10-Q 1 0001.txt NCE 2ND QTR 2000 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ____________ Exact name of registrant as specified in its charter, State or other jurisdiction of incorporation or organization, Address of principal executive Commission offices and Registrant's Telephone Number, IRS Employer File Number including area code Identification No. ----------- ------------------------------ ------------------ 1-12927 NEW CENTURY ENERGIES, INC. 84-1334327 (a Delaware Corporation) 1225 17th Street Denver, Colorado 80202 Telephone (303) 571-7511 1-3280 PUBLIC SERVICE COMPANY OF COLORADO 84-0296600 (a Colorado Corporation) 1225 17th Street Denver, Colorado 80202 Telephone (303) 571-7511 1-3789 SOUTHWESTERN PUBLIC SERVICE COMPANY 75-0575400 (a New Mexico Corporation) Tyler at Sixth Amarillo, Texas 79101 Telephone (303) 571-7511 ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No On August 1, 2000, 116,766,809 shares of the New Century Energies, Inc.'s Common Stock were outstanding. The aggregate market value of this common stock held by nonaffiliates based on the closing price on the New York Stock Exchange was approximately $4,130,625,868. Public Service Company of Colorado and Southwestern Public Service Company meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H (2) to such Form 10-Q. Table of Contents PART I - FINANCIAL INFORMATION Item l. Financial Statements ......................................... 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................... 39 PART II - OTHER INFORMATION Item 1. Legal Proceedings.............................................. 57 Item 6. Exhibits and Reports on Form 8-K............................... 57 This combined Form 10-Q is separately filed by New Century Energies, Inc., Public Service Company of Colorado and Southwestern Public Service Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each registrant makes representations only as to itself and makes no other representations whatsoever as to information relating to the other registrants. This report should be read in its entirety. No one section of the report deals with all aspects of the subject matter. FORWARD-LOOKING INFORMATION The following discussions include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Investors and prospective investors are cautioned that the forward-looking statements contained herein with respect to the revenues, earnings, capital expenditures, resolution and impact of litigation, competitive performance, or other prospects for the business of New Century Energies, Inc., Public Service Company of Colorado and/or Southwestern Public Service Company or their affiliated companies, including any and all underlying assumptions and other statements that are other than statements of historical fact, may be influenced by factors that could cause actual outcomes and results to be materially different than projected. Such factors include, but are not limited to, the effects of weather, future economic conditions, the performance of generating units, fuel prices and availability, regulatory decisions and the effects of changes in state and federal laws, the pace of deregulation of domestic retail natural gas and electricity markets, the timing and extent of change in commodity prices for all forms of energy, capital spending requirements, the evolution of competition, earnings retention and dividend payout policies, changes in accounting standards, 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 TERMS The abbreviations or acronyms used in the text and notes are defined below: Abbreviation or Acronym Term ---------------------------------------------------------------------- AEP............................................American Electric Power Cheyenne........................Cheyenne Light, Fuel and Power Company CPUC..........The Public Utilities Commission of the State of Colorado Denver District Court...............District Court in and for the City and County of Denver DSM.............................................Demand Side Management Dth..........................................................Dekatherm EPA...............................U.S. Environmental Protection Agency e prime.................................e prime, inc. and subsidiaries FERC..............................Federal Energy Regulatory Commission Fort St. Vrain..............Fort St. Vrain Electric Generating Station, formerly a nuclear generating station GCA................................................Gas Cost Adjustment ICA..........................................Incentive Cost Adjustment IRS...........................................Internal Revenue Service Kwh......................................................kilowatt-hour PSCo/SPS Merger..............business combination between PSCo and SPS NCE or Company..............................New Century Energies, Inc. NCE/NSP Merger................business combination between NCE and NSP NCI....................................New Century International, Inc. NMPRC..........................New Mexico Public Regulation Commission NOx.....................................................Nitrogen Oxide NSP......................................Northern States Power Company PSCCC........................Public Service Company Credit Corporation PSCo................................Public Service Company of Colorado PSRI.............................................PSR Investments, Inc. PUHCA...........Public Utility Holding Company Act of 1935, as amended PUCT................................Public Utility Commission of Texas QF.................................................Qualifying Facility SEC.................................Securities and Exchange Commission SO2.....................................................Sulfur Dioxide SPS................................Southwestern Public Service Company SFAS 71...........Statement of Financial Accounting Standards No. 71 - "Accounting for the Effects of Certain Types of Regulation" SFAS 112.........Statement of Financial Accounting Standards No. 112 - "Employers' Accounting for Postemployment Benefits" Thunder Basin...............................Thunder Basin Coal Company Y2K..........................................................Year 2000 Yorkshire Electricity..................Yorkshire Electricity Group plc Yorkshire Power.............................Yorkshire Power Group Ltd. ii NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) (Thousands of Dollars) ASSETS June 30, December 31, 2000 1999 ---- ---- Property, plant and equipment, at cost: Electric .......................................... $7,695,165 $7,496,942 Gas................................................ 1,362,575 1,327,048 Steam and other.................................... 116,019 113,050 Common to all departments.......................... 483,364 464,059 Construction in progress........................... 360,845 400,439 ------- ------- 10,017,968 9,801,538 Less: accumulated depreciation .................... 3,687,879 3,540,516 --------- --------- Total property, plant and equipment.............. 6,330,089 6,261,022 --------- --------- Investments, at cost: Investment in Yorkshire Power and other unconsolidated subsidiaries (Note 3) ............ 402,793 391,754 Other.............................................. 131,664 89,404 ------- ------- Total investments................................. 534,457 481,158 ------- ------- Current assets: Cash and temporary cash investments................ 36,109 83,763 Accounts receivable, less reserve for uncollectible accounts ($4,696 at June 30, 2000; $4,601 at December 31, 1999)...... ........................ 368,398 371,116 Accrued unbilled revenues.......................... 254,090 266,537 Recoverable purchased gas and electric energy costs 58,122 46,863 Materials and supplies, at average cost............ 73,191 75,021 Fuel inventory, at average cost.................... 29,979 29,618 Gas in underground storage, at cost (LIFO)......... 28,916 63,656 Prepaid expenses................................... 82,789 74,905 Other.............................................. 4,947 15,659 ------- ------- Total current assets.............................. 936,541 1,027,138 ------- --------- Deferred charges: Regulatory assets (Note 1)......................... 295,887 337,965 Unamortized debt expense........................... 29,436 29,775 Other.............................................. 241,619 184,934 ------- ------- Total deferred charges............................ 566,942 552,674 ------- ------- $8,368,029 $8,321,992 The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 1 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) (Thousands of Dollars) CAPITAL AND LIABILITIES June 30, December 31, 2000 1999 ---- ---- Common stock.......................................... $1,944,007 $1,916,088 Retained earnings..................................... 870,420 819,553 Accumulated other comprehensive income (Note 1) ...... (24,879) (2,951) ------- ------ Total common equity............................... 2,789,548 2,732,690 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........................ 2,248,618 2,374,121 --------- --------- 5,332,166 5,400,811 Noncurrent liabilities: Employees' postretirement benefits other than pensions 54,168 57,596 Employees' postemployment benefits................. 32,566 32,823 ------ ------ Total noncurrent liabilities...................... 86,734 90,419 ------ ------ Current liabilities: Notes payable and commercial paper................. 791,250 633,527 Long-term debt due within one year................. 176,634 136,218 Accounts payable................................... 440,734 471,757 Dividends payable.................................. 69,874 70,045 Recovered electric energy costs.................... 15,481 11,873 Customers' deposits................................ 31,300 30,810 Accrued taxes...................................... 50,812 88,617 Accrued interest................................... 59,859 61,701 Other.............................................. 154,765 152,535 ------- ------- Total current liabilities......................... 1,790,709 1,657,083 --------- --------- Deferred credits: Customers' advances for construction............... 64,614 56,259 Unamortized investment tax credits................. 93,017 95,426 Accumulated deferred income taxes.................. 957,663 967,408 Other.............................................. 43,126 54,586 ------- ------ Total deferred credits............................ 1,158,420 1,173,679 --------- --------- Commitments and contingencies (Notes 4 and 5)......... ---------- ---------- $8,368,029 $8,321,992 ========== ========== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 2 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Three Months Ended June 30, 2000 1999 ---- ---- Operating revenues: Electric........................................... $715,104 $607,277 Gas................................................ 139,359 173,172 Other.............................................. 22,389 20,385 ------- ------ 876,852 800,834 Operating expenses: Fuel used in generation............................ 167,801 152,857 Purchased power.................................... 179,770 130,635 Cost of gas sold................................... 82,560 114,502 Other operating and maintenance expenses-regulated. 132,959 137,040 Other operating and maintenance expenses-nonregulated 22,589 28,308 Depreciation and amortization...................... 73,805 69,895 Taxes (other than income taxes) ................... 32,789 37,477 ------- ------ 692,273 670,714 Operating income...................................... 184,579 130,120 Other income and deductions: Equity in earnings of Yorkshire Power and other unconsolidated subsidiaries (Note 3) 9,499 (2,787) Miscellaneous income and deductions - net.......... 2,414 (2,609) ------- ------- 11,913 (5,396) Interest charges and preferred dividends of subsidiaries: Interest on long-term debt......................... 43,467 43,942 Other interest..................................... 12,571 7,362 Allowance for borrowed funds used during construction (3,491) (2,611) Dividends on PSCo and SPS obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debentures of PSCo and SPS...................................... 5,762 5,762 ----- ----- 58,309 54,455 Income before income taxes and extraordinary item..... 138,183 70,269 Income taxes.......................................... 43,602 21,034 ------- ------ Income before extraordinary item...................... 94,581 49,235 Extraordinary item (Notes 1 and 4).................... (13,658) - ------- ------ Net income............................................ $80,923 $49,235 ======= ======= Weighted average common shares outstanding: Basic.............................................. 116,611 115,080 Diluted............................................ 116,649 115,103 Basic and diluted earnings per share of common stock outstanding: Income before extraordinary item................... $ 0.81 $ 0.43 Extraordinary item (Notes 1 and 4)................. (0.12) - -------- ------ Net income......................................... $ 0.69 $ 0.43 ======= ====== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 3 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Six Months Ended June 30, 2000 1999 ---- ---- Operating revenues: Electric........................................... $1,348,226 $1,201,808 Gas................................................ 423,394 478,307 Other.............................................. 43,902 35,414 ------- ------ 1,815,522 1,715,529 Operating expenses: Fuel used in generation............................ 310,696 286,706 Purchased power.................................... 342,399 257,879 Cost of gas sold................................... 269,313 333,581 Other operating and maintenance expenses-regulated. 266,865 266,466 Other operating and maintenance expenses-nonregulated 45,839 48,991 Depreciation and amortization...................... 145,995 139,397 Taxes (other than income taxes) ................... 67,013 75,097 ------- ------ 1,448,120 1,408,117 Operating income...................................... 367,402 307,412 Other income and deductions: Equity in earnings of Yorkshire Power and other unconsolidated subsidiaries (Note 3)............. 32,640 13,024 Miscellaneous income and deductions - net.......... 1,428 (6,151) ------- ------ 34,068 6,873 Interest charges and preferred dividends of subsidiaries: Interest on long-term debt......................... 87,002 85,352 Other interest..................................... 23,494 14,251 Allowance for borrowed funds used during construction (6,536) (5,527) Dividends on PSCo and SPS obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debentures of PSCo and SPS..................................... 11,525 11,525 ------ ------ 115,485 105,601 Income before income taxes and extraordinary item..... 285,985 208,684 Income taxes.......................................... 86,076 58,149 ------- ------ Income before extraordinary item...................... 199,909 150,535 Extraordinary item (Notes 1 and 4).................... (13,658) - ------- ------ Net income............................................ $186,251 $150,535 ======== ======== Weighted average common shares outstanding: Basic.............................................. 116,360 114,881 Diluted............................................ 116,398 114,916 Basic and diluted earnings per share of common stock outstanding: Income before extraordinary item................... $ 1.72 $ 1.31 Extraordinary item (Notes 1 and 4)................. (0.12) - -------- ------ Net income......................................... $ 1.60 $ 1.31 ======= ====== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 4 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands of Dollars) Six Months Ended June 30, 2000 1999 ---- ---- Operating activities: Net income......................................... $186,251 $150,535 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary item (Notes 1 and 4)............... 13,658 - Depreciation and amortization.................... 152,809 145,934 Amortization of investment tax credits........... (2,409) (2,551) Deferred income taxes............................ 21,564 15,003 Equity in earnings of Yorkshire Power and other unconsolidated subsidiaries, net................ (32,640) (13,024) Allowance for equity funds used during construction - (827) Change in accounts receivable.................... 2,859 7,089 Change in inventories............................ 36,209 18,420 Change in other current assets................... (978) 82,069 Change in accounts payable....................... (29,875) (15,928) Change in other current liabilities.............. (27,118) (52,103) Change in deferred amounts....................... (67,027) (22,186) Change in noncurrent liabilities................. (3,685) 2,124 Other............................................ (967) 84 ------- ------- Net cash provided by operating activities...... 248,651 314,639 Investing activities: Construction expenditures.......................... (211,180) (287,650) Allowance for equity funds used during construction - 827 Proceeds from disposition of property, plant and equipment.................................... 2,747 512 Purchase of other investments...................... (51,326) (11,809) Sale of other investments.......................... 7,498 2,402 ------- ------- Net cash used in investing activities.......... (252,261) (295,718) Financing activities: Proceeds from sale of common stock................. 20,683 20,532 Proceeds from sale of long-term debt............... 100,725 156,488 Redemption of long-term debt....................... (187,621) (66,774) Short-term borrowings - net........................ 157,723 19,702 Dividends on common stock.......................... (135,554) (133,379) -------- -------- Net cash used in financing activities.......... (44,044) (3,431) ------- ------- Net (decrease) increase in cash and temporary cash investments.............................. (47,654) 15,490 Cash and temporary cash investments at beginning of period.......................... 83,763 56,667 ------ ------ Cash and temporary cash investments at end of period....................................... $ 36,109 $ 72,157 ======== ======== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements 5 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY Three Months Ended June 30, 2000 and 1999 (Unaudited) (Thousands of Dollars, Except Share Information)
Accumulated Paid Other Common Stock, $1 par value in Retained Comprehensive Shares Amount Capital Earnings Income Total ------ ------ ------- -------- ------ ----- Balance at March 31, 1999 114,924,982 $ 114,925 $1,769,762 $ 775,016 $ (2,856) $2,656,847 Comprehensive income (Note 1): Net income................ - - - 49,235 - 49,235 Foreign currency translation adjustment............... - - - - (6,554) (6,554) ------ Comprehensive income 42,681 Dividends declared on common stock ..................... - - - (66,855) - (66,855) Issuance of common stock 317,286 317 11,511 - - 11,828 ------- ------- ------- ------- ------- ------ Balance at June 30, 1999 ... 115,242,268 $ 115,242 $1,781,273 $757,396 $ (9,410) $2,644,501 =========== ========= ========== ======== ======== ========== Balance at March 31, 2000 116,466,495 $ 116,466 $1,817,848 $857,225 $ (6,483) $2,785,056 Comprehensive income (Note 1): Net income................ - - - 80,923 - 80,923 Foreign currency translation adjustment............... - - - - (18,396) (18,396) ------- Comprehensive income.. 62,527 Dividends declared on common stock ..................... - - - (67,728) - (67,728) Issuance of common stock 288,639 289 9,404 - - 9,693 ------- --- ----- ------ ------- ------- Balance at June 30, 2000 116,755,134 $ 116,755 $1,827,252 $870,420 $(24,879) $2,789,548 =========== ========= ========== ======== ======== ==========
