service Company's Employee Investment Plan and Non-Qualified Salary Deferral Plan. ARTHUR ANDERSEN LLP Denver, Colorado, February 22, 2000. 132 EXHIBIT 24 POWER OF ATTORNEY Each director and/or officer of New Century Energies, Inc., whose signature appears herein hereby appoints Wayne H. Brunetti and Richard C. Kelly, and each of them severally, and each director and/or officer of Public Service Company of Colorado and Southwestern Public Service Company, whose signature appears herein hereby appoints Wayne H. Brunetti and Brian P. Jackson, and each of them severally, as his or her attorney-in-fact to sign in his or her name and behalf, in any and all capacities stated herein, and to file with the Securities and Exchange Commission, any and all amendments to this Annual Report on Form 10-K. 133 NEW CENTURY ENERGIES, INC. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, New Century Energies, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 22nd day of February, 2000. NEW CENTURY ENERGIES, INC. By /s/ Richard C. Kelly --------------------------------- Richard C. Kelly Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of New Century Energies, Inc. and in the capacities and on the date indicated. Signature Title Date - -------------------------------------------------------------------------------- /s/ Bill D. Helton Principal Executive February 22, 2000 - ----------------------------- Bill D. Helton Officer and Director Chairman of the Board and Chief Executive Officer /s/ Richard C. Kelly Principal Financial Officer February 22, 2000 - ----------------------------- Richard C. Kelly Executive Vice President and Chief Financial Officer /s/ Teresa S. Madden Principal Accounting Officer February 22, 2000 - ----------------------------- Teresa S. Madden Controller 134
Signature Title Date - ----------------------------------------------------------------------------------------------------- /s/ Bill D. Helton - ------------------------------- Chairman of the Board February 22, 2000 Bill D. Helton and Director /s/ Wayne H. Brunetti - ------------------------------- Vice Chairman and Wayne H. Brunetti Director February 22, 2000 /s/ C.Coney Burgess - ------------------------------- Director February 22, 2000 C. Coney Burgess /s/ Danny H. Conklin - ------------------------------- Director February 22, 2000 Danny H. Conklin /s/ Giles M. Forbess - ------------------------------- Director February 22, 2000 Giles M. Forbess /s/ Gayle L. Greer - ------------------------------- Director February 22, 2000 Gayle L. Greer /s/ R. R. Hemminghaus - ------------------------------- Director February 22, 2000 R. R. Hemminghaus /s/ A. Barry Hirschfeld - ------------------------------- Director February 22, 2000 A. Barry Hirschfeld /s/ J. Howard Mock - ------------------------------- Director February 22, 2000 J. Howard Mock - ------------------------------- Director February 22, 2000 Albert F. Moreno /s/ J. Michael Powers - ------------------------------- Director February 22, 2000 J. Michael Powers /s/ Rodney E. Slifer - ------------------------------- Director February 22, 2000 Rodney E. Slifer
135
Signature Title Date - ----------------------------------------------------------------------------------------------------- /s/ W.Thomas Stephens - ------------------------------- Director February 22, 2000 W. Thomas Stephens /s/ Robert G. Tointon - ------------------------------- Director February 22, 2000 Robert G. Tointon
136 PUBLIC SERVICE COMPANY OF COLORADO SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Public Service Company of Colorado has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 22nd day of February, 2000. PUBLIC SERVICE COMPANY OF COLORADO By /s/ Brian P. Jackson ------------------------------ Brian P. Jackson Senior Vice President, Finance and Administrative Services, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Public Service Company of Colorado and in the capacities and on the date indicated.
Signature Title Date - ----------------------------------------------------------------------------------------------------- /s/ Wayne H. Brunetti Principal Executive February 22, 2000 - ---------------------------------------- Wayne H. Brunetti Officer and Director Chairman, President and Chief Executive Officer /s/ Brian P. Jackson Principal Financial Officer February 22, 2000 - ---------------------------------------- Brian P. Jackson and Director Senior Vice President, Finance and Administrative Services, Chief Financial Officer and Treasurer /s/ Teresa S. Madden Principal Accounting Officer February 22, 2000 - ---------------------------------------- Teresa S. Madden Controller
137
Signature Title Date - ----------------------------------------------------------------------------------------------------- /s/ Wayne H. Brunetti Director February 22, 2000 - ---------------------------------------- Wayne H. Brunetti /s/ Henry H. Hamilton Director February 22, 2000 - ---------------------------------------- Henry H. Hamilton /s/ Brian P. Jackson Director February 22, 2000 - ---------------------------------------- Brian P. Jackson /s/ Richard C. Kelly Director February 22, 2000 - ---------------------------------------- Richard C. Kelly /s/ David M. Wilks Director February 22, 2000 - ---------------------------------------- David M. Wilks
138 SOUTHWESTERN PUBLIC SERVICE COMPANY SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Southwestern Public Service Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 22nd day of February, 2000. SOUTHWESTERN PUBLIC SERVICE COMPANY By /s/ Brian P. Jackson ------------------------------ Brian P. Jackson Senior Vice President, Finance and Administrative Services, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Southwestern Public Service Company and in the capacities and on the date indicated.
