-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S/JFZpsLsOO4cQqF2xeF0wlkuCg+TQ5GEXJoDuWI71636wp0i+fWz0vhhcDw50Nt Y+2+WXc7wadRvF9BEURaNA== 0000081018-97-000030.txt : 19971117 0000081018-97-000030.hdr.sgml : 19971117 ACCESSION NUMBER: 0000081018-97-000030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWESTERN PUBLIC SERVICE CO CENTRAL INDEX KEY: 0000092521 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 750575400 STATE OF INCORPORATION: NM FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03789 FILM NUMBER: 97718264 BUSINESS ADDRESS: STREET 1: SPS TOWER STREET 2: TYLER AT SIXTH ST CITY: AMARILLO STATE: TX ZIP: 79101 BUSINESS PHONE: 8063782121 MAIL ADDRESS: STREET 1: PO BOX 1261 CITY: AMARILLO STATE: TX ZIP: 79170 10-Q 1 SPS 10Q FOR 3RD QUARTER SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 1-3789 Southwestern Public Service Company (Exact name of registrant as specified in its charter) New Mexico 75-0575400 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Tyler at Sixth, Amarillo, Texas 79101 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, including area code: (806) 378-2121 -------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At November 10, 1997, 100 shares of the registrant's Common Stock, $1.00 par value (the only class of common stock), were outstanding. Registrant meets the conditions of General Instruction H(1)(a) and (b) to Form 10-Q and is therefore filing this form with a reduced disclosure format. 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 ...................................... 12 PART II - OTHER INFORMATION Item 1. Legal Proceedings................................................. 15 Item 6. Exhibits and Reports on Form 8-K.................................. 15 SIGNATURE.................................................................. 16 EXHIBIT 12................................................................. 17 EXHIBIT 15 ................................................................ 18 In addition to the historical information contained herein, this report contains a number of "forward-looking statements", within the meaning of the Securities Exchange Act of 1934. Such statements address future events and conditions concerning capital expenditures, earnings, resolution and impact of litigation, regulatory matters, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those projected in such statements due to a variety of factors including, without limitation, restructuring of the utility industry; future economic conditions; earnings retention and dividend payout policies; developments in the legislative, regulatory and competitive environments in which the Company operates; and other circumstances that could affect anticipated revenues and costs, such as compliance with laws and regulations. These and other factors are discussed in the Company's filings with the Securities and Exchange Commission, including this report. i TERMS The abbreviations or acronyms used in the text and notes are defined below: Abbreviation or Acronym Term - -------------------------------------------------------------------------------- Cheyenne..................................Cheyenne Light, Fuel and Power Company Company......................................Southwestern Public Service Company FERC........................................Federal Energy Regulatory Commission Merger.............................the business combination between PSCo and SPS NCE...................................................New Century Energies, Inc. NC Enterprises.............NC Enterprises, Inc., an intermediate holding company NCS...................................................New Century Services, Inc. NMPUC.......................................New Mexico Public Utility Commission PSCo..................Public Service Company of Colorado, a Colorado corporation PUHCA.................................Public Utility Holding Company Act of 1935 PSCCC.............................................PS Colorado Credit Corporation PSRI.......................................................PSR Investments, Inc. PUCT..........................................Public Utility Commission of Texas Quixx.........................................Quixx Corporation and subsidiaries SEC...........................................Securities and Exchange Commission SFAS 71.....................Statement of Financial Accounting Standards No. 71 - "Accounting for the Effects of Certain Types of Regulation" SFAS 121...................Statement of Financial Accounting Standards No. 121 - "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" Thunder Basin.........................................Thunder Basin Coal Company UE..............................Utility Engineering Corporation and subsidiaries WGI.....................................................WestGas InterState, Inc. ii PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEETS (Thousands of Dollars) ASSETS September 30, December 31, 1997 1996 ---- ---- (Unaudited) Property, plant and equipment, at cost: Electric ........................................ $2,510,263 $2,517,579 Other............................................ - 37,542 Construction in progress......................... 161,827 79,346 ------- ------- 2,672,090 2,634,467 Less: accumulated depreciation .................. (971,757) (944,279) -------- -------- Total property, plant and equipment............. 1,700,333 1,690,188 --------- --------- Investments, at cost: Notes receivable from affiliate (Note 1)......... 119,039 - Other............................................ 5,773 34,446 ------- ------- Total investments............................... 124,812 34,446 ------- ------- Current assets: Cash and temporary cash investments.............. 13,572 40,610 Accounts receivable, less reserve for uncollectible accounts ($3,826 at September 30, 1997; $2,574 at December 31, 1996) ......................... 103,319 67,779 Accrued unbilled revenues ........................ 16,706 20,304 Recoverable fuel and purchased power cost, net.... 17,776 15,715 Materials and supplies, at average cost........... 18,050 17,776 Fuel inventory, at average cost................... 2,306 2,320 Prepaid expenses and other........................ 2,837 4,984 ------- ------- Total current assets............................. 174,566 169,488 ------- ------- Deferred charges: Regulatory assets (Note 1)........................ 121,981 117,546 Unamortized debt expense ......................... 9,538 9,864 Other............................................. 44,188 23,262 ------- ------- Total deferred charges........................... 175,707 150,672 ------- ------- $2,175,418 $2,044,794 ========== ========== The accompanying notes to condensed financial statements are an integral part of these financial statements. 1 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEETS (Thousands of Dollars) CAPITAL AND LIABILITIES September 30, December 31, 1997 1996 ---- ---- (Unaudited) Common stock (Note 1)................................ $ 348,402 $ 348,402 Retained earnings.................................... 352,668 383,350 ------- ------- Total common equity.............................. 701,070 731,752 SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS (Note 3)........... 100,000 100,000 Long-term debt....................................... 620,572 620,400 ------- ------- 1,421,642 1,452,152 Noncurrent liabilities: Employees' postretirement benefits other than pensions ...................................... 6,152 2,967 Employees' postemployment benefits............... 498 2,369 ------- ------- Total noncurrent liabilities.................... 6,650 5,336 ------- ------- Current liabilities: Notes payable and commercial paper .............. 155,175 53,836 Notes payable to affiliates...................... 25,160 - Long-term debt due within one year............... 173 15,231 Accounts payable................................. 102,558 63,003 Dividends payable................................ 24,622 - Customers' deposits.............................. 5,487 5,842 Accrued taxes.................................... 28,586 19,999 Accrued interest................................. 9,761 13,151 Current portion of accumulated deferred income taxes 9,338 3,583 Other............................................ 9,255 28,504 ------- ------- Total current liabilities....................... 370,115 203,149 ------- ------- Deferred credits: Unamortized investment tax credits .............. 5,531 5,719 Accumulated deferred income taxes .............. 366,709 367,272 Other............................................ 4,771 11,166 ------- ------- Total deferred credits.......................... 377,011 384,157 ------- ------- Commitments and contingencies (Notes 1 and 2)....... $2,175,418 $2,044,794 ========== ========== The accompanying notes to condensed financial statements are an integral part of these financial statements. 2 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Three Months Ended September 30, 1997 1996 -------- ------- Operating revenues: Electric.......................................... $279,511 $253,630 Other............................................. 4,645 8,915 -------- ------- 284,156 262,545 Operating expenses: Fuel used in generation........................... 141,907 118,303 Purchased power................................... 3,957 5,778 Other operating expenses.......................... 27,852 32,695 Maintenance....................................... 7,332 6,768 Depreciation and amortization..................... 17,272 17,396 Taxes (other than income taxes)................... 11,969 11,978 Income taxes...................................... 20,816 22,597 -------- ------- 231,105 215,515 ------- ------- Operating income..................................... 