Authorized shares of common stock were 260 million at June 30, 2000 and 1999. The accompanying notes to consolidated condensed financial statements statements are an integral part of these financial statements. 6 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY Six Months Ended June 30, 2000 and 1999 (Unaudited) (Thousands of Dollars, Except Share Information)
Accumulated Paid Other Common Stock, $1 par value in Retained Comprehensive Shares Amount Capital Earnings Income Total ------ ------ ------- -------- ------ ----- Balance at December 31, 1998 114,490,772 $ 114,491 $1,751,895 $ 740,677 $7,764 $2,614,827 Comprehensive income (Note 1): Net income................. - - - 150,535 - 150,535 Foreign currency translation adjustment................. - - - - (17,174) (17,174) ------- Comprehensive income 133,361 Dividends declared on common stock ....................... - - - (133,816) - (133,816) Issuance of common stock 751,496 751 29,378 - - 30,129 ------- ------- ------- ------- ------- ------- Balance at June 30, 1999 .....115,242,268 $ 115,242 $1,781,273 $ 757,396 $(9,410) $2,644,501 =========== ========== ========== ========= ======= ========== Balance at December 31, 1999 115,837,199 $ 115,837 $1,800,251 $ 819,553 $(2,951) $2,732,690 Comprehensive income (Note 1): Net income................ - - - 186,251 - 186,251 Foreign currency translation adjustment............... - - - - (21,928) (21,928) -------- Comprehensive income 164,323 Dividends declared on common stock ..................... - - - (135,384) - (135,384) Issuance of common stock 917,935 918 27,001 - - 27,919 ------- ----- ------- ------- ------- ------ Balance at June 30, 2000 116,755,134 $ 116,755 $1,827,252 $ 870,420 $(24,879) $2,789,548 =========== ========== ========== ========= ======== ==========
Authorized shares of common stock were 260 million at June 30, 2000 and 1999. The accompanying notes to consolidated condensed financial statements statements are an integral part of these financial statements. 7 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) (Thousands of Dollars) ASSETS June 30, December 31, 2000 1999 ---- ---- Property, plant and equipment, at cost: Electric .......................................... $4,779,154 $4,629,092 Gas................................................ 1,324,487 1,289,995 Steam and other.................................... 68,305 68,109 Common to all departments.......................... 478,245 458,940 Construction in progress........................... 259,563 300,224 -------- -------- 6,909,754 6,746,360 Less: accumulated depreciation .................... 2,480,792 2,373,824 --------- --------- Total property, plant and equipment.............. 4,428,962 4,372,536 --------- --------- Investments, at cost: Note receivable from affiliate..................... 192,620 192,620 Other.............................................. 13,764 12,679 -------- -------- Total investments................................. 206,384 205,299 -------- -------- Current assets: Cash and temporary cash investments................ 15,095 51,731 Accounts receivable, less reserve for uncollectible accounts ($3,733 at June 30, 2000; $2,533 at December 31, 1999) .............................. 150,967 199,304 Accrued unbilled revenues ......................... 172,196 220,330 Recoverable purchased gas and electric energy costs 21,612 42,697 Materials and supplies, at average cost............ 54,058 53,984 Fuel inventory, at average cost.................... 27,689 27,326 Gas in underground storage, at cost (LIFO)......... 28,265 62,487 Current portion of deferred income taxes........... 4,869 3,532 Prepaid expenses and other......................... 27,548 42,760 -------- -------- Total current assets.............................. 502,299 704,151 -------- -------- Deferred charges: Regulatory assets (Note 1)......................... 224,942 236,251 Unamortized debt expense .......................... 18,179 18,892 Other.............................................. 58,901 51,813 -------- -------- Total deferred charges............................ 302,022 306,956 -------- -------- $5,439,667 $5,588,942 The accompanying notes to consolidated condensed financial statements statements are an integral part of these financial statements. 8 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) (Thousands of Dollars) CAPITAL AND LIABILITIES June 30, December 31, 2000 1999 ---- ---- Common stock.......................................... $1,414,835 $1,414,835 Retained earnings..................................... 428,039 346,050 -------- ------- Total common equity............................... 1,842,874 1,760,885 PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo (Note 6) ............ 194,000 194,000 Long-term debt........................................ 1,681,527 1,721,959 --------- --------- 3,718,401 3,676,844 Noncurrent liabilities: Employees' postretirement benefits other than pensions 46,974 51,080 Employees' postemployment benefits................. 26,229 26,229 -------- ------- Total noncurrent liabilities...................... 73,203 77,309 -------- ------- Current liabilities: Notes payable and commercial paper................. 295,300 356,192 Long-term debt due within one year................. 171,988 132,823 Accounts payable................................... 233,752 336,891 Dividends payable.................................. - 44,575 Recovered electric energy costs.................... 15,481 11,873 Customers' deposits................................ 24,984 24,370 Accrued taxes...................................... 54,499 67,030 Accrued interest................................... 42,074 44,034 Other.............................................. 81,814 91,067 -------- ------- Total current liabilities......................... 919,892 1,108,855 -------- --------- Deferred credits: Customers' advances for construction............... 63,280 54,826 Unamortized investment tax credits ................ 87,039 89,286 Accumulated deferred income taxes.................. 557,850 555,829 Other.............................................. 20,002 25,993 -------- ------- Total deferred credits............................ 728,171 725,934 -------- ------- Commitments and contingencies (Notes 4 and 5)......... ---------- ---------- $5,439,667 $5,588,942 ========== ========== The accompanying notes to consolidated condensed financial statements statements are an integral part of these financial statements. 9 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Three Months Ended June 30, 2000 1999 Operating revenues: Electric........................................... $449,230 $373,690 Gas................................................ 138,861 140,895 Other.............................................. 1,988 1,580 ------- ------- 590,079 516,165 Operating expenses: Fuel used in generation............................ 69,907 54,882 Purchased power.................................... 143,459 111,963 Gas purchased for resale........................... 84,642 87,721 Other operating and maintenance expenses........... 93,318 102,037 Depreciation and amortization...................... 51,886 48,822 Taxes (other than income taxes) ................... 20,462 23,595 Income taxes ..................................... 29,656 14,768 ------- ------- 493,330 443,788 Operating income...................................... 96,749 72,377 Other income and deductions-net....................... 4,307 831 Interest charges: Interest on long-term debt......................... 32,798 29,908 Other interest..................................... 6,104 6,741 Allowance for borrowed funds used during construction (2,567) (2,061) Dividends on PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo .......... 3,800 3,800 ------- ----- 40,135 38,388 ------ ------ Net income............................................ $60,921 $34,820 ======= ======= The accompanying notes to consolidated condensed financial statements statements are an integral part of these financial statements. 10 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Six Months Ended June 30, 2000 1999 ---- ---- Operating revenues: Electric........................................... $ 855,325 $ 755,012 Gas................................................ 409,582 395,066 Other.............................................. 5,722 4,957 ------- ------- 1,270,629 1,155,035 Operating expenses: Fuel used in generation............................ 126,109 106,747 Purchased power.................................... 276,615 226,190 Gas purchased for resale........................... 260,991 260,562 Other operating and maintenance expenses........... 190,984 196,548 Depreciation and amortization...................... 102,250 97,362 Taxes (other than income taxes) ................... 41,808 47,082 Income taxes ..................................... 65,453 43,982 ------- ------- 1,064,210 978,473 --------- ------- Operating income...................................... 206,419 176,562 Other income and deductions-net....................... 3,869 (735) Interest charges: Interest on long-term debt......................... 65,320 59,791 Other interest..................................... 12,250 11,961 Allowance for borrowed funds used during construction (4,562) (4,284) Dividends on PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo .......... 7,600 7,600 ----- ----- 80,608 75,068 Net income............................................ $ 129,680 $ 100,759 ========= ========= The accompanying notes to consolidated condensed financial statements statements are an integral part of these financial statements. 11 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands of Dollars) Six Months Ended June 30, 2000 1999 ---- ---- Operating activities: Net income......................................... $129,680 $100,759 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................... 105,373 100,369 Amortization of investment tax credits........... (2,247) (2,388) Deferred income taxes............................ 7,238 4,735 Change in accounts receivable.................... 48,337 17,210 Change in inventories............................ 33,785 18,729 Change in other current assets................... 84,431 102,519 Change in accounts payable....................... (103,139) (30,778) Change in other current liabilities.............. (19,522) (28,353) Change in deferred amounts....................... (8,653) (6,977) Change in noncurrent liabilities................. (4,106) 974 ------- ------- Net cash provided by operating activities...... 271,177 276,799 Investing activities: Construction expenditures.......................... (155,516) (215,940) Proceeds from disposition of property, plant and equipment ................................... 3,446 12,467 Purchase of other investments...................... (5,773) (2,481) Sale of other investments.......................... 5,073 2,361 ------- ------- Net cash used in investing activities.......... (152,770) (203,593) Financing activities: Proceeds from the sale of long-term debt........... 99,750 47,666 Redemption of long-term debt....................... (101,636) (66,482) Short-term borrowings - net........................ (60,892) 57,230 Dividends on common stock.......................... (92,265) (92,976) ------- ------- Net cash used in financing activities.......... (155,043) (54,562) -------- ------- Net (decrease) increase in cash and temporary cash investments ............................. (36,636) 18,644 Cash and temporary cash investments at beginning of period .......................... 51,731 19,926 ------ ------ Cash and temporary cash investments at end of period ................................ $ 15,095 $ 38,570 ======== ======== The accompanying notes to consolidated condensed financial statements statements are an integral part of these financial statements. 12 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEETS (Unaudited) (Thousands of Dollars) ASSETS June 30, December 31, 2000 1999 ---- ---- Property, plant and equipment, at cost: Electric........................................... $2,848,861 $2,802,077 Construction in progress........................... 95,562 95,477 ------- ------- 2,944,423 2,897,554 Less: accumulated depreciation..................... 1,160,806 1,123,739 --------- --------- Total property, plant and equipment............... 1,783,617 1,773,815 --------- --------- Investments, at cost: Notes receivable from affiliate.................... 119,036 119,036 Other.............................................. 6,012 5,946 ------- ------- Total investments................................. 125,048 124,982 ------- ------- Current assets: Cash and temporary cash investments................ 9,671 1,532 Accounts receivable, less reserve for uncollectible accounts ($333 at June 30, 2000; $682 at December 31, 1999)................................ 62,283 83,928 Accrued unbilled revenues.......................... 81,048 44,631 Recoverable electric energy cost (Note 4).......... 34,901 1,948 Materials and supplies, at average cost............ 16,027 18,035 Fuel inventory, at average cost.................... 2,290 2,292 Prepaid expenses and other......................... 21,991 4,324 ------- ------- Total current assets.............................. 228,211 156,690 ------- ------- Deferred charges: Regulatory assets (Note 1)......................... 70,759 101,419 Prepaid pension asset.............................. 50,763 40,087 Unamortized debt expense........................... 9,488 9,605 Other.............................................. 12,211 12,778 ------- ------- Total deferred charges............................ 143,221 163,889 ------- ------- $2,280,097 $2,219,376 ========== ========== The accompanying notes to consolidated condensed financial statements statements are an integral part of these financial statements. 13 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEETS (Unaudited) (Thousands of Dollars) CAPITAL AND LIABILITIES June 30, December 31, 2000 1999 ---- ---- Common stock.......................................... $353,099 $ 353,099 Retained earnings..................................... 421,854 408,284 ------- ------- Total common equity............................... 774,953 761,383 SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS (Note 6) ............. 100,000 100,000 Long-term debt (Notes 1 and 4)........................ 520,590 605,875 ------- ------- 1,395,543 1,467,258 Noncurrent liabilities: Employees' postretirement benefits other than pensions 6,504 6,086 Employees' postemployment benefits................. 4,683 4,940 ------- ------- Total noncurrent liabilities...................... 11,187 11,026 ------- ------- Current liabilities: Notes payable and commercial paper................. 311,350 177,746 Accounts payable................................... 98,554 76,560 Dividends payable.................................. - 20,963 Customers' deposits................................ 5,642 5,833 Accrued taxes...................................... 17,893 23,486 Accrued interest................................... 14,685 17,223 Current portion of accumulated deferred income taxes 6,327 - Other.............................................. 41,764 26,857 ------- ------- Total current liabilities......................... 496,215 348,668 ------- ------- Deferred credits: Unamortized investment tax credits................. 4,844 4,969 Accumulated deferred income taxes.................. 366,087 376,245 Other.............................................. 6,221 11,210 ------- ------- Total deferred credits............................ 377,152 392,424 ------- ------- Commitments and contingencies (Notes 4 and 5)......... ---------- ---------- $2,280,097 $2,219,376 ========== ========== The accompanying notes to consolidated condensed financial statements statements are an integral part of these financial statements. 14 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Three Months Ended June 30, 2000 1999 ---- ---- Operating revenues.................................... $256,643 $224,114 Operating expenses: Fuel used in generation............................ 97,894 97,975 Purchased power.................................... 28,579 11,404 Other operating and maintenance expenses........... 40,989 33,858 Depreciation and amortization...................... 19,365 18,435 Taxes (other than income taxes).................... 11,774 12,487 Income taxes....................................... 16,516 13,483 ------- ------- 215,117 187,642 Operating income...................................... 41,526 36,472 Other income and deductions - net..................... 2,826 2,380 Interest charges: Interest on long-term debt......................... 10,159 13,639 Other interest..................................... 4,504 960 Allowance for borrowed funds used during construction (919) (544) Dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS ........... 1,962 1,962 ----- ----- 15,706 16,017 Income before extraordinary item...................... 28,646 22,835 Extraordinary item (Notes 1 and 4).................... (13,658) - ------- ------- Net income............................................ $14,988 $22,835 ======= ======= The accompanying notes to consolidated condensed financial statements statements are an integral part of these financial statements. 15 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Six Months Ended June 30, 2000 1999 ---- ---- Operating revenues.................................... $472,875 $426,666 Operating expenses: Fuel used in generation............................ 184,587 180,028 Purchased power.................................... 49,740 16,509 Other operating and maintenance expenses........... 76,850 67,662 Depreciation and amortization...................... 38,719 36,907 Taxes (other than income taxes).................... 23,856 25,871 Income taxes....................................... 27,446 27,848 ------- ------- 401,198 354,825 Operating income...................................... 71,677 71,841 Other income and deductions - net..................... 6,236 4,460 Interest charges: Interest on long-term debt......................... 20,816 24,834 Other interest..................................... 8,235 2,549 Allowance for borrowed funds used during construction (1,965) (1,233) Dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS 3,925 3,925 ----- ----- 31,011 30,075 Income before extraordinary items..................... 46,902 46,226 Extraordinary item (Notes 1 and 4)................... (13,658) - ------- ------- Net income............................................ $33,244 $46,226 ======= ======= The accompanying notes to consolidated condensed financial statements statements are an integral part of these financial statements. 16 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands of Dollars) Six Months Ended June 30, 2000 1999 ---- ---- Operating activities: Net income......................................... $ 33,244 $ 46,226 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary item (Notes 1 and 4)............... 13,658 - Depreciation and amortization.................... 40,483 38,713 Amortization of investment tax credits........... (125) (125) Deferred income taxes............................ 13,535 6,102 Change in accounts receivable.................... 21,645 1,877 Change in inventories............................ 2,010 (573) Change in other current assets................... (83,897) (22,026) Change in accounts payable....................... 21,994 12,968 Change in other current liabilities.............. 6,585 (24,566) Change in deferred amounts....................... (19,131) (14,291) Change in noncurrent liabilities................. 161 1,001 ------- ------- Net cash provided by operating activities...... 