Signature Title Date - ----------------------------------------------------------------------------------------------------- /s/ Wayne H. Brunetti - ---------------------------------------- Principal Executive February 22, 2000 Wayne H. Brunetti Officer and Director Chairman and Chief Executive Officer /s/ Brian P. Jackson - ---------------------------------------- Principal Financial Officer February 22, 2000 Brian P. Jackson Senior Vice President, Finance and Administrative Services, Chief Financial Officer and Treasurer /s/ Teresa S. Madden - ---------------------------------------- Principal Accounting Officer February 22, 2000 Teresa S. Madden Controller
139
Signature Title Date - ----------------------------------------------------------------------------------------------------- /s/ Wayne Brunetti Director February 22, 2000 - ---------------------------------------- Wayne H. Brunetti /s/ Henry H. Hamilton - ---------------------------------------- Director February 22, 2000 Henry H. Hamilton /s/ Richard C. Kelly - ---------------------------------------- Director February 22, 2000 Richard C. Kelly /s/ David M. Wilks - ---------------------------------------- Director February 22, 2000 David M. Wilks
140 EXHIBIT INDEX 2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession NCE 2(a) 1* NCE/NSP Agreement and Plan of Merger dated March 24, 1999 (Form 8-K, March 24, 1999, Exhibit 2.1). 2(b) 1* Merger Agreement and Plan of Reorganization dated August 22, 1995 (Form S-4, Annex I, File No. 33-64951). PSCo 2(a) 1* Merger Agreement and Plan of Reorganization dated August 22, 1995 (Form 8-K, dated August 22, 1995, File No. 1-3280 - Exhibit 2). SPS 2(a) 1* Agreement and Plan of Reorganization dated August 22, 1995 (Form 8-K, Exhibit 2, dated August 22, 1995). 3 (i) Articles of Incorporation NCE 3(a) 1* Restated Articles of Incorporation dated December 8, 1995 (Form S-4, Exhibit 3(a)). PSCo 3(a) 1* Amended and Restated Articles of Incorporation dated July 10, 1998 (Form 10-K, December 31, 1998, Exhibit 3(a)(1)). SPS 3(a) 1* Amended and Restated Articles of Incorporation dated September 30, 1997 (Form 10-K, December 31, 1997, Exhibit 3(a)(2)). 3 (ii) By-Laws NCE 3(b) 1* Restated By-laws dated December 15, 1998 (Form 10-K, December 31, 1998, Exhibit 3(b)(1)). PSCo 3(b) 1* By-laws dated November 20, 1997 (Form 10-K, December 31, 1997, Exhibit 3(b)(1)). SPS 3(b) 1* By-laws dated September 29, 1997 (Form 10-K, December 31, 1997, Exhibit 3(b)(2)). 4 Instruments Defining the Rights of Security Holders, Including Indentures NCE 4(a) 1* Rights Agreement, dated as of August 1, 1997, between New Century Energies, Inc. and the Bank of New York, as Rights Agent (Form 8-K, August 1, 1997-Exhibit 1). 4(a) 2* Amendment as March 24, 1999 to the Rights Agreement, dated as of August 1, 1997, between New Century Energies, Inc. and the Bank of New York (Form 8-K, March 24, 1999, Exhibit 99.2). PSCo 4(a) 1* Indenture, dated as of December 1, 1939, providing for the issuance of First Mortgage Bonds (Form 10 for 1946- Exhibit (B-1)). 4(a) 2* Indentures supplemental to Indenture dated as of December 1, 1939: 141
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 Sept. 1, 1970 8-K, Sept. 1970 2 May 14, 1941 10, 1946 B-3 Feb. 1, 1971 8-K, Feb. 1971 2 Apr. 28, 1942 10, 1946 B-4 Aug. 1, 1972 8-K, Aug. 1972 2 Apr. 14, 1943 10, 1946 B-5 June 1, 1973 8-K, June 1973 1 Apr. 27, 1944 10, 1946 B-6 Mar. 1, 1974 8-K, Apr. 1974 2 Apr. 18, 1945 10, 1946 B-7 Dec. 1, 1974 8-K, Dec. 1974 1 Apr. 23, 1946 10-K, 1946 B-8 Oct. 1, 1975 S-7, (2-60082) 2(b)(3) Apr. 9, 1947 10-K, 1946 B-9 Apr. 28, 1976 S-7, (2-60082) 2(b)(4) June 1, 1947 S-1, (2-7075) 7(b) Apr. 28, 1977 S-7, (2-60082) 2(b)(5) Apr. 1, 1948 S-1, (2-7671) 7(b)(1) Nov. 1, 1977 S-7, (2-62415) 2(b)(3) May 20, 1948 S-1, (2-7671) 7(b)(2) Apr. 28, 1978 S-7, (2-62415) 2(b)(4) Oct. 1, 1948 10-K, 1948 4 Oct. 1, 1978 10-K, 1978 D(1) Apr. 20, 1949 10-K, 1949 1 Oct. 1, 1979 S-7, (2-66484) 2(b)(3) Apr. 24, 1950 8-K, Apr. 1950 1 Mar. 1, 1980 10-K, 1980 4(c) Apr. 18, 1951 8-K, Apr. 1951 1 Apr. 28, 1981 S-16, (2-74923) 4(c) Oct. 1, 1951 8-K, Nov. 1951 1 Nov.1, 1981 S-16, (2-74923) 4(d) Apr. 21, 1952 8-K, Apr. 1952 1 Dec. 1, 1981 10-K, 1981 4(c) Dec. 1, 1952 S-9, (2-11120) 2(b)(9) Apr. 29, 1982 10-K, 1982 4(c) Apr. 15, 1953 8-K, Apr. 1953 2 May 1, 1983 10-K, 1983 4(c) Apr. 19, 1954 8-K, Apr. 1954 1 Apr. 30, 1984 S-3, (2-95814) 4(c) Oct. 1, 1954 8-K, Oct. 1954 1 Mar. 1, 1985 10-K, 1985 4(c) Apr. 18, 1955 8-K, Apr. 1955 1 Nov. 1, 1986 10-K, 1986 4(c) Apr. 24, 1956 10-K, 1956 1 May 1, 1987 10-K, 1987 4(c) May 1, 1957 S-9, (2-13260) 2(b)(15) July 1, 1990 S-3, (33-37431) 4(c) Apr. 10, 1958 8-K, Apr. 1958 1 Dec. 1, 1990 10-K, 1990 4(c) May 1, 1959 8-K, May 1959 2 Mar. 1, 1992 10-K, 1992 4(d) Apr. 18, 1960 8-K, Apr. 1960 1 Apr. 1, 1993 10-Q, June 30, 1993 4(a) Apr. 19, 1961 8-K, Apr. 1961 1 June 1, 1993 10-Q, June 30, 1993 4(b) Oct. 1, 1961 8-K, Oct. 1961 2 Nov. 1, 1993 S-3, (33-51167) 4(a)(3) Mar. 1, 1962 8-K, Mar. 1962 3(a) Jan. 1, 1994 10-K, 1993 4(a)(3) June 1, 1964 8-K, June 1964 1 Sept. 2, 1994 8-K, Sept. 1994 4(a) May 1, 1966 8-K, May 1966 2 May 1, 1996 10Q, June 30, 1996 4(a) July 1, 1967 8-K, July 1967 2 Nov. 1, 1996 10-K, 1996 4(a)(3) July 1, 1968 8-K, July 1968 2 Feb. 1, 1997 10-Q, Mar. 31, 1997 4(a) Apr. 25, 1969 8-K, Apr. 1969 1 April 1, 1998 10-Q, Mar. 31, 1998 4(a) Apr. 21, 1970 8-K, Apr. 1970 1
4(b) 1* Indenture, dated as of October 1, 1993, providing for the issuance of First Collateral Trust Bonds (Form 10-Q, September 30, 1993 - Exhibit 4(a)). 4(b) 2* Indentures supplemental to Indenture dated as of October 1, 1993: Previous Filing: Form; Date or Exhibit Dated as of File No. No. ----------- -------- --- November 1, 1993 S-3, (33-51167) 4(b)(2) January 1, 1994 10-K, 1993 4(b)(3) September 2, 1994 8-K, Sept. 1994 4(b) May 1, 1996 10-Q, June 30, 1996 4(b) November 1, 1996 10-K, 1996 4(b)(3) February 1, 1997 10-Q, Mar. 31, 1997 4(b) April 1, 1998 10-Q, Mar. 31, 1998 4(b) 142 4(c) 1* Indenture date May 1, 1998, between PSCo and The Bank of New York, providing for the issuance of Subordinated Debt Securities (Form 8-K, May 6, 1998 - Exhibit 4.2). 4(c) 2* Supplemental Indenture dated May 11, 1998, between PSCo and The Bank of New York, (Form 8-K, May 6, 1998 - Exhibit 4.3). 4(c) 3* Preferred Securities Guarantee Agreement dated May 11, 1998, between PSCo and The Bank of New York, (Form 8-K, May 6, 1998 - Exhibit 4.4). 4(c) 4* Amended and Restated Declaration of Trust of PSCo Capital and Trust I date May 11, 1998, (Form 8-K, May 6, 1998 - Exhibit 4.1). 