53,051 47,030 Other income and deductions: Merger expenses................................... (7,200) (4,659) Miscellaneous income and deductions - net......... (383) 11,805 --------- ------- (7,583) 7,146 Interest charges: Interest on long-term debt........................ 11,000 12,139 Amortization of debt discount and expense less premium ........................................ 560 534 Other interest.................................... 1,963 1,386 Allowance for borrowed funds used during construction (1,129) (137) Dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust .... 1,963 - -------- ------- 14,357 13,922 ------ ------ Net income........................................... $ 31,111 $40,254 ======== ======= The accompanying notes to condensed financial statements are an integral part of these financial statements. 3 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Nine Months Ended September 30, 1997 1996 ---- ---- Operating revenues: Electric.......................................... $728,436 $702,410 Other............................................. 20,236 24,483 -------- ------- 748,672 726,893 Operating expenses: Fuel used in generation........................... 364,221 328,850 Purchased power................................... 12,088 16,816 Other operating expenses.......................... 97,294 98,255 Maintenance....................................... 22,461 25,746 Depreciation and amortization..................... 53,717 52,524 Taxes (other than income taxes)................... 34,819 34,899 Income taxes...................................... 36,894 50,845 -------- ------- 621,494 607,935 ------- ------- Operating income..................................... 127,178 118,958 Other income and deductions: Write-off of investment in Carolina Energy Project (Note 2) ....................................... (16,052) - Merger expenses................................... (15,239) (8,444) Miscellaneous income and deductions - net......... 2,113 12,800 -------- ------- (29,178) 4,356 Interest charges: Interest on long-term debt........................ 33,057 34,859 Amortization of debt discount and expense less premium ........................................ 1,683 1,581 Other interest.................................... 4,710 5,623 Allowance for borrowed funds used during construction ................................... (3,047) (1,770) Dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust .... 5,888 - -------- ------- 42,291 40,293 Net income........................................... 55,709 83,021 Dividend requirements on preferred stock............. - 121 -------- ------- Earnings available for common stock.................. $ 55,709 $ 82,900 ======== ======== The accompanying notes to condensed financial statements are an integral part of these financial statements. 4 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands of Dollars) Nine Months Ended September 30, 1997 1996 ---- ---- Operating activities: Net income........................................ $55,709 $83,021 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................... 56,290 54,918 Write off of investments......................... 16,052 695 Amortization of investment tax credits........... (188) (188) Deferred income taxes............................ 1,957 (12,345) Allowance for equity funds used during construction (5) - Change in accounts receivable.................... (37,112) (3,580) Change in inventories............................ (1,419) 1,425 Change in other current assets................... 1,543 (97) Change in accounts payable....................... 39,276 4,279 Change in other current liabilities.............. (10,565) (5,340) Change in deferred amounts....................... (52,143) 13,775 Change in noncurrent liabilities................. 1,419 5,601 Other............................................ 312 (278) ------- ------- Net cash provided by operating activities...... 71,126 141,886 ------- ------- Investing activities: Construction expenditures......................... (87,707) (86,304) Allowance for equity funds used during construction 5 - Proceeds from disposition of property, plant and equipment ...................................... 61 2,377 Sale of Quixx and UE to NC Enterprises (Note 1)... (29,567) - Purchase of other investments..................... (4,583) (3,290) ------ ------ Net cash used in investing activities.......... (121,791) (87,217) -------- ------- Financing activities: Proceeds from sale of long-term debt.............. - 58,615 Redemption of long-term debt...................... (16,099) (6,086) Redemption of preferred stock..................... - (260) Short-term borrowings - net....................... 101,495 (18,727) Dividends on common stock......................... (61,769) (67,515) Dividends on preferred stock...................... - (121) ------- ------- Net cash provided by (used in) financing activities .................................. 23,627 (34,094) ------ ------- Net (decrease) increase in cash and temporary cash investments ............................ (27,038) 20,575 Cash and temporary cash investments at beginning of period ......................... 40,610 13,612 ------ ------ Cash and temporary cash investments at end of period $13,572 $34,187 ======= ======= The accompanying notes to condensed financial statements are an integral part of these financial statements. 5 SOUTHWESTERN PUBLIC SERVICE COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Accounting Policies Merger On April 22, 1997, the Board of Directors of the Company approved a change in the Company's fiscal year. Effective January 1, 1997, the Company's new fiscal year is the twelve-month period ending December 31. Previously, the Company's fiscal year was a twelve-month period ending August 31. Effective August 1, 1997, following receipt of all required state and Federal regulatory approvals, the Company and PSCo merged in a tax-free "merger of equals" transaction and became wholly-owned subsidiaries of NCE, which is a registered holding company under the PUHCA. NCE owns the following direct subsidiaries: the Company, PSCo, Cheyenne, WGI, NCS and NC Enterprises. Each outstanding share of Company common stock was canceled and converted into the right to receive 0.95 of one share of NCE common stock and each outstanding share of PSCo common stock was canceled and converted into the right to receive one share of NCE common stock with this transaction being accounted for as a pooling of interests for accounting purposes. Effective with the Merger, the common stock of Quixx and UE, previously wholly-owned subsidiaries, was transferred through the sale by the Company of all of the outstanding common stock of such subsidiaries at net book value, aggregating approximately $119.0 million, to NC Enterprises (an intermediate holding company) in exchange for notes payable from NC Enterprises. These notes payable have thirty-year terms and bear interest at a rate of 7.25% per year with annual interest payments due beginning August 1, 1998 and annual principal payments due beginning August 1, 2001. The accompanying financial statements reflect the financial position, results of operations and cash flows for Quixx and UE for all periods prior to August 1, 1997. The transfer of Quixx and UE did not have a material impact on the Company's financial position, results of operations or cash flows. Business, Utility Operations and Regulation The Company was incorporated in New Mexico in 1921. The Company's principal business is the generation, transmission, distribution and sale of electric energy. Electric service is provided through an interconnected system to a population of about one million people in a 52,000-square-mile area of the Panhandle and south plains of Texas, eastern and southeastern New Mexico, the Oklahoma Panhandle and southwestern Kansas. The Company's operating revenues are derived primarily from operations in Texas and New Mexico. The Company maintains its accounts in accordance with the Uniform System of Accounts prescribed by the FERC and as adopted by the state utility commissions in Texas, New Mexico, Oklahoma and Kansas. Regulatory Assets and Liabilities The Company prepares its financial statements in accordance with the provisions of SFAS 71, as amended, which recognizes that accounting for rate regulated enterprises should reflect the relationship of costs and revenues introduced by rate regulation. A regulated utility may defer recognition of a cost (a regulatory asset) or recognize an obligation (a regulatory liability) if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in revenues. 6 NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) On September 1, 1996, the Company adopted SFAS 121, which imposes stricter criteria for the continued recognition of regulatory assets on the balance sheet by requiring that such assets be probable of future recovery at each balance sheet date. The adoption of this statement did not have a material impact on the Company's results of operations, financial position or cash flows. The following regulatory assets are reflected in the Company's condensed balance sheets: September 30, December 31, 1997 1996 ---- ---- (Thousands of Dollars) Income taxes.............................. $79,738 $81,403 Employees' postretirement benefits other than pensions..................... 3,062 3,192 Early retirement costs.................... 1,454 1,727 Demand-side management costs.............. 3,593 2,317 Unamortized debt reacquisition costs...... 18,728 19,880 Thunder Basin judgment.................... 7,626 - Other..................................... 7,780 9,027 ------- ------ Total................................... 