50,162 45,306 Investing activities: Construction expenditures.......................... (47,647) (61,840) Cost of disposition of property, plant and equipment (1,927) (2,162) Purchase and sale of other investments............. (66) (109) ------- ------- Net cash used in investing activities.......... (49,640) (64,111) Financing activities: Proceeds from sale of long-term debt............... - 99,846 Redemption of long-term debt....................... (85,350) - Short-term borrowings - net........................ 133,604 (35,465) Dividends on common stock.......................... (40,637) (40,031) ------- ------- Net cash provided by financing activities...... 7,617 24,350 ------- ------- Net increase in cash and temporary cash investments ............................. 8,139 5,545 Cash and temporary cash investments at beginning of period ................................... 1,532 1,350 ----- ----- Cash and temporary cash investments at end of period ................................... $ 9,671 $ 6,895 ======== ======= The accompanying notes to consolidated condensed financial statements statements are an integral part of these financial statements. 17 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Summary of Significant Accounting Policies (NCE, PSCo and SPS) Business, Utility Operations and Regulation NCE is a registered holding company under the 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 (see Note 4. Regulatory Matters for further discussion). Regulatory Assets and Liabilities The Company's regulated subsidiaries, except as discussed below for SPS, prepare their financial statements in accordance with the provisions of SFAS 71, as amended. SFAS 71 recognizes that accounting for rate regulated enterprises should reflect the relationship of costs and revenues introduced by rate regulation. A regulated utility may defer recognition of a cost (a regulatory asset) or recognize an obligation (a regulatory liability) if it is probable that, through the 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. Management has concluded that as of June 30, 2000, the requirements to apply SFAS 71 continue to be met by all utility operations, except for SPS' generation operations. In the event that a portion of a subsidiary's operations is no longer subject to the provisions of SFAS 71, as a result of a change in regulation or the effects of competition, the affected subsidiary could be required to write-off its 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' financial position, results of operations or cash flow. With the issuance of a final written order by the PUCT addressing the implementation of electric utility restructuring for SPS, management believes that sufficient details of a transition plan to competition now exist allowing for a reasonable determination of the impacts of the deregulation of SPS' generation business. Accordingly, SPS discontinued the application of SFAS 71 for the generation portion of its business during the second quarter of 2000. SPS applied the provisions of SFAS No. 101, "Regulated Enterprises - Accounting for the Discontinuation of SFAS 71" and Emerging Issues Task Force Consensus No. 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101" to SPS' electric generation business. While the PUCT rate order only addresses Texas operations, SPS plans to pursue a similar strategy to implement the restructuring legislation enacted in New Mexico and believes that all of its generation will ultimately be deregulated. Accordingly, SPS has applied SFAS 101 to all jurisdictions of its generation business. SPS' transmission and distribution business continues to meet the requirements of SFAS 71, as that business is expected to remain regulated. During the second quarter of 2000, SPS wrote-off its generation related regulatory assets and other deferred costs totaling approximately $19 million. This resulted in an after-tax extraordinary charge of approximately $13.7 million against the earnings of SPS and NCE. The total impacts of deregulation 18 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) may be affected by the results of future state and Federal regulatory proceedings prior to actual implementation of full competition, currently anticipated to begin on January 1, 2002 (see Note 4. Regulatory Matters for further discussion). The following regulatory assets are reflected in the Company's consolidated balance sheets (in thousands): June 30, 2000 NCE PSCo SPS ------- ------- ------ Income taxes........................ $ 98,291 $52,457 $ 46,452 Nuclear decommissioning costs....... 58,906 58,906 - Employees' postretirement benefits other than pensions............... 48,775 48,625 150 Employees' postemployment benefits.. 23,297 23,018 - Demand-side management costs........ 36,557 22,840 13,717 Unamortized debt reacquisition costs 24,014 13,237 10,252 Other............................... 6,047 5,859 188 -------- ------- -------- Total............................. $295,887 $224,942 $ 70,759 ======== ======== ======== December 31, 1999 NCE PSCo SPS ------- ------- ------ Income taxes........................ $123,241 $ 59,011 $64,829 Nuclear decommissioning costs....... 63,835 63,835 - Employees' postretirement benefits other than pensions............... 53,321 50,570 2,751 Employees' postemployment benefits.. 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 ======== ======== ======== The regulatory assets of the Company's regulated subsidiaries that are currently being recovered as of June 30, 2000 and December 31, 1999 are reflected in rates charged to customers. The recovery of regulatory assets over the next three years is estimated to exceed $125 million. Refer to the discussion below or the Notes to Consolidated Financial Statements included herein and in the NCE, PSCo and SPS 1999 Annual Report on Form 10-K for a more detailed discussion regarding recovery periods. The Company and its subsidiaries adopted accrual accounting for postemployment benefits under SFAS 112 in 1994. 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 Wyoming Public Service Commission 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. 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 in the gas rate case. PSCo appealed the District Court decision to the Colorado Supreme Court on January 31, 2000, and filed its opening brief on June 23, 2000. The Company expects a final decision on this matter in late 2000 or early 2001. 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. 19 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) Other Property Property, plant and equipment includes approximately $18.4 million and $26.2 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 applicable 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. 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 the U.S. Certain operations were retained and transferred to new subsidiaries of e prime. This sale did not have a significant impact on the Company's financial position, results of operations or cash flows. 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 earnings from its unconsolidated investments accounted for under the equity method of accounting. All significant intercompany items and transactions have been eliminated. Risk Management 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 three and six month periods ended June 30, 2000, NCE recognized a net gain of $2,223,000 and $1,948,000, respectively, and PSCo recognized a net gain of $1,083,000 and $959,000, respectively, for market value changes on energy trading contracts. For the three and six month periods ended June 30, 1999, NCE recognized net gains/(losses) of $688,000 and ($551,000), respectively, and PSCo recognized net gains of $261,000 and $78,000, respectively, 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. Comprehensive Income Comprehensive income (net income plus all other changes in net assets from non-owner sources) and its components were reported in NCE's Consolidated Condensed Statements of Shareholders' Equity for the three and six month periods ended June 30, 2000 and 1999. Other comprehensive income consists solely of foreign currency translation adjustments related to the investment in Yorkshire Power. For the three and six month periods ending June 30, 2000 and 1999, PSCo and SPS had no comprehensive income items, therefore, comprehensive income equals net income. 20 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) Basic and Diluted Earnings Per Share Basic earnings per share is based upon the weighted average common shares outstanding during the periods presented. 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 periods presented. Employee stock options are the Company's only common stock equivalents. The Company has no other potentially dilutive securities. The potentially dilutive securities included in the computation of diluted earnings per share were approximately 38,000 shares for both the three and six month periods ended June 30, 2000 and were 23,000 and 35,000 shares for the three and six month periods ended June 30, 1999, respectively. These shares had no impact on the Company's reported earnings per share information. Approximately 2,230,000 common shares are issuable under stock option grants as of June 30, 2000, 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. Statements of Cash Flows - Non-cash Transactions: Shares of common stock (264,042 in 2000 and 200,880 in 1999), valued at the market price on the date of issuance (approximately $7 million in 2000 and $10 million in 1999), were issued to savings plans of the Company. The estimated issuance values were recognized in other operating expenses during the respective preceding years. The stock issuances were non-cash financing activities and are not reflected in the consolidated condensed statements of cash flows. The changes in current assets, current liabilities and deferred amounts for the period prior to the sale of Texas-Ohio Gas, Inc. for 1999 are reflected in operating activities on the NCE Consolidated Condensed Statement of Cash Flows. General See Note 1. of the Notes to Consolidated Financial Statements in the NCE, PSCo and SPS 1999 Annual Report on Form 10-K for a summary of the companies and their subsidiaries significant accounting policies. 2. Proposed Merger with Northern States Power Company (NCE, PSCo and SPS) On March 24, 1999, NCE and Northern States Power Company ("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. 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 June 30, 2000, 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 21 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 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. 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"). The required applications or submissions to the state utility regulators and the FERC were completed in July 1999. In general, the filings to the state regulators proposed the sharing of cost savings among customers and shareholders for up to five years. All state regulatory approvals have been received. In January 2000, the FERC issued its order granting unconditional approval of the NCE/NSP Merger without requiring further hearings (see Note 4. 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. The waiting period under HSR expired March 1, 2000, effectively approving the NCE/NSP Merger. Final approvals by the SEC are pending. 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 during the third quarter of 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 executive officers and organization of Xcel Energy Inc. have been announced and merger integration plans have been prepared. 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 June 30, 2000 for balance sheet information and at January 1, 1999 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 $33 million each respectively, of deferred nonrecurring merger costs as of June 30, 2000, 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. 22 NOTES TO CONSOLIDATED CONDENSED 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 June 30, 2000 (in millions): NSP NCE Adjustments Pro Forma --- --- ----------- --------- Property, plant & equipment- net $ 4,468 $6,330 $3,904 $14,702 Current assets.......... 1,286 937 - 2,223 Other assets............ 6,172 1,101 (3,970) 3,303 ------- ------ ------ ------- Total assets.......... $11,926 $8,368 $ (66) $20,228 ======= ====== ====== ======= Common equity........... $ 2,761 $2,789 $ (66) $ 5,484 Preferred securities.... 305 294 - 599 Long-term debt.......... 4,839 2,249 - 7,088 ------ ------ ------ ------ Total capitalization.. 7,905 5,332 (66) 13,171 Current liabilities..... 1,953 1,791 - 3,744 Other liabilities....... 2,068 1,245 - 3,313 ------ ------ ------ ------ Total equity and liabilities $11,926 $8,368 $ (66) $20,228 ======= ====== ====== ======= The unaudited pro forma balance sheet information at June 30, 2000 reflects reporting adjustments to conform the presentation of non-regulated property (in property, plant and equipment). Unaudited Summarized Pro Forma Income Statement information for the six months ended June 30, 2000 and 1999 (in millions, except per share data): NSP NCE Adjustments Pro Forma --- --- ----------- --------- 2000 Revenues................ $1,472 $1,816 $ 921 $4,209 Operating income........ 157 367 276 800 Net income*............. 110 186 - 296 Earnings available for common* ............... 108 186 - 294 Basic & diluted earnings per share*......... $0.69 $1.60 - $0.87 1999 Revenues................ $1,402 $1,716 $ 167 $3,285 Operating income........ 154 307 56 517 Net income.............. 63 151 - 214 Earnings available for common ................ 60 151 - 211 Basic & diluted earnings per share.......... $0.40 $1.31 - $0.64 *During the second quarter 2000, SPS, a subsidiary of NCE, recognized an extraordinary charge of $13.7 million, net of tax ($0.12 per share for NCE; $0.04 per share for pro forma), related to the discontinued application of regulatory accounting under SFAS 71 for the generation portion of its business (see Note 1. Summary of Significant Accounting Policies and Note 4. Regulatory Matters). The unaudited pro forma income statement information for the six months ended June 30, 2000 and 1999 reflect reporting adjustments to conform the presentation of nonregulated revenues and earnings from equity investments in operating revenues. 23 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 3. Investment in Yorkshire Power (NCE) Investment Yorkshire Power is a joint venture equally owned by NCI, a subsidiary of NCE, and AEP, which acquired indirectly all of the outstanding ordinary shares of Yorkshire Electricity, a United Kingdom ("U.K.") regional electricity company. NCI accounts for its investment in Yorkshire Power using the equity method. 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. Summarized income statement information for the six months ended June 30, 2000 and 1999, respectively, is presented below (in millions): 2000 1999 ---- ---- Yorkshire Power: Operating revenues....................... $1,171.1 $1,156.7 -------- -------- Operating income......................... 186.1 152.0 -------- ----- Net income............................... $ 64.0 $ 30.2 ======== ======== NCI's equity in earnings of Yorkshire Power $ 32.0 $ 15.1 ======== ======== Yorkshire Power changed its accounting for depreciation, effective January 1, 2000. NCI's equity in earnings for the six months ended June 30, 2000 include approximately $6.5 million (after-tax) related to this change. Also, lower than expected electric energy supply costs contributed positively to the increase in Yorkshire Power's earnings. Distribution and Supply Price Proposals In December 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 its final price proposals for regional electricity distribution and supply businesses. The final proposals for Yorkshire Power's distribution business 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. The final proposal for Yorkshire Power's supply business 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 3.6% on the standard domestic tariff and a nominal price freeze from April 2001 ending in March 2002. On December 20, 1999, Yorkshire Power accepted these 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 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, possibly significantly, in comparison to its current level of earnings. 24 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) Additionally, earnings during the latter half of 2000, as compared to the first half of 2000, are expected to be lower due to an increase in gas prices and competition with higher marketing and other customer related costs. 4. Regulatory Matters (NCE, PSCo and SPS) Electric Utility Matters Restructuring Legislation (NCE and SPS) SPS is an integrated electric utility and serves approximately 385,000 retail customers in portions of the states of Texas, New Mexico, Oklahoma and Kansas. Over 97% of SPS' retail customers, sales and revenues are in Texas and New Mexico. SPS serves wholesale customers, within its service territory, that comprise approximately 30-35% of total electric revenues and Kwh sales. Restructuring legislation has been enacted in Texas and New Mexico, as summarized below. SPS has made and continues to make filings with the PUCT and the NMPRC, as required by each state's legislation, to address critical issues related to SPS' transition plans to retail competition. Retail competition will be implemented in these states on or before January 1, 2002. Texas will institute a 5% pilot program beginning June 2001. State and Federal regulators will be addressing a number of issues related to the implementation of restructuring during 2000 and 2001. SPS is diligently working to satisfy the legislative and regulatory requirements in developing its transition plans. It is anticipated that the implementation approach being developed in Texas, as discussed below, will satisfy the legislative and regulatory requirements in New Mexico and will be consistent with other state and Federal regulations. Overview of New Mexico Legislation On April 8, 1999, New Mexico enacted the Electric Utility Restructuring Act of 1999, which provides for customer choice for residential, small commercial and educational customers beginning January 1, 2001 and all remaining retail customers beginning 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 filings. SPS must separate its utility operations into at least two segments: 1) energy generation and competitive services and 2) transmission and distribution utility 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, in general, is prohibited from providing unregulated services. In January 2000, SPS petitioned the NMPRC to file its transition plan by 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 corporate separation from January 1, 2001 to January 1, 2002. On May 16, 2000, the NMPRC approved: 1) a one-year delay of customer choice for residential, small commercial and educational customers to January 1, 2002, 2) a six-month delay in customer choice for commercial and industrial customers to July 1, 2002, 3) a seven month delay for completion of SPS corporate separation by August 1, 2001 and 4) a utility transition plan filing date of June 1, 2000. Overview of Texas Legislation On June 18, 1999, an electric utility restructuring act ("SB-7") was passed in Texas, which provides for the implementation of 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 through 2001; 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 the 2001 pilot projects. 