4(d) 1* Indenture dated July 1, 1999, between PSCo and The Bank of New York, providing for the issuance of Senior Debt Securities (Form 8-K, July 13, 1999, Exhibit 4.1) and Supplemental Indenture dated July 15, 1999, between PSCo and The Bank of New York (Form 8-K, July 13, 1999, Exhibit 4.2). SPS 4(a) 1* Indenture, dated as of August 1, 1946, providing for the issuance of First Mortgage Bonds (Registration No. 2-6910, Exhibit 7-A). 4(a) 2* Indentures supplemental to Indenture dated as of August 1, 1946: Previous Filing: Form; Date or Exhibit Dated as of File No. No. ----------- -------- --- February 1, 1967 2-25983 2-S October 1, 1970 2-38566 2-T February 9, 1977 2-58209 2-Y March 1, 1979 2-64022 b(28) April 1, 1983 (two) 10-Q, May 1983 4(a) February 1, 1985 10-K, Aug. 1985 4(c) July 15, 1992 (two) 10-K, Aug. 1992 4(a) December 1, 1992 (two) 10-Q, Feb. 1993 4 February 15, 1995 10-Q, May 1995 4 March 1, 1996 333-05199 4(c) 4(b) 1* Indenture dated February 1, 1999 between SPS and The Chase Manhattan Bank (Form 8-K, February 25, 1999, Exhibit B). 4(b) 2* Supplemental Indenture dated March 1, 1999, between SPS and The Chase Manhattan Bank (Form 8-K, February 25, 1999, Exhibit C). 4(c) 1* Red River Authority for Texas Indenture of Trust dated July 1, 1991 (Form 10-K, August 31, 1991-Exhibit 4(b)). 4(d) 1* Indenture dated October 21, 1996, between SPS and Wilmington Trust Company, (Form 10-Q, November 30, 1996 - Exhibit 4(a)). 4(e) 1* Supplemental Indenture dated October 21, 1996, between SPS and Wilmington Trust Company, (Form 10-Q, November 30, 1996 - Exhibit 4(b)). 4(f) 1* Guarantee Agreement dated October 21, 1996, between SPS and Wilmington Trust Company, (Form 10-Q, November 30, 1996 - Exhibit 4(c)). 143 4(g) 1* Amended and Restated Trust Agreement dated October 21, 1996, among SPS, David M. Wilks, as initial depositor, Wilmington Trust Company and the administrative trustees named therein (Form 10-Q, November 30, 1996 -Exhibit 4(d)). 4(h) 1* Agreement as to Expenses dated October 21, 1996, between SPS and Southwestern Public Service Capital I, (Form 10-K, December 31, 1996 - Exhibit F). 10 Material Contracts NCE 10(a) 1* Form of Key Executive Change in Control Agreement (Form 10-K, December 31, 1998, Exhibit 10(a)(1)). 10(a) 2* Senior Executive Severance Policy, effective March 24, 1999, between New Century Energies, Inc. and Senior Executives ( Form 10-Q, March 31, 1999, Exhibit 10(a)(2)). 10(b) 1*+ Employment Agreement, effective August 1, 1997, between the Company and Mr. Bill D. Helton (Form S-4, Annex I, File No. 33-64951). 10(b) 2*+ Employment Agreement, effective August 1, 1997, between the Company and Mr. Wayne H. Brunetti (Form S-4, Annex I, File No. 33-64951). 10(b) 3*+ Employment Agreement, effective December 15, 1997, between company and Mr. Paul J. Bonavia (Form 10Q, September 30, 1998 - Exhibit 10(a)). 10(b) 4+ Amendments to the Employment Agreement between the Company and Mr. Bill D. Helton. 10(b) 5*+ The employment agreement, dated March 24, 1999, among Northern States Power Company, New Century Energies, Inc. and Wayne H. Brunetti (Form 10-Q, March 31, 1999, Exhibit 10(b)). 10(c) 1*+ Omnibus Incentive Plan, effective August 1, 1997 (Form Def 14A, December 31, 1997 - Exhibit A) 10(d) 1*+ Directors' Voluntary Deferral Plan (Form 10-K, December 31, 1998, Exhibit 10(d) (1)). 10(e) 1*+ Supplemental Executive Retirement Plan (Form 10-K, December 31, 1998, Exhibit 10(e) (1)). 10(f) 1*+ Salary Deferral and Supplemental Savings Plan for Executive Officers (Form 10-K, December 31, 1998, Exhibit 10(f) (1)). 10(g) 1*+ Salary Deferral and Supplemental Savings Plan for Key Managers (Form 10-K, December 31, 1998, Exhibit 10(g) (1)). PSCo 10(a) 1* Amended and Restated Coal Supply Agreement entered into October 1, 1984 but made effective as of January 1, 1976 between the Registrant and Amax Inc. on behalf of its division, Amax Coal Company (Form 10- K, December 31, 1984 - Exhibit 10(c)(1)). 10(a) 2* First Amendment to Amended and Restated Coal Supply Agreement entered into May 27, 1988 but made effective January 1, 1988 between the Registrant and Amax Coal Company (Form 10-K, December 31, 1988- Exhibit 10(c)(2). 10(b) 1*+ Supplemental Executive Retirement Plan for Key Management Employees, as amended and restated March 26, 1991 (Form 10-K, December 31, 1991 - Exhibit 10(e)(2)). 144 10(b) 2*+ Executive Savings Plan (Form 10-K, December 31, 1991 - Exhibit 10(e)(5)). 10(b) 3*+ Form of Key Executive Severance Agreement, as amended on August 22, and November 27, 1995. (Form 10-K, December 31, 1995 - Exhibit 10(3)(4)). SPS 10(a) 1* Coal Supply Agreement (Harrington Station) between SPS and TUCO, dated May 1, 1979 (Form 8-K, May 14, 1979 - Exhibit 3). 10(b) 1* Master Coal Service Agreement between Swindell-Dressler Energy Supply Company and TUCO, dated July 1, 1978 (Form 8-K, May 14, 1979 - Exhibit 5(A)). 10(c) 1* Guaranty of Master Coal Service Agreement between Swindell-Dressler Energy Supply Company and TUCO (Form 8-K, May 14, 1979 - Exhibit 5(B)). 10(d) 1* Coal Supply Agreement (Tolk Station) between SPS and TUCO dated April 30, 1979, as amended November 1, 1979 and December 30, 1981 (Form 10-Q, February 28, 1982 - Exhibit 10(b)). 10(e) 1* Master Coal Service Agreement between Wheelabrator Coal Services Co. and TUCO dated December 30, 1981, as amended November 1, 1979 and December 30, 1981 (Form 10-Q, February 28, 1982 - Exhibit 10(c)). 10(f) 1*+ Incentive Compensation Plan (an Executive Management Plan) as amended July 23, 1996 (Form 10-K, August 31, 1996 - Exhibit 10(a)). 10(g) 1*+ 1989 Stock Incentive Plan as amended April 23, 1996 (Form 10-K, August 31, 1996 - Exhibit 10(b)). 10(h) 1*+ Director's Deferred Compensation Plan as amended January 10, 1990 (Form 10-K, August 31, 1996 - Exhibit 10(c)). 10(i) 1*+ Supplemental Retirement Income Plan as amended July 23, 1991 (Form 10-K, August 31, 1996 - Exhibit 10(e)). 10(j) 1*+ EPS Performance Unit Plan dated October 27, 1992 (Form 10-K, August 31, 1996 - Exhibit 10(a)). 12 Statement Re Computation of Ratios 12(a) PSCo Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges is set forth at page 121 herein. 12(b) SPS Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges is set forth at page 122 herein. 21 Subsidiaries of the Registrants 23(a) Consent of Arthur Andersen LLP is set forth at page 132 herein. 24 Power of Attorney is set forth at page 133 herein. 