121,981 117,546 ======= ======= As of September 30, 1997, the Company's regulatory assets are being recovered through rates charged to customers over periods ranging from ten to thirty years, except for the costs related to the state regulatory jurisdictional portion of the Thunder Basin judgment for which recovery is currently undetermined. Under current rates, the Company is recovering approximately $8 million related to its regulatory assets per year. The Company believes it will continue to be subject to rate regulation to the extent necessary to recover these assets. In the event that a portion of the Company's operations is no longer subject to the provisions of SFAS 71 as a result of a change in regulation or the effects of competition, the Company could be required to write-off related regulatory assets, determine any impairment to other assets resulting from deregulation and write-down any impaired assets to their estimated fair value which could materially adversely impact the Company's results of operations, financial position or cash flows. The Company was named as a defendant in a case entitled Thunder Basin Coal Co. v. Southwestern Public Service Co., No. 93-CV-304B (D. Wyo.). (See Note 6 of the Notes to Consolidated Financial Statements in the Company's 1996 Transition Report on Form 10-K as of December 31, 1996). On November 1, 1994, the jury returned a verdict in favor of Thunder Basin and awarded Thunder Basin damages of approximately $18.8 million. The Company appealed the judgment to the Tenth Circuit Court of Appeals and on January 7, 1997, that Court found in favor of Thunder Basin and upheld the judgment. The Company filed a motion for rehearing, which was denied. In February 1997, the Company recorded the liability for the judgment, including interest and court costs, in the amount of approximately $22.3 million and deferred these costs for future rate recovery. These amounts, including interest, were paid in April 1997. The Company is amortizing these costs as a recoverable component of fuel used in generation. As of September 30, 1997, approximately $14.7 million of these costs have been amortized. Management believes that the Thunder Basin judgment is recoverable from customers, although any such recovery would be subject to review by various regulatory agencies. On September 17, 1996, the FERC issued an order granting the Company approval to collect the FERC jurisdictional portion of the judgment from wholesale customers. On October 24, 1997, the NMPUC issued an order granting recovery of the New Mexico retail jurisdictional portion of the judgment. On May 1, 1997, the Company filed a request with the PUCT to surcharge under-collected fuel and purchased power expenses, which included $9.1 million of the Thunder Basin judgment. On November 4, 1997, an administrative law judge ("ALJ") issued a proposal for a decision which denied recovery of the judgment through a surcharge. The Company filed exceptions to this ALJ recommendation 7 NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) and on November 19, 1997 the PUCT will consider this matter. Management believes that recovery of the Thunder Basin costs in the Texas retail jurisdiction will be approved either in this surcharge request or through a fuel reconciliation proceeding in 1998. General See Note 1 of the Notes to Consolidated Financial Statements in the Company's 1996 Transition Report on Form 10-K as of December 31, 1996 for a summary of the Company's significant accounting policies. 2. Commitments and Contingencies Regulatory Matters Fuel and Purchased Power Recovery A PUCT substantive rule requires periodic examination of the Company's fuel and purchased power costs, the efficiency of the use of such fuel and purchased power, fuel acquisition and management policies and purchase power commitments. On May 1, 1995, the Company filed with the PUCT a petition for a fuel reconciliation for the months of January 1992 through December 1994. The PUCT issued an order in January 1996 requiring the Company to make a $3.9 million fuel refund consisting of $2.1 million of overrecovered fuel costs and $1.8 million of disallowed fuel costs for the period. This refund was made in April 1996. Additionally, the order required the Company to flow through to customers 100% of margins from non-firm off-system opportunity sales as of January 1995. Prior PUCT rulings had allowed the Company to retain 25% of these margins. The 100% flow through is required by PUCT rules, absent a rule waiver. A motion for rehearing on the fuel disallowance (which was adjusted to $1.9 million) was subsequently denied by the PUCT and the Company was ordered to flow through 100% of the margin effective with the first billing cycle after the date of the order. Upon appeal to the Travis County District Court in May 1996, the PUCT's decision on the disallowed fuel costs was upheld. The Travis County District Court decision has been appealed to the Texas Court of Appeals which has not yet ruled in the matter. Management believes that the ultimate outcome of this matter will not significantly affect the Company's results of operations, financial position or cash flows. At September 30, 1997, the Company had approximately $18.1 million in underrecovered