25 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) Overall, SB-7's objective is to introduce full retail competition into the Texas electric utility industry. SB-7 requires each utility to unbundle its business activities into three separate legal entities: 1) a power generation company, 2) a regulated transmission and distribution company, and 3) a retail electric provider. SB-7 limits the market share that a single generation provider can control to 20% of the generating capacity within a power region. The establishment of a qualified power region with multiple generation suppliers is required under SB-7 in order to implement full retail competition. SB-7 specifically addresses competition in the Texas Panhandle, where SPS operates, recognizing that certain transmission constraints exist within the region that may 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 return any excess earnings indicated in the annual earnings tests to customers during the period January 1, 1999 through December 31, 2001 or alternatively may direct any excess earnings 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). Implementation SPS filed its business separation plan in Texas during the first quarter of 2000 for the unbundling of business activities relating to power generation, transmission, and distribution and retail electric provider services. In summary, SPS has committed 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 undue competitive advantages on NCE's businesses as compared to non-affiliates. In April 2000, the PUCT approved SPS' business separation plan. Overall, the plan provides for the separation of all competitive energy services by September 1, 2000, the establishment of an NCE customer care company, which will provide customer services for all of NCE's operating utilities, and a formal code of conduct and compliance manual for managing affiliate transactions. Prior to any legal separation and unbundling, SPS will be required to address the provisions limiting or otherwise affecting such activities contained in its first mortgage bond indenture. SPS has arranged interim financing, as approved by the NMPRC, to enable SPS to make open market purchases, and to complete a tender offer and the monetary defeasance of all outstanding First Mortgage Bonds. Subject to all required approvals and indebtedness restrictions, it is anticipated that all generation-related and certain other assets and liabilities will be transferred at net book value to newly-formed affiliates in accordance with SPS' business separation plan by January 1, 2001 (approximately 50% of SPS' assets). It is expected that SPS and its affiliates will be capitalized consistent with their respective business operations. On April 18, 2000, SPS entered into a Stipulation with the staff of the PUCT and other significant parties to the NCE/NSP Merger docket, which was filed with the PUCT, and among other things, specifically addresses SPS implementation plans to meet the requirements of the Texas deregulation legislation. In summary, the Stipulation provides for the implementation of full retail customer choice by SPS in its Texas service region, including the future divestiture of certain SPS generation assets. Subject to certain market conditions, SPS has agreed to divest 1,750 megawatts, at a minimum, by January 1, 2002 and has specifically identified the plants that it would sell in connection with additional divestitures required to establish a qualified power region. For SPS to comply with this qualified power region requirement and to implement full customer choice in Texas, a minimum of 2,843 megawatts and a maximum of 3,184 megawatts of existing power generation assets or capacity must be sold to third party non-affiliates. SPS has committed to complete these divestitures by January 1, 2006. These divestitures represent approximately 64-71% of the generation capacity owned by SPS and its affiliates. SPS expects some or all of these divestitures to be completed by the end of 2001. Assuming these divestitures are completed, approximately 1,281 to 1,608 megawatts of generation capacity in Texas and New Mexico would be retained by the Company through an affiliated power generation company. Management believes that these divestitures are in response to the legal requirements of SB-7 and that these divestitures can occur consistent with the pooling-of-interests accounting requirements. The Stipulation provides that if the SEC determines that the divestitures would prohibit the pooling-of-interest accounting for the Merger, the divestitures would be delayed. The Stipulation also resolves certain issues related to the proposed merger between NCE and NSP and concludes that such merger is in the public interest. On May 30, 2000, the PUCT issued a rate order approving the 26 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) Stipulation. SPS has committed, contingent upon closing of the NCE/NSP Merger, 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 systems of multiple owners in the central United States. SPS filed a rate case on March 31, 2000 to set the rates for the transmission and distribution services in Texas, which are to be unbundled and implemented on January 1, 2002. The Company requested recovery of all jurisdictional costs associated with restructuring in Texas. Hearings and a final rate order are not expected before 2001. On June 1, 2000, SPS filed its transition plan with the NMPRC. The Company filed to establish rates for the transmission and distribution business in New Mexico, requesting approval of its corporate restructuring/separation and other associated matters. Hearings are anticipated to be held in the fourth quarter of 2000. On July 24, 2000, SPS commenced a fixed spread tender offer to purchase for cash the remaining $294.9 million total principal amount of five series of SPS' First Mortgage Bonds. Under the terms of the offer, SPS will purchase the remaining bonds of each series at a price [determined by the yield to maturity for bonds that are not redeemable and to the first redemption date for bonds that are redeemable], at the time of tender, equal to the sum of the yield on the applicable referenced U.S. Treasury Note plus a fixed spread. The purchase offer expired on August 4, 2000 with approximately 92% of the outstanding bonds purchased. SPS currently intends that all bonds which are not tendered or otherwise acquired by SPS (approximately 8% of the total outstanding First Mortgage Bonds) will be defeased by the end of 2000. The bonds will be defeased by deposting with the trustee cash sufficient to pay the principal amount of the outstanding First Mortgage Bonds at maturity or the first redemption date, the applicable redemption date, the applicable redemption premium at the first redemption date and accrued interest to maturity or the first redemption date. Upon defeasance, all obligations of SPS under its Indenture and the First Mortgage Bonds would be discharged. Financial Reporting Matters With the issuance of a final written order by the PUCT on May 30, 2000 addressing the implementation of electric utility restructuring for SPS, management believes that sufficient details of a transition plan to competition now exist allowing for a reasonable determination of the impacts of the deregulation of SPS' generation business. Accordingly, SPS discontinued the application of SFAS 71 for that portion of its business during the second quarter of 2000. SPS applied the provisions of SFAS No. 101, "Regulated Enterprises - Accounting for the Discontinuation of SFAS 71" and Emerging Issues Task Force Consensus No. 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101" for SPS' electric generation business. While the above rate order only addresses Texas operations, SPS plans to pursue a similar strategy to implement the restructuring legislation enacted in New Mexico and believes that all of its generation will ultimately be deregulated. Accordingly, SPS has applied SFAS 101 to all jurisdictions of its generation business. SPS' transmission and distribution business continues to meet the requirements of SFAS 71, as that business remains regulated. During the second quarter 2000, SPS wrote-off its generation related regulatory assets and other deferred costs totaling approximately $19 million. This resulted in an after-tax extraordinary charge of approximately $13.7 million against the earnings of SPS and NCE. The total impacts of deregulation may be affected by the results of future state and Federal regulatory proceedings prior to actual implementation of full competition, estimated to begin on January 1, 2002. Additionally, there may be other significant financial implications of implementing SB-7 and electric restructuring in New Mexico. These implications include, but are not limited to, the refinancing of securities, investments in information technology, establishing an independent operation of the electric transmission systems, implementing the procedures to govern affiliate transactions, the pricing of unbundled energy services and the regulatory recovery of incurred costs related to these issues. Based on current estimates these incurred costs could be as much as $75 million. 27 The resolution of these matters may have a significant financial impact on the financial position, results of operations and cash flows of SPS and NCE. 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; - a Quality Service Plan ("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 and the first six months of 2000. In April of each year following the measurement period, PSCo files 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. The $15 million refund obligations for 1997 were finalized and refunded to customers. PSCo has recorded customer refund obligations for its earnings test of approximately $11 million for 1998 and $16 million for 1999. During the six months ended June 30, 2000, PSCo has recorded an estimated customer refund obligation of approximately $6 million (excluding adjustments to true-up prior year estimates). In June 2000, an Administrative Law Judge ("ALJ") issued a Recommended Decision on the unresolved issues related to the 1998 earnings test. PSCo filed its brief on exceptions with the CPUC, asking the Commission to disregard the ALJ's Recommended Decision and to issue an order adopting the Company's position. Final CPUC decisions related to the refund obligations for 1998 and 1999 are pending. In 1999, PSCo did not achieve all of the minimum service performance measures under the QSP, due in part to circumstances associated with extreme weather conditions. PSCo recorded an estimated refund obligation of approximately $3.6 million in 1999. PSCo has filed its report for the year ended 1999 with the CPUC addressing the calculated amount of the refund. During the second quarter of 2000, the CPUC staff reviewed the report for the calendar year 1999 and calculated a refund amount of approximately $4.8 million. A final decision on the 1999 refund amount is pending. 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. Various provisions of this regulatory plan were extended and modified as discussed in "NCE/NSP Merger Rate Filings". 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 fuel and purchased power costs, the efficiency of the use of such fuel and purchased power, fuel acquisition and management policies and purchase 28 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) power commitments. SPS is required to file an application for the PUCT 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. In July 2000, the PUCT approved a settlement agreement between SPS and the General Counsel of the PUCT, which provided for the recovery of substantially all fuel costs, including approximately $12.1 million of the Texas retail jurisdictional portion of the Thunder Basin judgment. On June 30, 2000, SPS filed an application for the PUCT to retrospectively review the operations of a utility's electricity generation and fuel management activities. In this application, SPS filed its reconciliation for the generation and fuel management activities totaling approximately $419 million, for the period from January 1998 through December 1999. Final approval is pending. SPS filed an emergency application on July 21, 2000, seeking to increase its fixed fuel factor, to be effective September 1, 2000. SPS was approximately $18 million under-recovered in fuel costs associated with the Texas retail jurisdiction through May 2000 as a result of recent increases in natural gas costs. SPS has committed to file an additional application seeking to surcharge its Texas retail customers the under-recovered amount above including any related interest. 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. Cheyenne Rate Case In August of 1999, Cheyenne filed a combined gas and electric rate case with the WPSC requesting an increase in the annual 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. 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. All regulatory approvals have been received in all required states, including Wyoming, Kansas and Oklahoma. Following is a brief summary of the merger rate proceedings in Colorado, Texas 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: - PSCo will reduce its retail electric rates by $11 million annually for the two-year period from July 1, 2000 through June 30, 2002; 29 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) - 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 issued a final order approving the NCE/NSP Merger on April 24, 2000. Texas On April 18, 2000, SPS entered into a Stipulation, as discussed previously in "Restructuring Legislation", resolving certain issues related to the NCE/NSP Merger and concluding that such proposed merger is in the public interest. The major provisions of the regulatory plan not previously discussed include the following: o guaranteed merger savings credits of $400,000 per month (effective July 1, 2000) and the amortization of merger costs over the period from the effective date of the merger through December 31, 2005; o retention of the current fuel cost recovery mechanism to pass along fuel cost savings to retail customers and; o an agreement to comply with various new service quality and reliability standards, covering service installations and upgrades, light replacements, customer service call center and electric service reliability. The PUCT issued the final order approving the NCE/NSP Merger on May 30, 2000. 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 (totaling approximately $3.5 million) - 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 cost recovery mechanism to pass along fuel cost savings to retail customers. - SPS will not pass to customers any negative rate impacts of the NCE/NSP Merger. The NMPRC issued the final order on May 9, 2000 approving the NCE/NSP Merger. Gas Utility Matters PSCo Rate Cases On July 17, 2000, PSCo filed a retail rate case with the CPUC requesting an annual increase in its jurisdictional gas department revenues of approximately $40 million. The request for a rate increase reflects revenues for additional plant investment, a 12.5% return on equity, new depreciation rates, and recovery of the dismantlement costs associated with the Leyden Gas Storage facility, as discussed below. Hearings have not yet been scheduled. 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. On June 8, 1999, the CPUC approved an increase in 30 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) base rates of approximately $15 million with an 11.25% return on equity, effective July 1, 1999. PSCo was also allowed recovery of prudently incurred year 2000 costs 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 and the imputation of merger savings. PSCo filed a petition with the Colorado Supreme Court on January 31, 2000 to appeal the Denver District Court's decision. PSCo filed opening briefs with the Colorado Supreme Court on June 23, 2000. In the event that PSCo is not successful in its appeal(s), including pursuing regulatory recovery, these amounts related to SFAS 112 costs will be written off. Planned Closure of the Leyden Underground Gas Storage Facility On April 14, 2000, PSCo filed an application with the CPUC requesting authority to shut down and abandon its Leyden Natural Gas Underground Storage Facility located northwest of the City of Arvada, Colorado during 2001, after 40 years of operation. The application seeks approval of a formal decommissioning plan. The plan outlines PSCo's proposal to plug and abandon the wells that are currently being used to inject and withdraw gas from the mine and requests approval of the costs to decommission and shut down the facility, which are currently estimated at approximately $8.6 million. In June 2000, an ALJ determined that the notice was adequate and the application was proper. Hearings and testimony are scheduled for the third quarter of 2000. PSCo has requested recovery of these costs and its remaining plant investments in the retail rate case filed in July 2000. 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 related to this matter. 5. Commitments and Contingencies (NCE, PSCo and SPS) Environmental Issues The Company and its subsidiaries are subject to various environmental laws, including regulations governing air and water quality, 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 at several sites. In many situations, PSCo is pursuing or intends to pursue insurance claims and believes it will recover some 31 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 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. 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. Other Environmental Matters PSCo has obtained all necessary approvals 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 levels required under the Clean Air Act Amendments of 1990. The cost of these controls will be recovered through rates from Colorado customers. Hayden Steam Electric Generating Station In 1996, PSCo and the other joint owners of Hayden Station reached an agreement, enforceable by U.S. District Court through a Consent Decree, resolving violations alleged in complaints filed by a conservation organization, the Colorado Department of Public Health and Environment ("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. If the Hayden Station remains in compliance with the settlement until early 2001, the Hayden owners may petition the U.S. District Court to release jurisdiction over the Consent Decree. 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 the Clean Air Act requirement 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 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. Tax Matters PSRI, a subsidiary of PSCo, owns and manages permanent life insurance policies on certain past and present employees. These corporate owned life insurance ("COLI") policies were entered into prior to July 1, 1986. In 1996, Congress passed legislation to phase out the tax benefits associated 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. In March 2000, the IRS amended its original adjustment to also disallow the interest deductions taken in tax years 1995 through 1997. The total disallowance of interest expense deductions for the five years as proposed by the IRS is approximately $175 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 loans on it's income tax returns for subsequent years. Management believes that PSRI's tax deduction of interest 32 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 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. 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. 6. Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debentures (NCE, PSCo and SPS) In May 1998, PSCo Capital Trust I, a wholly-owned trust of PSCo, issued 7,760,000 shares of its 7.60% Trust Originated Preferred Securities for $194 million. The sole asset of the trust is $200 million principal amount of PSCo's 7.60% Deferrable Interest Subordinated Debentures, due June 30, 2038. Holders of the securities are entitled to receive quarterly dividends at an annual rate of 7.60% of the liquidation preference value of $25. The securities are redeemable at the option of PSCo on and after May 11, 2003 at 100% of the principal amount outstanding plus accrued interest. In addition to PSCo's obligations under the Subordinated Debentures, PSCo has agreed, pursuant to a guarantee issued to the trust and the provisions of the trust agreement establishing the trust, 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. 7. 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. Revenues from operating segments below the quantitative thresholds are included in the "All Other" category. Those primarily include a company involved in non-regulated energy 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. 33 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 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/ Three months ended: Electric Gas All Unallocated Consolidated June 30, 2000 Utility Utility International Other Amounts Total ------- ------- ------------- ----- ------- ----- Revenues: External customers $715,104 $140,199 $ - $21,549 $ - $ 876,852 Intersegment 122 3,117 - 31,247 - 34,486 Segment profit 64,399 844 5,829 13,621 (3,770) 80,923 June 30, 1999 Revenues: External customers $607,438 $144,131 $ - $49,265 $ - $ 800,834 Intersegment 107 1,699 - 33,352 - 35,158 Segment profit 53,823 (362) (65) (1,221) (2,940) 49,235 Six months ended: Electric Gas All Unallocated Consolidated June 30, 2000 Utility Utility International Other Amounts Total ------- ------- ------------- ----- ------- ----- Revenues: External customers $1,348,226 $415,356 $ - $51,940 $ - $1,815,522 Intersegment 178 5,887 - 43,713 - 49,778 Segment profit 120,369 25,167 27,913 20,591 (7,789) 186,251 June 30, 1999 Revenues: External customers $1,201,584 $403,514 $ - $110,431 $ - $1,715,529 Intersegment 262 3,658 - 49,994 - 53,914 Segment profit 118,128 17,103 18,075 3,378 (6,149) 150,535