145 27 Financial Data Schedule UT 27 (a) Financial Data Schedule for NCE as of December 31, 1999 27 (b) Financial Data Schedule for PSCo as of December 31, 1999 27 (c) Financial Data Schedule for SPS as of December 31, 1999 99 Unaudited Pro Forma Combined Condensed Financial Information of New Century Energies, Inc. and Northern States Power Company - ----------- * Previously filed as indicated and incorporated herein by reference. + Management contracts of compensatory plans or arrangements. 146 EX-10 2 AMENDMENTS TO EMPLOYMENT AGREEMENT AMENDMENT TO EMPLOYMENT AGREEMENT and TERMINATION OF CHANGE IN CONTROL AGREEMENT ------------------------------------------ This amendment to the employment agreement entered into on the 1st day of August, 1997, by and between New Century Energies, Inc. (the "Company") and Bill D. Helton (the "Executive") (the "Employment Agreement"), and to the change in control agreement entered into on the 1st day of August, 1997, by and between the Company and the Executive (the "Change in Control Agreement"), is made effective this 4th day of January, 2000. RECITALS -------- WHEREAS, the Company and the Executive are parties to the Employment Agreement and the Change in Control Agreement; and WHEREAS, the Executive and the Company have mutually agreed that the Executive will retire effective as of March 1, 2000, and will thus not serve as Chairman of the Board of Directors of the Company (the "Board") through May 31, 2001, as was previously agreed to and memorialized in the Employment Agreement; and WHEREAS, the Executive and the Company have mutually agreed that, in consideration for the Executive's agreement to amend his Employment Agreement and terminate his Change in Control Agreement, thereby forfeiting certain payments and benefits he otherwise would have been entitled to under such agreements had he served as Chairman of the Board through May 31, 2001, the Company shall provide to the Executive a lump sum cash payment, which payment is intended to pay to the Executive an amount equal to the payments and benefits that otherwise would have been provided to the Executive pursuant to the Employment Agreement; and WHEREAS, to effectuate such agreements between the Company and the Executive, the Company and the Executive wish to amend certain provisions in the Employment Agreement and to terminate the Change in Control Agreement. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which is acknowledged by the Company and the Executive, the Company and the Executive hereby agree as follows: 1. Section 1 of the Employment Agreement shall be amended to read as follows: "1. EMPLOYMENT PERIOD. The Company shall employ the Executive, and the Executive shall serve the Company, on the terms and conditions set forth in this Agreement, for a period beginning at the Effective Time (as defined in the Reorganization Agreement, the "Effective Time") and ending on February 29, 2000 (the "Employment Period")." 2. Paragraph (a) of Section 2 of the Employment Agreement shall be amended to read as follows: "(a) During the Employment Period, the Executive shall serve as Chief Executive Officer of the Company and Chairman of the Board of Directors of the Company (the "Board"). The Executive shall serve as an employee of the Company with such duties and responsibilities as are customarily assigned to such positions, and such other duties and responsibilities not inconsistent therewith as may from time to time be assigned to him by the Board." 3. A new sentence shall be added to the end of Section 4(c)(i) of the Employment Agreement, which new sentence shall read as follows: "The amendment of this Agreement and termination of the Executive's change in control agreement and the changes to the Executive's duties and responsibilities to and employment relationship with the Company made and/or provided for by the amendment and termination agreement entered into by and between the Executive and the Company on January 4, 2000, shall not constitute Good Reason for purposes of this Agreement." 4. A new paragraph (f) shall be added following paragraph (e) of Section 4 of the Employment Agreement, which new paragraph (f) shall read as follows: "(f) Retirement. If the Executive is an employee of the Company or a successor thereto on the last day of the Employment Period, the Executive shall be deemed to have retired effective as of the immediately succeeding day (such retirement to be referred to herein as "Retirement"). During the period beginning on the first day of Retirement and ending on the first to occur of (i) May 31, 2001, or (ii) the consummation of the merger by and between the Company and Northern States Power Company, the Executive shall serve as Chairman Emeritus of the Board." 5. The first sentence of paragraph (a) of Section 5 of the Employment Agreement shall be amended to read as follows: "If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or Disability, or the Executive terminates employment for Good Reason, the Company shall continue to provide the Executive with the compensation and benefits set forth in paragraphs (a), (b) and (c) of Section 3 as if he had remained employed by the Company pursuant to this Agreement through May 31, 2001, and then retired (at which time he will be treated as eligible for all retiree welfare benefits and other benefits provided to retired senior executives, as set forth in Section 3(c)(ii) and (iii)); PROVIDED, that the Incentive Compensation for such period shall be based upon the target 2 Incentive Compensation for the year in which the Date of Termination occurs; PROVIDED, further, that in lieu of stock options, restricted stock and other stock-based awards, the Executive shall be paid cash equal to the fair market value as of the Date of Termination (without regard to any restrictions and based upon a valuation model generally utilized for purposes of valuing comparable stock based compensation awards) of the stock options, restricted stock and other stock-based awards that would otherwise have been granted with such cash being paid within 90 days after the Date of Termination; PROVIDED, further, that to the extent any benefits described in paragraph (c) of Section 3 cannot be provided pursuant to the plan or program maintained by the Company for its executives, the Company shall provide such benefits outside such plan or program at no additional cost (including, without limitation, tax cost) to the Executive and his family, and PROVIDED, finally, that during any period when the Executive is eligible to receive benefits of the type described in clause (B) of paragraph (c)(iii) of Section 3 under another employer-provided plan, the benefits provided by the Company under paragraph (a) of Section 5 may be made secondary