PSCo: PSCo has two reportable segments: electric utility and gas utility. The electric utility segment consists primarily of the activities of PSCo's regulated operations that provide wholesale and retail electric service in Colorado. The gas utility segment consists primarily of the activities of PSCo's regulated gas operations in Colorado. 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, a finance company that finances certain of PSCo's current assets and a steam production segment serving the Denver area. 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/ Three months ended: Electric Gas All Unallocated Consolidated June 30, 2000 Utility Utility Other Amounts Total ------- ------- ----- ------- ----- Revenues from external customers $ 449,230 $138,861 $ 1,988 $ - $590,079 Segment profit 52,316 783 7,822 - 60,921 June 30, 1999 Revenues from external customers $ 373,690 $140,895 $ 1,580 $ - $516,165 Segment profit 31,439 (441) 3,822 - 34,820
34
Six months ended: Electric Gas All Unallocated Consolidated June 30, 2000 Utility Utility Other Amounts Total ------- ------- ----- ------- ----- Revenues from external customers $855,325 $409,582 $ 5,722 $ - $1,270,629 Segment profit 92,786 24,858 12,036 - 129,680 June 30, 1999 Revenues from external customers $755,012 $395,066 $ 4,957 $ - $1,155,035 Segment profit 73,391 16,781 10,587 - 100,759
SPS: SPS operates in the regulated electric utility industry providing wholesale and retail electric service in Texas, New Mexico, Kansas and Oklahoma. Revenues from external customers for this reportable segment were $256.6 million and $224.1 million for the three months ended June 30, 2000 and 1999, respectively. Revenues from external customers for this reportable segment were $472.9 million and $426.7 million for the six months ended June 30, 2000 and 1999, respectively. 8. Management's Representations (NCE, PSCo and SPS) In the opinion of the registrants, the accompanying unaudited consolidated condensed financial statements for NCE, PSCo and SPS include all adjustments necessary for the fair presentation of the financial position of the Company and its subsidiaries at June 30, 2000 and December 31, 1999 and the results of operations for the three and six months ended June 30, 2000 and 1999 and cash flows for the six months ended June 30, 2000 and 1999. The unaudited consolidated condensed financial information and notes thereto should be read in conjunction with the consolidated financial statements and notes included in the 1999 combined Annual Report on Form 10-K for NCE, PSCo and SPS. Because of seasonal and other factors, the results of operations for the six months ended June 30, 2000 should not be taken as an indication of earnings for all or part of the balance of the year. 35 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO NEW CENTURY ENERGIES, INC.: We have reviewed the accompanying consolidated condensed balance sheet of New Century Energies, Inc. (a Delaware corporation) and subsidiaries as of June 30, 2000, and the related consolidated condensed statements of income, and shareholders' equity for the three and six month periods ended June 30, 2000 and 1999, and the consolidated condensed statements of cash flows for the six month periods ended June 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of New Century Energies, Inc. and subsidiaries as of December 31, 1999, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended (not presented separately herein), and in our report dated February 15, 2000, we expressed an unqualified opinion on these financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Denver, Colorado, August 4, 2000. 36 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO PUBLIC SERVICE COMPANY OF COLORADO: We have reviewed the accompanying consolidated condensed balance sheet of Public Service Company of Colorado (a Colorado corporation) and subsidiaries as of June 30, 2000, and the related consolidated condensed statements of income for the three and six month periods ended June 30, 2000 and 1999, and the consolidated condensed statements of cash flows for the six month periods ended June 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet and statement of capitalization of Public Service Company of Colorado and subsidiaries as of December 31, 1999, and the related consolidated statements of income, shareholder's equity and cash flows for the year then ended (not presented separately herein), and in our report dated February 15, 2000, we expressed an unqualified opinion on these financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Denver, Colorado, August 4, 2000. 37 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO SOUTHWESTERN PUBLIC SERVICE COMPANY: We have reviewed the accompanying condensed balance sheet of Southwestern Public Service Company (a New Mexico corporation) as of June 30, 2000, and the related condensed statements of income for the three and six month periods ended June 30, 2000 and 1999, and the condensed statements of cash flows for the six month periods ended June 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the balance sheet and statement of capitalization of Southwestern Public Service Company as of December 31, 1999, and the related statements of income, shareholder's equity and cash flows for the year then ended (not presented separately herein), and in our report dated February 15, 2000, we expressed an unqualified opinion on these financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Denver, Colorado, August 4, 2000. 38 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (NCE, PSCo and SPS) NCE's Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended June 30, 2000 Compared to the Three Months Ended June 30, 1999 NCE/NSP Merger On March 24, 1999, the Company and NSP entered into an Agreement and Plan of Merger providing for a strategic business combination of the companies. Consummation of this "merger of equals" is subject to certain closing conditions and the obtaining of applicable regulatory approvals. All required State and Federal regulatory agency authorizations have been received, except for the approval by the SEC and Federal Communication Commission. The Company expects that the SEC will make its ruling on the NCE/NSP Merger in the third quarter of 2000 and it is expected the NCE/NSP Merger will be completed during August 2000. The name of the merged company will be Xcel Energy Inc. The combined company is anticipated to be one of the top 10 largest gas and electric energy companies in the U.S. Xcel Energy Inc. will serve approximately 3.1 million electricity customers and 1.6 million natural gas customers in portions of twelve states. See Note 2. Proposed Merger with Northern States Power Company in Item 1. FINANCIAL STATEMENTS. Earnings Earnings per share (basic and diluted) were $0.69 ($0.81 per share before the extraordinary item) for the second quarter of 2000 as compared to $0.43 per share (basic and diluted) for the second quarter of 1999. The increase is primarily attributable to higher wholesale electric marketing and trading activities as the Company successfully marketed excess system power in the western U.S. at prices substantially higher than normal. Continued customer growth in Colorado and the on-going cost containment efforts also contributed to the higher earnings in 2000. Equity in earnings of Yorkshire Power increased as a result of lower than expected electricity supply prices in the United Kingdom. However, Yorkshire Power's future contribution to earnings is expected to decline due to the distribution and supply price reductions which became 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. During the second quarter of 2000, SPS discontinued the application of regulatory accounting under SFAS 71 for the generation portion of its business, and recognized a $13.7 million extraordinary charge, net of tax. The charge was recorded following a PUCT rate order addressing the implementation of electric utility restructuring for SPS. See Note 1. Summary of Significant Accounting Policies and Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS. Electric Operations The following table details the change in electric operating revenues and energy costs for the second quarter of 2000 as compared to the same period in 1999 (in thousands). Increase -------- Electric operating revenues: Retail................................................ $45,689 Wholesale............................................. 30,780 Other (including unbilled revenues)................... 31,358 ------- Total revenues...................................... 107,827 Fuel used in generation............................... 14,944 Purchased power....................................... 49,135 ------- Net increase in electric margin..................... $43,748 ======= 39 The following table compares electric sales by major customer classes for the second quarter of 2000 and 1999. Millions of Kwh Sales 2000 1999 % Change * ---- ---- ---------- Residential................................ 2,359 2,244 5.1% Commercial and industrial.................. 6,968 6,676 4.4 Public authority........................... 198 203 (2.3) ----- ----- Total retail............................. 9,525 9,123 4.4 Wholesale.................................. 4,041 3,030 33.3 ----- ----- Total...................................... 13,566 12,153 11.6 ====== ====== Power marketing and trading................ 1,773 2,953 ** ===== ===== * Percentages are calculated using unrounded amounts. ** Percentage change is significant, but presentation of the amount is not meaningful. Electric margin increased $43.7 million in the second quarter of 2000, when compared to the second quarter of 1999, primarily due to the favorable results from the wholesale energy marketing and trading business, which contributed an additional $21.6 million to electric margin. The increase resulted from the Company's ability to market excess system power in the western U.S. at prices substantially higher than normal. The future performance of the wholesale energy marketing and trading business is dependent upon several factors including, market conditions, plant operational performance, availability of electric energy, implementation of deregulation and other factors. In addition, higher retail sales of 4.4% resulting primarily from customer growth of approximately 2.5% and the impacts of more normal weather served to increase margin. Mild, wet weather in the second quarter of 1999 reduced loads for air conditioning and irrigation. Increased fuel and purchased power costs to serve customer load growth have resulted in higher cost sharing under PSCo's ICA. 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 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). PSCo has an ICA, which allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders. Fuel used in generation expense increased $14.9 million or 9.8% during the second quarter of 2000, as compared to the same quarter in 1999, primarily due to increased generation levels at PSCo and SPS and higher gas costs for generation at PSCo's Fort St. Vrain generating station and various SPS plants. Purchased power expense increased $49.1 million or 37.6% during the second quarter of 2000, as compared to the same quarter in 1999, primarily due to increased costs related to wholesale energy marketing activities and purchased power capacity and energy costs, including option premium charges for stand-by capacity to serve retail customers. Gas Operations The following table details the change in gas revenues and gas purchased for resale for the second quarter of 2000, as compared to the same period in 1999 (in thousands). Increase (Decrease) ------------------- Revenues from gas sales (including unbilled revenues). $(35,667) Gas purchased for resale.............................. (31,942) ------- Net decrease in gas sales margin..................... (3,725) Transportation revenues............................... 1,854 ------- Decrease in net gas margin........................... $(1,871) ======= 40 The following table compares gas Dth deliveries by major customer classes for the second quarter of 2000 and 1999. Millions of Dth Deliveries 2000 1999 % Change * ---- ---- ---------- Residential................................ 17.3 19.1 (9.7)% Commercial................................. 8.1 9.3 (12.9) ----- ----- Total sales.............................. 25.4 28.4 (10.6) Transportation............................. 31.5 28.1 12.1 ----- ----- Total.................................... 56.9 56.5 0.7 ===== ===== === Non-regulated gas marketing and trading.... 85.4 40.5 ** ===== ===== * Percentages are calculated using unrounded amounts. ** Percentage change is significant, but presentation of the amount is not meaningful. Gas sales margin decreased during the second quarter of 2000, when compared to the second quarter of 1999, primarily due to warmer spring weather in Colorado during the second quarter of 2000. The decrease in margin was offset, in part, by higher gas rates, effective July 1, 1999, resulting from PSCo's 1998 rate case and the favorable impacts of customer growth of approximately 3.7%. Revenues from gas sales decreased $27.6 million related to non-regulated gas marketing and trading activities, due in part to the sale of Texas Ohio Gas in 1999. Gas transportation revenues increased approximately $1.8 million during the second quarter of 2000, when compared to the second quarter of 1999, primarily due to higher deliveries at PSCo. PSCo and Cheyenne have in place GCA mechanisms for natural gas sales, which recognize the majority of the effects of changes in the cost of gas purchased for resale and adjusts revenues to reflect such changes in cost on a timely basis. As a result, the changes in revenues associated with these mechanisms during the second quarter of 2000, as compared to the first quarter of 1999, 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 $2.0 million primarily due to an increase in revenue from engineering, design and construction management and energy management and consulting services. Equity earnings from Yorkshire Power increased $10.1 million over 1999 primarily due to lower than expected prices for its electric supply costs in the United Kingdom and operating expenses due to staff reductions resulting from an aggressive cost reduction program (see Note 3. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). Non-Fuel Operating Expenses and Other Income and Deductions Other operating and maintenance expense-regulated decreased $4.1 million primarily due to lower costs at PSCo including lower gas distribution operation costs, lower steam generation maintenance and lower electric distribution maintenance costs. Other operating and maintenance expense-non-regulated decreased $5.7 million primarily due to lower energy management and consulting services, offset, in part, by increased costs in providing engineering, design and construction management. Depreciation and amortization increased $3.9 million during the second quarter of 2000, as compared to the same period of 1999, primarily due to the depreciation of property additions. Taxes other than income taxes decreased approximately $4.7 million primarily due to lower business and utility property tax accruals in Colorado. 41 Income taxes increased $22.6 million during the second quarter of 2000, when compared to the same quarter in 1999, primarily due to higher pre-tax income in the current period and higher Colorado state and foreign tax credits recognized in 1999. Interest charges increased $3.9 million during the second quarter of 2000, when compared to the same quarter in 1999, primarily due to costs to finance capital expenditures, including higher interest costs on short-term debt. Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999 Earnings Available for Common Stock Earnings per share (basic and diluted) were $1.60 ($1.72 per share before the extraordinary item) for the first six months of 2000 as compared to $1.31 per share (basic and diluted) for the first six months of 1999. The increase is primarily attributable to the Company's ability to successfully market excess system power in the western U.S. at prices substantially higher than normal. Continued customer growth in Colorado, the on-going cost containment efforts and higher equity in earnings of Yorkshire Power also contributed to the higher earnings in 2000. During the second quarter of 2000, SPS discontinued the application of regulatory accounting under SFAS 71 for the generation portion of its business, and recognized a $13.7 million extraordinary charge, net of tax. The charge was recorded following a PUCT rate order addressing the implementation of electric utility restructuring for SPS. See Note 1. Summary of Significant Accounting Policies and Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS. Electric Operations The following table details the change in electric operating revenues and energy costs for the six months ended June 30, 2000, as compared to the same period in 1999 (in thousands). Increase -------- Electric operating revenues: Retail....................................... $47,511 Wholesale.................................... 63,657 Other (including unbilled revenues).......... 35,250 ------- Total revenues.............................. 146,418 Fuel used in generation....................... 23,990 Purchased power............................... 84,520 ------- Net increase in electric margin............. $37,908 ======= The following table compares electric Kwh sales by major customer classes for the six months ended June 30, 2000 and 1999. Millions of Kwh Sales 2000 1999 % Change * ---- ---- ---------- Residential ..................... 5,112 4,956 3.2% Commercial and Industrial ....... 13,959 13,336 4.7 Public Authority ................ 400 384 4.1 ------ ------ Total Retail................... 19,471 18,676 4.3 Wholesale ....................... 7,858 5,787 35.8 ------ ------ Total............................ 27,329 24,463 11.7 ====== ====== Power Marketing and Trading...... 8,403 4,434 ** ====== ====== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful. Electric margin increased in the first six months of 2000, when compared to the same period of 1999, primarily due to the favorable results from the wholesale energy marketing and trading business, which contributed 42 an additional $22.6 million to electric margin. The Company was able to market excess system power in the western U.S. at prices substantially higher than normal. The future results of the Company's wholesale marketing and trading business may be impacted by market conditions and other factors. Higher retail sales of 4.3% resulting primarily from customer growth of approximately 2.5% favorably impacted margin. Increased fuel and purchased power cost have resulted in higher cost sharing under PSCo's ICA. The ICA is a cost adjustment mechanism that allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders. Provisions for estimated customer refunds in connection with the sharing of earnings in excess of 11% return on equity were approximately $8.4 million and $6.6 million in the first six months ended June 30, 2000 and 1999, respectively (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). During 1999, changes were made in the billing cycles of various retail and wholesale customers in anticipation of implementing a new customer information system which resulted in lower billed Kwh sales and higher unbilled revenues. Fuel used in generation expense increased approximately $23.9 million of 8.4% during the first six months of 2000, as compared to the same period in 1999, primarily due to increased generation levels at PSCo and SPS and higher gas costs for generation at Fort St. Vrain generating station and various SPS plants. Purchased power expense increased $84.5 million or 32.8% during the first six months of 2000, as compared to the same period in 1999, primarily due to increased energy marketing and electric trading activities. In addition, the increase resulted in part from an extended outage at one of PSCo's generating stations and increased purchased power capacity and energy costs, including option premium charges for stand-by capacity. There was an increase at SPS in capacity costs of $9 million related to new purchased power contracts. Gas Operations The following table details the change in revenues from gas sales and gas purchased for resale for the first six months of 2000, as compared to the same period in 1999 (in thousands). Increase (Decrease) ------------------- Revenues from gas sales (including unbilled revenues) $(57,979) Gas purchased for resale........................ (64,268) ------- Net increase in gas sales margin.............. 6,289 Transportation revenues......................... 3,066 ------ Increase in net gas margin.................... $9,355 ====== The following table compares gas Dth deliveries by major customer classes for the first six months of 2000 and 1999. Millions of Dth Deliveries 2000 1999 % Change * ---- ---- ---------- Residential................................ 55.4 58.1 (4.7)% Commercial................................. 25.2 27.4 (8.1) ----- ----- Total sales.............................. 80.6 83.5 (3.5) Transportation............................. 65.4 59.6 9.7 ----- ----- Total.................................... 146.0 145.1 0.6 ===== ===== === Non-regulated gas marketing and trading.... 164.5 80.0 ** ===== ===== * Percentages are calculated using unrounded amounts. ** Percentage change is significant, but presentation of the amount is not meaningful. Gas sales margin increased during the first six months of 2000, when compared to the first six months of 1999, primarily due to higher base gas rates effective July 1, 1999, resulting from PSCo's 1998 gas rate case and the favorable impacts of customer growth of 3.7%. The increase in margin was offset, in part, by warmer winter/spring weather during the first six months of 2000 as it was approximately 6% warmer than the first six 43 months of 1999. Although non-regulated gas marketing and trading sales increased significantly, the margin on such sales decreased slightly when compared to prior year. Gas transportation revenues increased $3.1 million during the first six months of 2000, compared to the first six months of 1999, primarily due to higher deliveries and higher transportation rates effective July 1, 1999. The growth in the transport business continues to be impacted by the shifting of various commercial customers to transport customers and additional capacity on a leased gas pipeline. PSCo has in place a GCA mechanism for natural gas sales, which recognizes the majority of the effects of changes in the cost of gas purchased for resale and adjusts revenues to reflect such changes in costs on a timely basis. As a result, the changes in revenues associated with these mechanisms during the first six months of 2000, as compared to the first six months of 1999, had little impact on net income. However, the fluctuations in gas sales impacts 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. Other Operating Revenues and Equity in Earnings of Unconsolidated Subsidiaries Other operating revenues increased approximately $8.5 million primarily due to an increase in revenue from engineering, design and construction management and energy management and consulting services. Equity earnings from Yorkshire Power increased $16.9 million over 1999 primarily due to a stronger performance in the supply business resulting from lower electricity supply prices and lower operating cost due to an aggressive cost reduction program, and a change in its accounting for depreciation, effective January 1, 2000. NCI's equity earnings for the six months ended June 30, 2000, includes approximately $6.5 million (after-tax) related to the change in accounting (see Note 3. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). Non-Fuel Operating Expenses and Other Income and Deductions Other operating and maintenance expense-regulated was comparable with the prior year. The Company experienced lower electric and gas distribution maintenance expenses and lower steam generation maintenance expenses. The decrease was offset by higher steam generation operation costs and higher electric transmission costs. Other operating and maintenance expense-non-regulated decreased $3.2 million during the first six months of 2000, as compared to the same period in 1999, primarily due to lower energy management and consulting services, offset, in part, by increased costs in providing engineering, design and construction management. Depreciation and amortization increased $6.6 million during the first six months of 2000, as compared to the second quarter 1999, primarily due to the depreciation of property additions. Taxes other than income taxes decreased approximately $8.1 million during the first six months of 2000, as compared to the same period in 1999, primarily due to lower business and utility property taxes in Colorado. Income taxes increased approximately $27.9 million during the first six months of 2000, as compared to the same period in 1999, due to higher pretax income in the current period and the favorable impact of deducting certain prior year severance costs in 1999. Interest charges increased approximately $9.9 million during the first six months of 2000, as compared to the same period in 1999. The increase is primarily attributable to costs to finance capital expenditures, including higher interest costs on short-term debt. In July 1999, PSCo issued $200 million of 6 7/8% Series A Senior Notes, due in July 2009. 44 Other Market Risks NCE and its subsidiaries are exposed to market risks, including changes in commodity prices, interest rates and currency exchange rates as fully disclosed in the NCE, PSCo and SPS 1999 Annual Report on Form 10-K. NCE's regulated subsidiaries have limited exposure to commodity price and interest rate risk due to cost-based rate regulation. Exposure to currency exchange risk is related to NCE's investment in Yorkshire Power (see Note 3. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). There have been no material changes in the market risk exposures that affect the quantitative and qualitative disclosures presented as of December 31, 1999 in the 1999 Annual Report on Form 10-K. In connection with the deregulation of the electricity industry in the states of Texas and New Mexico, SPS is in the process of refinancing its First Mortgage Bonds. As a result, SPS will remain exposed to interest rate risk for its generation business. SPS' fuel adjustment clauses are expected to remain in effect through December 31, 2001, thereby limiting the short-term exposure to commodity price risk. Commitments and Contingencies Issues related to regulatory and environmental matters are discussed in Notes 4 and 5 in Item 1. FINANCIAL STATEMENTS. These matters and the future resolution thereof may impact the Company's future results of operations, financial position or cash flows. Common Stock Dividend The Board of Directors approved a $0.58 per share dividend payable to shareholders of the Company for the second quarter of 2000. The Company's common stock dividend level is dependent upon the Company's financial position, results of operations, cash flows and other factors, including the proposed merger with NSP. The Board of Directors of the Company will continue to evaluate the common stock dividend on a quarterly basis. Liquidity and Capital Resources Cash Flows -Six Months Ended June 30 2000 1999 Decrease ----- ---- -------- Net cash provided by operating activities (in millions) ......... $248.4 $314.6 $(66.2) Cash provided by operating activities decreased during the first six months of 2000, when compared to the same period in 1999, primarily due to NCE/NSP Merger costs and development costs of non-regulated business activities. 2000 1999 Decrease ---- ---- -------- Net cash used in investing activities (in millions) ......... $(252.3) $(295.7) $43.4 Cash used in investing activities decreased during 2000, when compared to 1999, primarily due to a decrease in the level of construction expenditures. 2000 1999 Increase ---- ---- -------- Net cash used in financing activities (in millions) ......... $ (43.8) $(3.4) $(40.4) Cash used in financing activities increased during 2000, when compared to 1999, primarily due more long-term debt financing in 1999. During the second quarter of 1999, PSCo refinanced approximately $48.75 million to take advantage of lower interest rates and SPS issued $100 million of senior notes used initially for the repayment of short-term debt. 45 Financing Activities Long-Term Debt During the first and second quarters of 2000, SPS repurchased in the open market approximately $27 million and $58 million, respectively, of its First Mortgage Bonds. On July 24, 2000, SPS announced the commencement of a tender offer for all of its outstanding First Mortgage Bonds ($294.9 million). Settlement of bonds tendered will occur no later than August 9, 2000. Any bonds not tendered or otherwise acquired by SPS are expected to be defeased in accordance with SPS' First Mortgage Indenture by the end of 2000 (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS.) During the first quarter of 1999, PSCo refinanced a portion of its pollution control bonds in the amount of $48.75 million to take advantage of lower interest rates. The interest rate on the new bonds is 5.1% compared to 5 7/8% on $21.5 million and 7 3/8% on $27.25 million. In addition, SPS issued $100 million of 6.2% unsecured senior notes due March 1, 2009. The proceeds were used initially for the repayment of certain short-term debt, pending the retirement of $90 million of the SPS 6 7/8% First Mortgage Bonds due December 1, 1999 and for other general corporate purposes. On June 29, 1999, PSCo filed a registration statement to issue up to $500 million of unsecured debt. On July 16, 1999, PSCo issued $200 million of unsecured senior notes, at an interest rate of 6 7/8%, due July 15, 2009. Proceeds were used for general corporate purposes including capital expenditures, repayment of short-term debt and refunding of long-term debt on maturity or otherwise. Bank Lines of Credit PSCo and its subsidiary, PSCCC, closed on a $600 million credit agreement on July 20, 2000 which will be used primarily to support the issuance of commercial paper by PSCo and PSCCC but also provides for direct borrowings thereunder. This credit agreement which terminates on July 19, 2001 replaces PSCo's existing $300 million 364 day facility which expired on July 23, 2000 and PSCo and its subsidiaries $300 million multi-year facility which would have terminated on November 17, 2000. SPS closed a credit agreement on February 25, 2000. The commitment under the credit agreement is $300 million and terminates on February 23, 2001 and will be used primarily for commercial paper backup but also provides for direct borrowings thereunder. On July 20, 2000, SPS closed a $500 million credit agreement which terminates on January 20, 2002. The funds from this credit agreement will be used for general corporate purposes including commercial paper backup and costs resulting from Texas and New Mexico deregulation legislation such as open market purchases, tender offer and defeasance costs of SPS' outstanding First Mortgage Bonds and other related restructuring costs. SPS is the initial borrower under this credit agreement, however, at the time of separation of the generation assets the obligations under this credit agreement will be assumed by a newly formed generation company. Electric Utility Industry Restructuring Electric utilities have historically operated in a highly regulated environment in which they have an obligation to provide electric service to their customers in return for an exclusive franchise within their service territory with an opportunity to earn a regulated rate of return. This regulatory environment is changing. The generation sector has experienced competition from nonutility power producers and the FERC is requiring utilities, including the Company's subsidiaries, to provide wholesale transmission service to others and may order electric utilities to expand their transmission systems to facilitate transmission services without impairing reliability. State regulatory authorities are in the process of changing utility regulations in response to federal and state statutory changes and evolving markets, including consideration of providing open access to retail customers. 46 Restructuring legislation was passed in Texas and New Mexico during 1999. The PUCT issued a final order addressing SPS' implementation of electric utility restructuring in Texas during the second quarter of 2000. SPS plans to pursue a similar strategy to implement the restructuring legislation enacted in New Mexico and believes that all of its generation business will ultimately be deregulated. SPS discontinued the application SFAS 71 related to its generation business during the second quarter of 2000, recording an extraordinary charge of $13.7 million. See Note 1. Summary of Significant Accounting Policies and Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS for additional discussion related to this matter. The total impacts of deregulation may be affected by the results of future state and Federal regulatory proceedings prior to actual implementation of full competition, estimated to begin on January 1, 2002. 47 PSCo's Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended June 30, 2000 Compared to the Three Months Ended June 30, 1999 Earnings Available for Common Stock Earnings were $60.9 million for the second quarter of 2000, as compared to $34.8 million for the second quarter of 1999, primarily due to favorable results from the electric energy marketing and trading activities. Electric Operations The following table details the change in electric operating revenues and energy costs for the three months ended June 30, 2000, as compared to the same period in 1999 (in thousands). Increase (Decrease) ------------------- Electric operating revenues: Retail....................................... $15,680 Wholesale.................................... 97,285 Other (including unbilled revenues).......... (37,425) ------- Total revenues.............................. 75,540 Fuel used in generation....................... 15,025 Purchased power............................... 31,496 ------- Net increase in electric margin............. $29,019 ======= The following table compares electric Kwh sales by major customer classes for the three months ended June 30, 2000 and 1999. Millions of Kwh Sales 2000 1999 % Change * ---- ---- ---------- Residential ..................... 1,639 1,567 4.6% Commercial and Industrial ....... 3,942 3,799 3.8 Public Authority ................ 61 60 2.2 ------ ------ Total Retail................... 5,642 5,426 4.0 Wholesale ....................... 1,561 1,167 33.7 ------ ------ Total............................ 7,203 6,593 9.3 ====== ====== Power Marketing and Trading...... 1,773 1,793 1.1 ====== ====== * Percentages are calculated using unrounded amounts. Electric margin increased in the second quarter of 2000, when compared to the second quarter of 1999, primarily due to the favorable results from the energy marketing and trading business, which contributed an additional $18.6 million to electric margin. The increase resulted from the Company's ability to market excess system power in the western U.S. at prices substantially higher than normal. The future performance of the wholesale energy marketing and trading business is dependent upon several factors including, market conditions, plant operational performance, availability of electric energy, implementation of deregulation and other factors. In addition, higher retail sales of 4.0% resulting primarily from customer growth of approximately 2.8% served to increase margin. Increased fuel and purchased power cost to serve customer load growth have resulted in higher cost sharing under the ICA. The ICA is a cost adjustment mechanism that allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders. Provisions for estimated customer refunds in connection with the sharing of earnings in excess of 11% return on equity were approximately $5.9 million and $2.8 million in the second quarter of 2000 and 1999, respectively (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). 48 Fuel used in generation expense increased approximately $15.0 million or 27.4% during the second quarter of 2000, as compared to the same quarter in 1999, primarily due to increased generation levels and higher gas costs for generation at Fort St. Vrain. Purchased power expense increased $31.5 million or 28.1% during the second quarter of 2000, as compared to the same quarter in 1999, primarily due to increased costs related to wholesale energy marketing activities and purchased power capacity and energy costs, including option premium charges for stand-by capacity to serve retail customers. Gas Operations The following table details the change in revenues from gas sales and gas purchased for resale for the second quarter of 2000, as compared to the same period in 1999 (in thousands). Increase (Decrease) ------------------ Revenues from gas sales (including unbilled revenues of $8.6 million) ..................... $ (4,102) Gas purchased for resale........................ (3,079) ------ Net decrease in gas sales margin.............. (1,023) Transportation revenues......................... 2,068 ------ Increase in net gas margin.................... $1,045 ====== The following table compares gas Dth deliveries by major customer classes for the second quarter of 2000 and 1999. Millions of Dth Deliveries 2000 1999 % Change * ---- ---- ---------- Residential................... 16.8 19.0 (11.7)% Commercial.................... 7.6 8.8 (13.0) ------- -------- Total sales................. 24.4 27.8 (12.1) Transportation................ 