to those provided under another plan." 6. A new paragraph (d) shall be added following paragraph (c) of Section 5 of the Employment Agreement, which new paragraph (d) shall read as follows: "(d) Retirement. If the Executive's employment is terminated because of the Executive's Retirement (as that term is defined in paragraph (f) of Section 4), then, as consideration for the Executive's agreement not to compete with the Company for a period of 24 months following the termination of his employment (as provided in the restrictive covenant contained in Section 8 hereof), and as consideration for the amendment of this Agreement and the termination of the Executive's change in control agreement pursuant to the amendment and termination agreement entered into by and between the Company and the Executive on January 4, 2000, which amendment and termination agreement provides for, among other things, the forfeiture of the right to serve as Chairman of the Board through May 31, 2001, forfeiture of the right to receive certain minimum levels of compensation and benefits through May 31, 2001, forfeiture of the right to receive severance payments and benefits in the event of certain qualifying terminations of employment and the termination of the Executive's change in control agreement and all rights thereunder, the Company shall pay to the Executive within 5 days of such Retirement, a lump sum cash payment of $2,481,969.05 and, in addition, shall provide an office and secretarial support for the Executive at the Company's expense in either Denver, Colorado or Amarillo, Texas (as determined by the Executive), or, in lieu 3 thereof, shall provide such other equivalent arrangements as are mutually agreed upon by the Company and the Executive." 7. All provisions of the Employment Agreement not specifically mentioned in this Agreement shall be considered modified to the extent necessary to be consistent with the changes made in this Agreement. 8. If the Executive's employment is terminated because of the Executive's Retirement (as that term is defined in paragraph (f) of Section 4), the Change in Control agreement shall be deemed null and void effective as of the date of the Executive's Retirement and the Executive shall have no right to any severance or other benefits provided for thereunder and the Company shall have no further obligations thereunder. Date: 1/5/00 New Century Energies, Inc. ________________________ By /s/ Wayne Brunetti ____________________________ Its Attested: The Executive /s/ Cathy J. Hart /s/ Bill D. Helton ______________________________ ______________________________ ______________________________ Bill D. Helton 4 SECOND AMENDMENT TO EMPLOYMENT AGREEMENT This amendment to the Employment Agreement entered into on the 1st day of August, 1997, by and between New Century Energies, Inc. (the"Company") and Bill D. Helton (the "Executive"), as amended (the "Employment Agreement"), is made effective this 21st day of February, 2000. Whereas, the Company and the Executive wish to change the date by which payment is to be made to the Executive under paragraph 5(d) of the Employment Agreement, Now therefore, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the Company and the Executive, the Company and the Executive agree as follows: 1. Paragraph (d) of Section 5 of the Employment Agreement is amended to provide that the time period within which the lump sum cash payment of $2,481,969.05 referenced therein shall be paid will be "within 25 days of such Retirement". Date: 2/21/00 ________________ New Century Energies, Inc. By: /s/ Richard C. Kelly _________________________ Its: Executive Vice President ________________________ Date: 2/18/00 Executive ________________ /s/ Bill D. Helton _____________________________ Bill D. Helton EX-21 3 SUBSIDIARIES OF NEW CENTURY ENERGIES, INC. EXHIBIT 21 SUBSIDIARIES OF NEW CENTURY ENERGIES, INC As of December 31, 1999 Subsidiary State of Incorporation ---------- ---------------------- 1. Public Service Company of Colorado Colorado 2. Southwestern Public Service Company New Mexico 3. Cheyenne Light, Fuel and Power Company Wyoming 4. WestGas InterState, Inc. Colorado 5. New Century Services, Inc. Delaware 6. NC Enterprises, Inc. Delaware SUBSIDIARIES OF PUBLIC SERVICE COMPANY OF COLORADO As of December 31, 1999 Subsidiary State of Incorporation ---------- ---------------------- 1. 1480 Welton, Inc. Colorado 2. PSR Investments, Inc. Colorado 3. PS Colorado Credit Corporation Colorado 4. Green and Clear Lakes Company New York 5. Colorado Natural Fuels, LLC Colorado 6. Fuel Resources Development Co. (a dissolved Colorado corporation) Colorado EX-27.1 4 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NEW CENTURY ENERGIES, INC. CONSOLIDATED CONDENSED BALANCE SHEET AS OF DECEMBER 31, 1999 AND CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001004858 NEW CENTURY ENERGIES, INC. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 PER-BOOK 6,261,022 481,158 1,027,138 552,674 0 8,321,992 115,837 1,800,251 819,553 2,732,690 294,000 0 2,323,198 20,000 0 613,527 141,921 0 50,923 5,703 2,151,436 8,321,992 3,375,430 113,390 2,733,742 2,733,742 641,688 35,167 676,855 216,868 346,597 0 0 267,721 176,729 639,985 3.01 3.01
EX-27.2 5 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET AS OF DECEMBER 31, 1999 AND CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000081018 PUBLIC SERVICE COMPANY OF COLORADO 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 PER-BOOK 4,372,536 205,299 704,151 306,956 0 5,588,942 0 1,414,835 346,050 1,760,885 194,000 0 1,721,959 561 0 355,631 132,823 0 54,257 2,308 1,423,083 5,588,942 2,226,956 96,574 1,774,876 1,871,450 355,506 4,933 360,439 156,174 204,265 0 204,265 183,428 125,106 475,626 0.00 0.00
EX-27.3 6 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEET AS OF DECEMBER 31, 1999 AND CONDENSED STATEMENTS OF INCOME AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000092521 SOUTHWESTERN PUBLIC SERVICE COMPANY 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 PER-BOOK 1,773,815 124,982 156,690 163,889 0 2,219,376 0 353,099 408,284 761,383 100,000 0 605,875 0 0 177,746 0 0 0 0 574,372 2,219,376 925,937 59,399 711,764 771,163 154,774 9,370 164,144 61,435 102,709 0 102,709 84,243 50,018 130,733 0.00 0.00