27.2 23.6 15.1 ------- -------- Total....................... 51.6 51.4 0.4 ======= ======== * Percentages are calculated using unrounded amounts Gas sales margin (excluding transportation) decreased during the second quarter of 2000, when compared to the second quarter of 1999, primarily due to warmer spring weather during the second quarter of 2000 as it was approximately 32% warmer than the second quarter of 1999. The decrease in margin was offset, in part, by the higher base gas rates effective July 1, 1999, resulting from PSCo's 1998 gas rate case and the favorable impacts of customer growth of 3.8%. Gas transportation revenues increased $2.1 million during the second quarter of 2000, compared to the second quarter of 1999, primarily due to higher deliveries and higher transportation rates effective July 1, 1999. The growth in the transport business continues to be impacted by the shifting of various commercial customers to transport customers and additional capacity on a leased gas pipeline. PSCo has in place a GCA mechanism for natural gas sales, which recognizes the majority of the effects of changes in the cost of gas purchased for resale and adjusts revenues to reflect such changes in costs on a timely basis. As a result, the changes in revenues associated with these mechanisms during the second quarter of 2000, as compared to the second quarter of 1999, had little impact on net income. However, the fluctuations in gas sales impacts 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. 49 Non-Fuel Operating Expenses and Other Income and Deductions Other operating and maintenance expenses decreased approximately $8.7 million primarily due to lower gas distribution operation costs, lower steam generation maintenance and lower electric distribution maintenance costs. Taxes other than income taxes decreased approximately $3.1 million during the second quarter of 2000, as compared to the second quarter of 1999, primarily due to lower business and utility property taxes in Colorado. Income taxes increased approximately $14.9 million during the second quarter of 2000, as compared to the second quarter of 1999, due to higher pretax income in the current period. Other income and deductions-net increased $3.5 million during the second quarter of 2000, as compared to the second quarter of 1999, primarily due to increased profits in non-utility activities. Interest charges increased approximately $1.7 million during the second quarter of 2000, as compared to the second quarter of 1999. The increase is primarily attributable to costs to finance capital expenditures, including higher interest costs on short-term debt. In July 1999, PSCo issued $200 million of 6 7/8% Series A Senior Notes, due in July 2009. Commitments and Contingencies See Note 4. Regulatory Matters and Note 5. Commitments and Contingencies in Item 1. FINANCIAL STATEMENTS. Financing Activities Discussion relating to PSCo's financing activities is covered under "Financing Activities" in NCE's Management's Discussion and Analysis of Financial Condition and Results of Operations. Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999 Earnings Available for Common Stock Earnings were $129.7 million for the second quarter of 2000, as compared to $100.8 million for the second quarter of 1999, primarily due to the strong performance and contributions from the electric energy marketing and trading business. Electric Operations The following table details the change in electric operating revenues and energy costs for the six months ended June 30, 2000, as compared to the same period in 1999 (in thousands). Increase (Decrease) ------------------- Electric operating revenues: Retail....................................... $17,820 Wholesale.................................... 113,397 Other (including unbilled revenues).......... (30,904) ------- Total revenues.............................. 100,313 Fuel used in generation....................... 19,362 Purchased power............................... 50,425 ------- Net increase in electric margin............. $30,526 ======= 50 The following table compares electric Kwh sales by major customer classes for the six months ended June 30, 2000 and 1999. Millions of Kwh Sales 2000 1999 % Change * ---- ---- ---------- Residential ..................... 3,584 3,499 2.5% Commercial and Industrial ....... 7,903 7,720 2.4 Public Authority ................ 124 108 14.7 ------ ------ Total Retail................... 11,611 11,327 2.5 Wholesale ....................... 3,649 3,019 20.9 ------ ------ Total............................ 15,260 14,346 6.4 ====== ====== Power Marketing and Trading...... 8,403 2,196 ** ====== ====== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful. Electric margin increased in the first six months of 2000, when compared to the same period of 1999, primarily due to the favorable results from the wholesale energy marketing and trading business, which contributed an additional $19.3 million to electric margin. The increase resulted from the Company's ability to market excess system power in the western U.S. at prices substantially higher than normal. The future results of the Company's wholesale marketing and trading business maybe impacted by market conditions and other factors. In addition, margin increased due to higher retail sales of 2.5% resulting primarily from customer growth of approximately 2.7%. Increased fuel and purchased power costs have resulted in higher cost sharing under the ICA. The ICA is a cost adjustment mechanism that allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders. Provisions for estimated customer refunds in connection with the sharing of earnings in excess of 11% return on equity were approximately $8.4 million and $6.6 million in the second quarter of 2000 and 1999, respectively (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). Fuel used in generation expense increased approximately $19.4 million or 18.1% during the first six months of 2000, as compared to the same period in 1999, primarily due to increased generation levels to serve native retail load and market wholesale power within and outside PSCo's service territory. Purchased power expense increased $50.4 million or 22.3% during the first six months of 2000, as compared to the same period in 1999, primarily due to increased costs related to wholesale energy marketing activities and increased purchased power capacity and energy costs, including option premium charges for stand-by capacity to serve retail customers. Gas Operations The following table details the change in revenues from gas sales and gas purchased for resale for the first six months of 2000, as compared to the same period in 1999 (in thousands). Increase -------- Revenues from gas sales (including unbilled revenues of $6.8 million) ..................... $10,758 Gas purchased for resale........................ 429 ------ Net increase in gas sales margin.............. 10,329 Transportation revenues......................... 3,758 ------ Increase in net gas margin.................... $14,087 ======= 51 The following table compares gas Dth deliveries by major customer classes for the first six months of 2000 and 1999. Millions of Dth Deliveries 2000 1999 % Change * ---- ---- ---------- Residential................... 53.8 56.8 (5.3)% Commercial.................... 23.8 25.9 (8.1) ------- -------- Total sales................. 77.6 82.7 (6.2) Transportation................ 56.0 50.1 11.6 ------- -------- Total....................... 133.6 132.8 0.5 ======= ======== * Percentages are calculated using unrounded amounts Gas sales margin increased during the first six months of 2000, when compared to the first six months of 1999, primarily due to higher base gas rates effective July 1, 1999, resulting from PSCo's 1998 gas rate case and the favorable impacts of customer growth of 3.7%. The increase in margin was offset, in part, by the lower sales resulting from the warmer winter/spring weather during the first six months of 2000 (approximately 6%), compared to the first six months of 1999. Gas transportation revenues increased $3.8 million during the first six months of 2000, compared to the first six months of 1999, primarily due to higher deliveries and higher transportation rates effective July 1, 1999. The growth in the transport business continues to be impacted by the shifting of various commercial customers to transport customers and additional capacity on a leased gas pipeline. PSCo has in place a GCA mechanism for natural gas sales, which recognizes the majority of the effects of changes in the cost of gas purchased for resale and adjusts revenues to reflect such changes in costs on a timely basis. As a result, the changes in revenues associated with these mechanisms during the first six months of 2000, as compared to the first six months of 1999, had little impact on net income. However, the fluctuations in gas sales impacts 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. Non-Fuel Operating Expenses and Other Income and Deductions Other operating and maintenance expenses decreased approximately $5.6 million primarily due to lower electric and gas distribution maintenance expense and lower steam generation maintenance expense. Taxes other than income taxes decreased approximately $5.3 million during the first six months of 2000, as compared to the same period in 1999, primarily due to lower business and utility property taxes in Colorado. Income taxes increased approximately $21.5 million during the first six months of 2000, as compared to the same period in 1999, due to higher pretax income in the current period and the favorable impact of deducting certain prior year severance costs in 1999. Other income and deductions-net increased $4.6 million during the first six months of 2000, as compared to the same period in 1999, primarily due to increased profits in non-utility operations and a gain from the sale of a subsidiary's investment. Interest charges increased approximately $5.5 million during the first six months of 2000, as compared to the same period in 1999. The increase is primarily attributable to costs to finance capital expenditures, including higher interest costs on short-term debt. In July 1999, PSCo issued $200 million of 6 7/8% Series A Senior Notes, due in July 2009. 52 Commitments and Contingencies See Note 4. Regulatory Matters and Note 5. Commitments and Contingencies in Item 1. FINANCIAL STATEMENTS. Financing Activities Discussion relating to PSCo's financing activities is covered under "Financing Activities" in NCE's Management's Discussion and Analysis of Financial Condition and Results of Operations. 53 SPS's Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended June 30, 2000 Compared to the Three Months Ended June 30, 1999 Earnings Available for Common Stock Earnings available for common stock were $15.0 million during the second quarter of 2000 compared to $22.8 million for the same quarter in 1999. Earnings decreased primarily due to the extraordinary charge of $13.7 million (after-tax). During the second quarter of 2000, SPS discontinued the application of regulatory accounting under SFAS 71 for the generation portion of its business, and recognized a $13.7 million extraordinary charge, net of tax. The charge was recorded following a PUCT rate order addressing the implementation of electric utility restructuring for SPS. See Note 1. Summary of Significant Accounting Policies and Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS. Operating Revenues Electric Operations Substantially all of SPS's operating revenues result from the sale of electric energy. The principal factors impacting revenues are the amount and price of energy sold. The following table details the change in electric operating revenues and energy costs for the second quarter of 2000, as compared to the same period in 1999 (in thousands). Increase (Decrease) ------------------- Electric operating revenues: Retail.............................. $29,019 Wholesale........................... 28,534 Other (including unbilled revenues). (25,024) ------- Total revenues.................... 32,529 Fuel used in generation.............. (81) Purchased power...................... 17,175 ------- Net increase in electric margin... $15,435 ======= The following table compares electric Kwh sales by major customer classes for the second quarter of 2000 and 1999. Millions of Kwh Sales 2000 1999 % Change* ----- ---- --------- Residential ............ 672 629 6.8% Commercial and Industrial 2,860 2,723 5.0 Public Authority ....... 134 141 (5.0) ----- ----- Total Retail.......... 3,666 3,493 5.0 Wholesale............... 2,480 1,986 24.9 ----- ----- Total................... 6,146 5,479 12.2 ===== ===== * Percentages are calculated using unrounded amounts. Electric operating revenues increased $32.5 million or 14.5% during the second quarter in 2000, when compared to the same period in 1999 primarily due to weather. Mild, wet weather in the second quarter of 1999, reduced loads for air conditioning and irrigation. Weather in the second quarter 2000 was closer to normal. In addition, customer growth of 1.8% favorably impacted margin. Purchased power increased $17.2 million during the second quarter of 2000, when compared to the same period in 1999, due to an increase in capacity costs related to new purchase power contracts and an increase in wholesale purchases. SPS generates the majority of its power for sale to its firm retail and wholesale customers 54 and sells non-firm energy as the market demands. Similarly, SPS will purchase 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 during the second quarter of 2000, when compared to the second quarter of 1999, had little impact on net income. (See discussion on "SPS Electric Cost Adjustment Mechanisms" Note 4. Regulatory Matters - in Item 1. FINANCIAL STATEMENTS). Non-Fuel Operating Expenses Other operating and maintenance expenses increased $7.1 million or 21.1% during the second quarter of 2000, as compared to the same period in 1999, primarily due increases in customer expenses and transmission operations. Income taxes increased $3.0 million during the second quarter of 2000, as compared to the same period in 1999, primarily due to the effect of higher pre-tax income (before extraordinary item). The effective income tax rates for the quarter ended June 30, 2000 and 1999 were 36.6% and 37.1%, respectively. Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999 Earnings Available for Common Stock Earnings available for common stock were $33.2 million ($46.9 million before the extraordinary item) during the second quarter of 2000 compared to $46.2 million for the same quarter in 1999. Earnings before the extraordinary item increased only slightly as the favorable impacts of weather and customer growth were substantially offset by higher operating and restructuring costs. During the second quarter of 2000, SPS discontinued the application of regulatory accounting under SFAS 71 for the generation portion of its business, and recognized a $13.7 million extraordinary charge, net of tax. The charge was recorded following a PUCT rate order addressing the implementation of electric utility restructuring for SPS. See Note 1. Summary of Significant Accounting Policies and Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS. Operating Revenues Electric Operations Substantially all of SPS's operating revenues result from the sale of electric energy. The principal factors impacting revenues are the amount and price of energy sold. The following table details the change in electric operating revenues and energy costs for the first six months of 2000, as compared to the same period in 1999 (in thousands). Increase (Decrease) ------------------- Electric operating revenues: Retail.............................. $28,472 Wholesale........................... 39,892 Other (including unbilled revenues). (22,155) ------- Total revenues.................... 46,209 Fuel used in generation.............. 4,559 Purchased power...................... 33,231 ------- Net increase in electric margin... $ 8,419 ======= 55 The following table compares electric Kwh sales by major customer classes for the first six months of 2000 and 1999. Millions of Kwh Sales 2000 1999 % Change* ---- ---- --------- Residential ............ 1,418 1,346 5.3% Commercial and Industrial 5,725 5,297 8.1 Public Authority ....... 274 274 - ----- ----- Total Retail.......... 7,417 6,917 7.2 Wholesale............... 4,209 3,319 26.8 ----- ----- Total................... 11,626 10,236 13.6 ====== ====== * Percentages are calculated using unrounded amounts. Electric operating revenues increased $46.2 million or 10.8% during the first six months in 2000, when compared to the same period in 1999 primarily due to weather. Mild, wet weather in the first six months of 1999 reduced loads for air conditioning and irrigation. Weather in the first six months of 2000 was closer to normal. During 1999, changes were made in the billing cycles of various retail and wholesale customers in anticipation of implementing a new customer information system which resulted in lower billed Kwh sales and higher unbilled revenues. Purchased power increased $33.2 million during the first six months of 2000, when compared to the same period in 1999, due to an increase in capacity costs related to new purchase power contracts and an increase in wholesale purchases. SPS generates the majority of its power for sale to its firm retail and wholesale customers and sells non-firm energy as the market demands. Similarly, SPS will purchase 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 during the second quarter of 2000, when compared to the second quarter of 1999, had little impact on net income. (See discussion on "SPS Electric Cost Adjustment Mechanisms" Note 4. Regulatory Matters - in Item 1. FINANCIAL STATEMENTS). Non-Fuel Operating Expenses Other operating and maintenance expenses increased $9.2 million or 13.6% during the first six months of 2000, as compared to the same period in 1999, primarily due to higher costs associated with restructuring activities in Texas and New Mexico as well as increases in customer expenses and transmission operations. Commitments and Contingencies See Note 4. Regulatory Matters and Note 5. Commitments and Contingencies in Item 1. FINANCIAL STATEMENTS. Restructuring Legislation and Financing Activities Discussion relating to the changing regulatory environment, including restructuring legislation and SPS financing activities is covered under "Electric Utility Industry" and "Financing Activities" in NCE's Management's Discussion and Analysis of Financial Condition and Results of Operations. 56 PART II - OTHER INFORMATION Item 1. Legal Proceedings Part 1. See Note 4. Regulatory Matters and Note 5. Commitments and Contingencies in Item 1, Part 1. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges for PSCo is set forth at page 60 herein. 12(b) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges for SPS is set forth at page 61 herein. 15(a) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 62 herein for NCE. 15(b) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 63 herein for PSCo. 15(c) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 64 herein for SPS. 27(a) Financial Data Schedule for NCE as of June 30, 2000. 27(b) Financial Data Schedule for PSCo as of June 30, 2000. 27(c) Financial Data Schedule for SPS as of June 30, 2000. 99 Unaudited Pro Forma Combined Condensed Financial Information of New Century Energies, Inc. and Northern States Power Company (b) Reports on Form 8-K The following reports on Form 8-K were filed since the beginning of the second quarter of 2000. - A combined report on Form 8-K dated April 18, 2000, was separately filed by NCE and SPS on April 19, 2000. The items reported were Item 5. Other Events: Stipulation agreement executed which addresses SPS' implementation plans to meet the requirements of the Texas restructuring legislation and resolves certain issues related to the NCE/NSP Merger. - A combined report on Form 8-K dated May 30, 2000, was separately filed by NCE and SPS on June 1, 2000. The items reported were Item 5. Other Events: On May 30, 2000, the PUCT issued a rate order which approved the Stipulation dated April 18, 2000, that was entered into with the staff of the PUCT and other significant parties. The Stipulation specifically addressed SPS' implementation plans to meet the requirements of the Texas restructuring legislation enacted in June 1999. In summary, the Stipulation provides for the implementation of full retail customer choice by SPS in its Texas service region, including the future divestiture of approximately 64-71% of the generation capacity owned by SPS and its affiliates. - A combined report on Form 8-K dated and filed on July 24, 2000, was separately by NCE and SPS. The items reported were Item 5. Other Events: On July 24, 2000, SPS announced the commencement of a fixed spread tender offer to purchase for cash the remaining, approximately $295 million, principal amount of five series of SPS First Mortgage Bonds. 57 NEW CENTURY ENERGIES, INC. SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, New Century Energies, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 4th day of August, 2000. NEW CENTURY ENERGIES, INC. By /s/R. C. Kelly --------------------------------- R. C. Kelly Executive Vice President and Chief Financial Officer PUBLIC SERVICE COMPANY OF COLORADO SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Public Service Company of Colorado has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 4th day of August, 2000. PUBLIC SERVICE COMPANY OF COLORADO By /s/R. C. Kelly --------------------------------- R. C. Kelly Executive Vice President, Chief Financial Officer and Treasurer SOUTHWESTERN PUBLIC SERVICE COMPANY SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Southwestern Public Service Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 4th day of August, 2000. SOUTHWESTERN PUBLIC SERVICE COMPANY By /s/R. C. Kelly --------------------------------- R. C. Kelly Executive Vice President Chief Financial Officer and Treasurer 58 EXHIBIT INDEX 2(a) 1* NCE/NSP Agreement and Plan of Merger dated March 24, 1999 (Form 8-K, March 24, 1999, Exhibit 2.1). 3(a) 1* NCE Restated Articles of Incorporation dated December 8, 1995(Form S-4, Exhibit 3(a)). 3(a) 2* PSCo Amended and Restated Articles of Incorporation dated July 10, 1998 (Form 10-K, December 31, 1998, Exhibit 3(a)1). 3(a) 3* SPS Amended and Restated Articles of Incorporation dated September 30, 1997 (Form 10-K, December 31, 1997, Exhibit 3(a)2). 3(b) 1* NCE Restated By-laws dated December 15, 1998 (Form 10-K, December 31, 1998, Exhibit 3(b)1). 3(b) 2* PSCo By-laws dated November 20, 1997 (Form 10-K, December 31, 1997, Exhibit 3(b)1). 3(b) 3* SPS By-laws dated September 29, 1997 (Form 10-K, December 31, 1997, Exhibit 3(b)2). 12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges for PSCo is set forth at page 60 herein. 12(b) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges for SPS is set forth at page 61 herein. 15(a) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 62 herein for NCE. 15(b) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 63 herein for PSCo. 15(c) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 64 herein for SPS. 27(a) Financial Data Schedule for NCE as of June 30, 2000. 27(b) Financial Data Schedule for PSCo as of June 30, 2000. 27(c) Financial Data Schedule for SPS as of June 30, 2000. 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. 59 EXHIBIT 12(a) PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO CONSOLIDATED FIXED CHARGES (not covered by Report of Independent Public Accountants) Six Months Ended June 30, 2000 1999 ---- ---- (Thousands of Dollars, except ratios) Fixed charges: Interest on long-term debt........................... $62,870 $57,627 Interest on borrowings against corporate-owned life insurance contracts........................... 31,835 28,268 Other interest....................................... 12,250 11,961 Amortization of debt discount and expense less premium 2,450 2,166 Interest component of rental expense................. 5,305 4,591 Dividends on PSCo obligated mandatorily redeemable preferred securities.............................. 7,600 7,600 ------ ------ Total.............................................. $122,310 $112,213 ======== ======== Earnings (before fixed charges and taxes on income): Net income........................................... $129,680 $100,759 Fixed charges as above............................... 122,310 112,212 Provisions for Federal and state taxes on income, net of investment tax credit amortization............ 65,453 43,982 ------ ------ Total.............................................. $317,443 $256,953 ======== ======== Ratio of earnings to fixed charges...................... 2.60 2.29 ==== ==== 60 EXHIBIT 12(b) SOUTHWESTERN PUBLIC SERVICE COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (not covered by Report of Independent Public Accountants) Six Months Ended June 30, 2000 1999 ---- ---- (Thousands of Dollars, except ratios) Fixed charges: Interest on long-term debt........................... $19,797 $23,714 Other interest....................................... 8,235 2,549 Amortization of debt discount and expense less premium 1,019 1,121 Interest component of rental expense................. 367 382 Dividends on SPS obligated mandatorily redeemable preferred securities.............................. 3,925 3,925 ------ ------ Total.............................................. $33,343 $31,691 ======= ======= Earnings (before fixed charges and taxes on income): Net income........................................... $46,902 $46,226 Fixed charges as above............................... 33,343 31,691 Provisions for Federal and state taxes on income, net of investment tax credit amortization............ 27,446 27,848 ------ ------ Total.............................................. $107,691 $105,765 ======== ======== Ratio of earnings to fixed charges...................... 3.23 3.34 ==== ==== 61 EXHIBIT 15(a) August 4, 2000 New Century Energies, Inc.: We are aware that New Century Energies, Inc. has incorporated by reference in its Registration Statement (Form S-8, File No. 333-28639) pertaining to the Omnibus Incentive Plan; its Registration Statement (Form S-3, File No. 333-28637) pertaining to the Dividend Reinvestment and Cash Payment Plan; its Registration Statements (Forms S-3, File Nos. 333-40361 and 333-64067) pertaining to the registration of NCE Common Stock and its Registration Statement (Form S-8, File No. 333-58117) pertaining to the NCE Employee Investment Plan and NCE Employees' Savings and Stock Ownership Plan, its Form 10-Q for the quarter ended June 30, 2000, which includes our report dated August 4, 2000, covering the unaudited consolidated condensed financial statements contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our Firm or a report prepared or certified by our Firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN 62 EXHIBIT 15(b) August 4, 2000 Public Service Company of Colorado: We are aware that Public Service Company of Colorado has incorporated by reference in its Registration Statement (Form S-3, File No. 33-62233) pertaining to the Automatic Dividend Reinvestment and Common Stock Purchase Plan; its Registration Statement (Form S-3, File No. 33-37431) as amended on December 4, 1990, pertaining to the shelf registration of Public Service Company of Colorado's First Mortgage Bonds; its Registration Statement (Form S-8, File No. 33-55432) pertaining to the Omnibus Incentive Plan; its Registration Statement (Form S-3, File No. 33-51167) pertaining to the shelf registration of Public Service Company of Colorado's First Collateral Trust Bonds; its Registration Statement (Form S-3, File No. 33-54877) pertaining to the shelf registration of Public Service Company of Colorado's First Collateral Trust Bonds and Cumulative Preferred Stock and its Registration Statement (Form S-3, File No. 333-81791) pertaining to the shelf registration of Public Service Company of Colorado's Senior Debt Securities, its Form 10-Q for the quarter ended June 30, 2000, which includes our report dated August 4, 2000, covering the unaudited consolidated condensed financial statements contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our Firm or a report prepared or certified by our Firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN 63 EXHIBIT 15(c) August 4, 2000 Southwestern Public Service Company: We are aware that Southwestern Public Service Company has incorporated by reference in its Registration Statement (Form S-3, File No. 333-05199) pertaining to Southwestern Public Service Company's Preferred Stock and Debt Securities; its Registration Statement (Form S-8, File No. 33-27452) pertaining to Southwestern Public Service Company's 1989 Stock Incentive Plan and its Registration Statement (Form S-8, File No. 33-57869) pertaining to Southwestern Public Service Company's Employee Investment Plan and Non-Qualified Salary Deferral Plan, its Form 10-Q for the quarter ended June 30, 2000, which includes our report dated August 4, 2000, covering the unaudited condensed financial statements contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our Firm or a report prepared or certified by our Firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN 64 EXHIBIT 99 UNAUDITED PROFORMA COMBINED CONDENSED FINANCIAL INFORMATION The following unaudited pro forma combined condensed balance sheet at June 30, 2000 gives effect to the NCE/NSP Merger as if it had occurred at June 30, 2000. The unaudited pro forma combined condensed statements of income for each of the periods ended June 30, 2000 give effect to the NCE/NSP Merger as if it had occurred on January 1, 1999. 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. 65 Unaudited Pro Forma Combined Condensed Statement of Income Reflecting Completion of the NCE/NSP Merger Six Months Ended June 30, 2000 (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....................... $1,169,052 $1,348,226 $ 1 $ $2,517,279 Gas............................ 303,004 423,394 (8,038) 718,360 Nonregulated and other revenues - 43,902 858,732 902,634 Earnings from equity investments - - 70,089 70,089 ------ ------- ------- ------- ---------- Total operating revenues 1,472,056 1,815,522 920,784 4,208,362 Operating expenses: Electric fuel and purchased power 367,684 653,095 - 1,020,779 Cost of gas sold and transported 189,631 269,313 (9,330) 449,614 Other operation and maintenance 412,784 266,865 - 679,649 Depreciation and amortization 183,700 145,995 (4,099) 325,596 Taxes other than income taxes 113,700 67,013 (845) 179,868 Income taxes - utility......... 47,631 - (47,631) - Nonregulated operating expenses - 45,839 707,151 752,990 ------ ------- ------- -------- --------- Total operating expenses..... 1,315,130 1,448,120 645,246 3,408,496 Operating income.................. 156,926 367,402 275,538 799,866 Other income (expense): Income from nonregulated businesses before interest and taxes............ 186,260 - (185,517) 743 Equity earnings from unconsolidated subsidiaries.................. - 32,640 (32,640) - Other income (deductions) - net (6,600) 1,428 (9,750) (14,922) Income taxes on nonregulated and nonoperating items - benefit............... (11,272) - 11,272 - ------- ------ ------- ------- ------ Total other income (expense). 168,388 34,068 (216,635) (14,179) Financing costs: Interest charges............... 207,276 103,960 - 311,236 Distributions on mandatorily redeemable preferred securities of subsidiary trusts.......... 7,875 11,525 - 19,400 ----- ------ ------ ------- ------ Total financing costs........ 215,151 115,485 - 330,636 Income before income taxes and extraordinary item............... 110,163 285,985 58,903 455,051 Income taxes...................... - 86,076 58,903 144,979 Income before Extraordinary item 110,163 199,909 - 310,072 Extraordinary item................ - (13,658) - (13,658) ------- ------- ------- ------- ------- Net income........................ 110,163 186,251 - 296,414 Preferred dividends & redemption premiums of NSP.................. 2,121 - - 2,121 ------ ------ ------- ------- ----- Earnings available for common shareholders..................... $108,042 $186,251 $ - $ - $ 294,293 ======== ======== ====== ======= ========== Average common shares outstanding (Note 1)......................... 156,305 116,360 63,998 336,663 Average common and potentially diluted shares outstanding (Note 1) 156,352 116,398 64,019 336,769 Basic and diluted earnings per share: Income before extraordinary item $0.69 $1.72 $0.91 Extraordinary item............. - (0.12) (0.04) ----- ----- ----- Earnings available for common shareholders.................. $0.69 $1.60 $0.87 ===== ===== =====
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements. 66 Unaudited Pro Forma Combined Condensed Statement of Income Reflecting Completion of the NCE/NSP Merger Six Months ended June 30, 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....................... $1,145,642 $1,201,808 $ (224) $ $2,347,226 Gas............................ 256,916 478,307 (74,793) 660,430 Nonregulated and other revenues - 35,414 214,743 250,157 Earnings from equity investments - - 27,336 27,336 ------ ------- ------- ------ Total operating revenues..... 1,402,558 1,715,529 167,062 3,285,149 Operating expenses: Electric fuel and purchased power 356,586 544,585 - 901,171 Cost of gas sold and transported 147,300 333,581 (64,657) 416,224 Other operation and maintenance 400,681 266,466 - 667,147 Depreciation and amortization 175,580 139,397 (4,434) 310,543 Taxes other than income taxes 114,993 75,097 (1,157) 188,933 Income taxes - utility......... 53,859 - (53,859) - Nonregulated operating expenses - 48,991 234,820 283,811 ------ ------- ------- ------- --------- Total operating expenses..... 1,248,999 1,408,117 110,713 2,767,829 Operating income.................. 153,559 307,412 56,349 517,320 Other income (expense): Income from nonregulated businesses before interest and taxes............ (7,213) - 7,213 - Equity earnings from unconsolidated subsidiaries.................. - 13,024 (13,024) - Other income (deductions) - net (41,629) (6,151) 3,321 (44,459) Income taxes on nonregulated and nonoperating items - benefit.. 51,986 - (51,986) - ------ ------ ------- ------- ------ Total other income (expense). 3,144 6,873 (54,476) (44,459) Financing costs: Interest charges............... 85,017 94,076 - 179,093 Distributions on mandatorily redeemable preferred securities of subsidiary trusts.......... 7,874 11,525 - 19,400 Dividends & redemption premiums on preferred stock of subsidiaries.................. - - - - ------ ------ ------- ------- ------ Total financing costs........ 92,892 105,601 - 198,493 Income before income taxes........ 63,811 208,684 1,873 274,368 Income taxes...................... - 58,149 1,873 60,022 ------ ------ ------- ------- ------ Net income........................ 63,811 150,535 - 214,346 Preferred dividends & redemption premiums of NSP.................. 3,171 - - 3,171 ------ ------ ------- ------- ------- Earnings available for common shareholders..................... $60,640 $150,535 $ - $ - $ 211,175 ======= ======== ====== ======= ========= Average common shares outstanding (Note 1)......................... 152,704 114,881 63,185 330,770 Average common and potentially diluted shares outstanding (Note 1)......................... 152,834 114,916 63,204 330,954 Basic and diluted earnings per share $0.40 $1.31 $0.64 ===== ===== =====
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements. 67 Unaudited Pro Forma Combined Condensed Balance Sheet Reflecting Completion of the NCE/NSP Merger June 30, 2000 (Thousands of Dollars)
Northern New Century Reporting Pro Forma States Power Energies Adjustments Adjustments Pro Forma (as Reported) (as Reported) (Note 3) (Note 4) Combined ------------- ------------- ---------- ---------- ---------- ASSETS Property, plant and equipment: Electric.......................... $7,563,322 $7,695,165 $ (165,987) $ $15,092,500 Gas............................... 971,828 1,362,575 (21,013) 2,313,390 Other............................. 390,644 960,228 4,348,625 5,699,497 -------- ------- --------- ------- --------- Total property, plant and equipment 8,925,794 10,017,968 4,161,625 23,105,387 Accumulated provision for depreciation (4,554,809) (3,687,879) (257,481) (8,500,169) Nuclear fuel - net................ 97,314 - - 97,314 -------- ------ ------- ------- ------ Net property, plant and equipment 4,468,299 6,330,089 3,904,144 14,702,532 Current assets: Cash and cash equivalents......... 120,470 36,109 - 156,579 Accounts receivable - net......... 523,252 368,398 - 891,650 Accrued unbilled utility revenues 109,183 254,090 - 363,273 Fuel and gas inventories.......... 49,343 58,895 - 108,238 Material and supplies inventories 313,883 73,191 - 387,074 Prepayments and other............. 169,729 145,858 - 315,587 -------- ------- ------- ------- ------- Total current assets............. 1,285,860 936,541 - 2,222,401 Other assets: Equity investments................ 1,039,726 402,793 - 1,442,519 External decommissioning fund and other investments................ 597,980 131,664 - 729,644 Regulatory assets................. 228,376 295,887 - 524,263 Non-regulated property - net...... 3,904,144 - (3,904,144) - Other............................. 401,967 271,055 - (66,000) 607,022 ------- ------- ------- ------- ------- Total other assets............... 6,172,193 1,101,399 (3,904,144) (66,000) 3,303,448 --------- --------- ---------- ------- --------- Total assets......................... $11,926,352 $8,368,029 $ - $(66,000) $20,228,381 =========== ========== ======= ======== =========== LIABILITIES AND EQUITY Capitalization: Common stock (Note 1)............. $393,217 $ 116,755 $ - $335,671 $ 845,643 Other stockholders' equity (Note 1) 2,367,682 2,672,793 - (401,671) 4,638,804 --------- --------- ------- -------- --------- Total common stockholders equity 2,760,899 2,789,548 - (66,000) 5,484,447 Preferred stockholders' equity 105,340 - - 105,340 Mandatorily redeemable preferred securities of subsidiary trusts.. 200,000 294,000 - 494,000 Long-term debt.................... 4,838,940 2,248,618 - 7,087,558 --------- --------- ------ ------- ---------- Total capitalization............. 7,905,179 5,332,166 - (66,000) 13,171,345 Current liabilities: Current portion of long-term debt 381,128 176,634 - 557,762 Short-term debt................... 731,849 791,250 - 1,523,099 Accounts payable.................. 379,083 440,734 - 819,817 Taxes accrued..................... 168,203 50,812 - 219,015 Other accrued liabilities......... 293,108 331,279 - 624,387 -------- ------- ------- ------- --------- Total current liabilities........ 1,953,371 1,790,709 - 3,744,080 Other liabilities: Deferred income taxes............. 895,703 957,663 - 1,853,366 Deferred investment tax credits... 113,606 93,017 - 206,623 Regulatory liabilities............ 517,764 - - 517,764 Minority interest in NRG.......... 257,477 - - 257,477 Other............................. 283,252 194,474 - 477,726 -------- ------- ------- ------- -------- Total other liabilities.......... 2,067,802 1,245,154 - 3,312,956 --------- --------- ------- ------- --------- Total liabilities and equity $11,926,352 $8,368,029 $ - $(66,000) $20,228,381 =========== ========== ======= ======== ===========
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements. 68 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 June 30, 2000 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 $66 million as of June 30, 2000. 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. 69