EX-99 7 UNAUDITED PRO FORMA COMB. COND. FINANCIAL INFO. EXHIBIT 99 UNAUDITED PROFORMA COMBINED CONDENSED FINANCIAL INFORMATION The following unaudited pro forma combined condensed balance sheet at December 31, 1999 gives effect to the NCE/NSP Merger as if it had occurred at December 31, 1999. The unaudited pro forma combined condensed statements of income for each of the three years in the period ended December 31, 1999 give effect to the NCE/NSP Merger as if it had occurred on January 1, 1997. These statements are prepared on the basis of accounting as required under a pooling of interests and do not reflect any cost savings anticipated by management as a result of the NCE/NSP Merger. Accordingly, the pro forma information is not necessarily indicative of the financial position or results of operations that would have occurred had the NCE/NSP Merger been consummated for the periods for which it is given effect, nor is it necessarily indicative of future operating results or financial condition. 147 Unaudited Pro Forma Combined Condensed Statement of Income Reflecting Completion of the NCE/NSP Merger Year ended December 31, 1999 (Thousands of Dollars, Except per Share Data)
Northern New Century Reporting States Power Energies Adjustments Pro Forma Pro Forma (as Reported) (as Reported) (Note 2) Adjustments Combined ------------- ------------- ----------- ----------- ---------- Operating revenues: Electric....................................... $ 2,397,096 $ 2,527,341 $ (74) $ $4,924,363 Gas............................................ 471,915 764,943 (95,429) 1,141,429 Nonregulated and other revenues................ - 83,146 608,342 691,488 Earnings from equity investments............... - - 112,124 112,124 ------------- ------------- ----------- ----------- ---------- Total operating revenues.................... 2,869,011 3,375,430 624,963 6,869,404 Operating expenses: Electric fuel and purchased power.............. 773,680 1,185,232 - 1,958,912 Cost of gas sold and transported............... 278,240 485,107 (79,892) 683,455 Other operation and maintenance................ 768,169 538,967 90,989 1,398,125 Depreciation and amortization.................. 355,704 280,913 (9,063) 627,554 Taxes other than income taxes.................. 222,446 137,259 (2,034) 357,671 Income taxes - utility......................... 127,293 - (127,293) - Nonregulated operating expenses................ - 106,264 514,866 621,130 ------------- ------------- ----------- ----------- ---------- Total operating expenses.................... 2,525,532 2,733,742 387,573 5,646,847 Operating income................................ 343,479 641,688 237,390 1,222,557 Other income (expense): Income from nonregulated businesses before interest and taxes............................ 65,376 - (65,376) - Equity earnings from unconsolidated subsidiaries.................................. - 44,265 (44,265) - Other income (deductions) - net................ (9,320) (9,098) (456) (18,874) Income taxes on nonregulated and nonoperating items - benefit............................... 61,010 - (61,010) - ------------- ------------- ----------- ----------- ---------- Total other income (expense)................ 117,066 35,167 (171,107) (18,874) Financing costs: Interest charges............................... 220,459 193,818 - 414,277 Distributions on mandatorily redeemable preferred securities of subsidiary trusts..... 15,750 23,050 - 38,800 ------------- ------------- ----------- ----------- ---------- Total financing costs....................... 236,209 216,868 - 453,077 Income before income taxes...................... 224,336 459,987 66,283 750,606 Income taxes.................................... - 113,390 66,283 179,673 ------------- ------------- ----------- ----------- ---------- Net income...................................... 224,336 346,597 - 570,933 Preferred dividends & redemption premiums of NSP............................................ 5,292 - - 5,292 ------------- ------------- ----------- ----------- ---------- Earnings available for common shareholders...... $ 219,044 $ 346,597 $ - $ - $ 565,641 ============= ============= =========== =========== ========== Average common shares outstanding (Note 1)...... 153,366 115,211 63,366 331,943 Average common and potentially diluted shares outstanding (Note 1)........................... 153,443 115,233 63,378 332,054 Basic and diluted earnings per share............ $ 1.43 $ 3.01 $ 1.70 ============= ============= ==========
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements. 148 Unaudited Pro Forma Combined Condensed Statement of Income Reflecting Completion of the NCE/NSP Merger Year ended December 31, 1998 (Thousands of Dollars, Except per Share Data)
Northern New Century Reporting States Power Energies Adjustments Pro Forma Pro Forma (as Reported) (as Reported) (Note 2) Adjustments Combined ------------- ------------- ----------- ----------- ---------- Operating revenues: Electric....................................... $ 2,362,351 $ 2,624,057 $ (1,089) $ $4,985,319 Gas............................................ 456,823 781,571 (128,390) 1,110,004 Nonregulated and other revenues................ - 72,143 311,709 383,852 Earnings from equity investments............... - - 115,985 115,985 ------------- ------------- ----------- ----------- ---------- Total operating revenues.................... 2,819,174 3,477,771 298,215 6,595,160 Operating expenses: Electric fuel and purchased power.............. 689,275 1,283,768 721 1,973,764 Cost of gas sold and transported............... 267,050 502,879 (110,436) 659,493 Other operation and maintenance................ 794,332 547,136 - 1,341,468 Depreciation and amortization.................. 338,225 268,743 (8,055) 598,913 Taxes other than income taxes.................. 220,620 134,137 (2,175) 352,582 Income taxes - utility......................... 145,383 - (145,383) - Nonregulated operating expenses................ - 90,607 368,365 458,972 ------------- ------------- ----------- ----------- ---------- Total operating expenses.................... 2,454,885 2,827,270 103,037 5,385,192 Operating income................................ 364,289 650,501 195,178 1,209,968 Other income (expense): Income from nonregulated businesses before interest and taxes............................ 51,171 - (51,171) - Equity earnings from unconsolidated subsidiaries.................................. - 36,101 (36,101) - Other income (deductions) - net................ 4,812 (4,250) 37,477 38,039 Income taxes on nonregulated and nonoperating items - benefit............................... 40,588 - (40,588) - ------------- ------------- ----------- ----------- ---------- Total other income (expense)................ 96,571 31,851 (90,383) 38,039 Financing costs: Interest charges............................... 162,737 181,906 - 344,643 Distributions on mandatorily redeemable preferred securities of subsidiary trusts..... 15,750 17,561 - 33,311 Dividends & redemption premiums on preferred stock of subsidiaries......................... - 5,332 - 5,332 ------------- ------------- ----------- ----------- ---------- Total financing costs....................... 178,487 204,799 - 383,286 Income before income taxes...................... 282,373 477,553 104,795 864,721 Income taxes.................................... - 135,596 104,795 240,391 ------------- ------------- ----------- ----------- ---------- Net income...................................... 282,373 341,957 - 624,330 Preferred dividends & redemption premiums of NSP............................................ 5,548 - - 5,548 ------------- ------------- ----------- ----------- ---------- Earnings available for common shareholders...... $ 276,825 $ 341,957 $ - $ - $ 618,782 ============= ============= =========== =========== ========== Average common shares outstanding (Note 1)...... 150,502 111,859 61,522 323,883 Average common and potentially diluted shares outstanding (Note 1)........................... 150,743 112,008 61,604 324,355 Basic earnings per share........................ $ 1.84 $ 3.06 $ 1.91 ============= ============= ========== Diluted earnings per share...................... $ 1.84 $ 3.05 $ 1.91 ============= ============= ==========
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements. 149 Unaudited Pro Forma Combined Condensed Statement of Income Reflecting Completion of the NCE/NSP Merger Year ended December 31, 1997 (Thousands of Dollars, Except per Share Data)
Northern New Century Reporting States Power Energies Adjustments Pro Forma Pro Forma (as Reported) (as Reported) (Note 2) Adjustments Combined ------------- ------------- ----------- ----------- ---------- Operating revenues: Electric.......................................... $ 2,218,550 $ 2,451,421 $ (923) $ $4,669,048 Gas............................................... 515,196 780,623 (143,284) 1,152,535 Nonregulated and other revenues................... - 52,570 367,778 420,348 Earnings from equity investments.................. - - 52,766 52,766 ------------- ------------- ----------- ----------- ---------- Total operating revenues....................... 2,733,746 3,284,614 276,337 6,294,697 Operating expenses: Electric fuel and purchased power................. 596,238 1,181,354 - 1,777,592 Cost of gas sold and transported.................. 331,296 507,318 (131,929) 706,685 Other operation and maintenance................... 745,828 537,091 - 1,282,919 Depreciation and amortization..................... 325,880 243,078 (9,414) 559,544 Taxes other than income taxes..................... 227,893 129,280 (2,007) 355,166 Income taxes - utility............................ 144,855 - (144,855) - Nonregulated operating expenses................... - 57,268 410,489 467,757 ------------- ------------- ----------- ----------- ---------- Total operating expenses....................... 2,371,990 2,655,389 122,284 5,149,663 Operating income................................... 361,756 629,225 154,053 1,145,034 Other income (expense): Income from nonregulated businesses before interest and taxes............................... 12,078 - (12,078) - Equity earnings from unconsolidated subsidiaries..................................... - 34,166 (34,166) - Merger costs...................................... (29,005) (34,088) - (63,093) Other income (deductions)......................... 3,515 (27,267) 37,046 13,294 Income taxes on nonregulated and nonoperating items - benefit.................................. 48,145 - (48,145) - ------------- ------------- ----------- ----------- ---------- Total other income (expense)................... 34,733 (27,189) (57,343) (49,799) Financing costs: Interest charges.................................. 144,732 187,028 - 331,760 Distributions on mandatorily redeemable preferred securities of subsidiary trusts........ 14,437 7,850 - 22,287 Dividends & redemption premiums on preferred stock of subsidiaries............................ - 11,752 - 11,752 ------------- ------------- ----------- ----------- ---------- Total financing costs.......................... 159,169 206,630 - 365,799 Income before income taxes and extraordinary item.. 237,320 395,406 96,710 729,436 Income taxes....................................... - 133,919 96,710 230,629 ------------- ------------- ----------- ----------- ---------- Income before extraordinary item................... 237,320 261,487 - 498,807 Extraordinary item - U.K. windfall tax............. - (110,565) - (110,565) ------------- ------------- ----------- ----------- ---------- Net income......................................... 237,320 150,922 - 388,242 Preferred dividends & redemption premiums of NSP............................................... 11,071 - - 11,071 ------------- ------------- ----------- ----------- ---------- Earnings available for common shareholders......... $ 226,249 $ 150,922 $ - $ - $ 377,171 ============= ============= =========== =========== ========== Average common shares outstanding (Note 1)......... 140,594 104,805 57,643 303,042 Average common and potentially diluted shares outstanding (Note 1).............................. 140,870 104,872 57,680 303,422 Earnings per share - basic and diluted: Income before extraordinary item.................. $ 1.61 $ 2.50 $ 1.61 Extraordinary item................................ - (1.06) (0.37) ------------- ------------- ---------- Total............................................ $ 1.61 $ 1.44 $1.24 ============= ============= ==========
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements. 150 Unaudited Pro Forma Combined Condensed Balance Sheet Reflecting Completion of the NCE/NSP Merger December 31, 1999 (Thousands of Dollars)
Northern New Century Reporting Pro Form States Power Energies Adjustments Adjustments Pro Forma (as Reported) (as Reported) (Note 3) (Note 4) Combined ------------- ------------- ----------- ----------- ----------- ASSETS Property, plant and equipment: Electric..................................... $ 7,430,686 $ 7,496,942 $ (119,944) $ $14,807,684 Gas.......................................... 952,131 1,327,048 (12,663) 2,266,516 Other........................................ 375,058 977,548 2,422,850 3,775,456 ------------- ------------- ----------- ----------- ----------- Total property, plant and equipment......... 8,757,875 9,801,538 2,290,243 20,849,656 Accumulated provision for depreciation....... (4,409,151) (3,540,516) (203,767) (8,153,434) Nuclear fuel - net........................... 102,727 - - 102,727 ------------- ------------- ----------- ----------- ----------- Net property, plant and equipment........... 4,451,451 6,261,022 2,086,476 12,798,949 Current assets: Cash and cash equivalents.................... 55,968 83,763 - 139,731 Accounts receivable - net.................... 428,950 371,116 - 800,066 Accrued unbilled utility revenues............ 144,261 266,537 - 410,798 Fuel and gas inventories..................... 59,600 93,274 - 152,874 Material and supplies inventories............ 231,503 75,021 - 306,524 Prepayments and other........................ 113,524 137,427 - 250,951 ------------- ------------- ----------- ----------- ----------- Total current assets........................ 1,033,806 1,027,138 - 2,060,944 Other assets: Equity investments........................... 1,047,248 391,754 - 1,439,002 External decommissioning fund and other investments........................... 561,682 89,404 - 651,086 Regulatory assets............................ 248,127 337,965 - 586,092 Non-regulated property - net................. 2,086,476 - (2,086,476) - Other........................................ 338,941 214,709 - (45,000) 508,650 ------------- ------------- ----------- ----------- ----------- Total other assets.......................... 4,282,474 1,033,832 (2,086,476) (45,000) 3,184,830 ------------- ------------- ----------- ----------- ----------- Total assets.................................. $ 9,767,731 $ 8,321,992 $ - $ (45,000) $18,044,723 ============= ============= =========== =========== =========== LIABILITIES AND EQUITY Capitalization: Common stock (Note 1)........................ $ 389,324 $ 115,837 $ - $ 333,031 $ 838,192 Other stockholders' equity (Note 1).......... 2,168,206 2,616,853 - (378,031) 4,407,028 ------------- ------------- ----------- ----------- ----------- Total common stockholders equity............ 2,557,530 2,732,690 - (45,000) 5,245,220 Preferred stockholders' equity............... 105,340 - 105,340 Mandatorily redeemable preferred securities of subsidiary trusts........................ 200,000 294,000 - 494,000 Long-term debt............................... 3,453,364 2,374,121 - 5,827,485 ------------- ------------- ----------- ----------- ----------- Total capitalization........................ 6,316,234 5,400,811 - (45,000) 11,672,045 Current liabilities: Current portion of long-term debt............ 294,831 136,218 - 431,049 Short-term debt.............................. 799,159 633,527 - 1,432,686 Accounts payable............................. 321,382 471,757 - 793,139 Taxes accrued................................ 172,059 88,617 - 260,606 Other accrued liabilities.................... 238,705 326,964 - 565,669 ------------- ------------- ----------- ----------- ----------- Total current liabilities................... 1,826,136 1,657,083 - 3,483,219 Other liabilities: Deferred income taxes........................ 811,638 967,408 - 1,779,046 Deferred investment tax credits.............. 118,582 95,426 - 214,008 Regulatory liabilities....................... 461,569 - - 461,569 Other........................................ 233,572 201,264 - 434,836 ------------- ------------- ----------- ----------- ----------- Total other liabilities..................... 1,625,361 1,264,098 - 2,889,459 ------------- ------------- ----------- ----------- ----------- Total liabilities and equity.................. $ 9,767,731 $ 8,321,992 $ - $ (45,000) $18,044,723 ============= ============= =========== =========== ===========
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements. 151 Notes to Unaudited Pro Forma Combined Condensed Financial Statements 1. The unaudited pro forma combined condensed financial statements reflect the conversion of each share of NCE common stock, par value $1.00 per share, into 1.55 share of common stock of the combined company and the continuation of each share of NSP common stock, par value $2.50 per share, as one share of common stock of the combined company ($2.50 par value), as provided in the NCE/NSP Merger Agreement. The unaudited pro forma combined condensed financial statements are presented as if the companies were combined during all periods included therein. 2. The unaudited pro forma combined condensed income statements reflect certain reclassifications to conform the presentation of operating results. These reporting adjustments include: (a) separate presentation of nonregulated revenues and equity earnings in operating revenues; (b) separate presentation of all nonregulated expenses, including project write-downs, in operating expenses; (c) presentation of nonregulated interest and other income, including gains for project sales, in other income (deductions) - net; and (d) presentation of all income taxes (regulated and nonregulated) on a single line before arriving at net income. 3. The unaudited pro forma combined condensed balance sheet at December 31, 1999 reflects reporting adjustments to conform the presentation of: (a) investments and deferred charges (in other assets); (b) nonregulated property (in property, plant and equipment); and (c) construction work in progress (in other property, plant and equipment). 4. The allocation of the estimated costs savings resulting from the merger to NCE, NSP and their customers, net of the costs incurred to achieve such savings, will be subject to regulatory review and approval. At the time the merger agreement was signed, cost savings resulting from the merger were estimated to be approximately $1.1 billion over a ten-year period, net of transaction costs (including fees for financial advisors, attorneys, accountants, filings and printing) and net of costs to achieve the savings. Nonrecurring costs directly attributable to the NCE/NSP Merger are being deferred and total approximately $45 million as of December 31, 1999. Assuming the business combination is accounted for as a pooling-of- interests, these costs will be expensed upon the consummation of the NCE/NSP Merger. The unaudited pro forma combined condensed statements of income do not reflect any of these costs. The unaudited pro forma combined condensed balance sheet has been adjusted to reflect a write-off of the deferred costs and a related reduction of retained earnings. 5. Intercompany transactions (including purchased and exchanged power transactions) between NCE and NSP during the periods presented were not material and, accordingly, no pro forma adjustments were made to eliminate such transactions. 152 -----END PRIVACY-ENHANCED MESSAGE-----