fuel costs in Texas and has requested PUCT approval to surcharge Texas retail customers for the underrecovery, including the Thunder Basin judgment as discussed in Note 1. Accounting Policies Business, Utility Operations and Regulation - Regulatory Assets and Liabilities. FERC Rate Case On December 19, 1989, the FERC issued its final order regarding a 1985 rate case. The Company appealed certain portions of the order that related to recognition in rates of the reduction of the federal income tax rate from 46% to 34%. The United States Court of Appeals for the District of Columbia Circuit remanded the case, directing the FERC to reconsider the Company's claim of an offsetting cost and limiting the FERC's actions. The FERC issued its Order on Remand in July 1992, required filings were made and a hearing was completed in February 1994. In October 1994, the administrative law judge issued a favorable initial decision that, if approved by the FERC, would result in a substantial recovery by the Company. Negotiated settlements with the Company's partial requirements customers and Texas-New Mexico Power Company were approved by the FERC in July 1993 and September 1993, respectively, and the Company received approximately $2.8 million, including interest. In a settlement with the Company's New Mexico cooperative customers, the Company received approximately $7 million, including interest. The FERC approved this settlement in July 1995. Resolutions of these matters with the remaining wholesale customers, Golden Spread Electric Cooperative, Inc. member cooperatives and Lyntegar Electric Cooperative, have not been reached. The Company cannot reasonably estimate 8 NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) the remaining amount recoverable from these proceedings; however, a favorable resolution could materially improve earnings in the year in which it is resolved. BCH Energy Limited Partnership Investment As discussed in the Company's 1996 Transition Report on Form 10-K as of December 31, 1996 under BUSINESS. Nonutility Businesses, Quixx holds a 49% limited partnership interest in BCH Energy Limited Partnership ("BCH"), which owns a waste-to-energy cogeneration facility located near Fayetteville, North Carolina. Limited commercial operation of the BCH project began in June 1996; however, the facility did not achieve the expected performance level. An effort was made to restructure the project but it was not possible to achieve the required improvements on economically viable terms; therefore, in December 1996, Quixx wrote off its investment of approximately $16 million. Carolina Energy Limited Partnership Investment The Carolina Energy Project is similar to the BCH project, but with design modifications. Construction was originally scheduled to be completed later in 1997 but was halted pending an independent analysis of the project's engineering and financial viability. Additionally, the banks providing debt financing to the project withheld funds for continued construction. Quixx, UE, other equity owners, senior creditors and the construction contractor have been unable to restructure the project on mutually agreeable terms. The construction contractor is demobilizing and the creditors have initiated remedies provided under the credit agreement. Accordingly, management has determined it is unlikely the project will be completed under the present ownership, if at all, and Quixx's and UE's net investments in the Carolina Energy Project are unlikely to be recovered. As a consequence, in June 1997, Quixx wrote-off its investment of approximately $13.64 million in the Carolina Energy Limited Partnership. Additionally, UE wrote-off its net investment of approximately $2.42 million in this same partnership. Quixx held a one-third ownership interest, including a 1% general partnership interest, in the partnership. UE's net investment in the partnership was comprised of subordinated debt and the related interest receivable, as well as engineering services. This combined investment represents approximately $16.1 million. 3. SPS Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debentures of SPS In October 1996, Southwestern Public Service Capital I, a wholly-owned trust, issued in a public offering $100 million of its 7.85% Trust Preferred Securities, Series A. The sole asset of the trust is $103 million principal amount of the Company's 7.85% Deferrable Interest Subordinated Debentures, Series A due September 1, 2036. 4. Management's Representations In the opinion of the Company, the accompanying unaudited condensed financial statements include all adjustments necessary for the fair presentation of the financial position of the Company at September 30, 1997 and December 31, 1996, and the results of operations for the three and nine months ended September 30, 1997 and 1996 and cash flows for the nine months ended September 30, 1997 and 1996. The condensed financial information and notes thereto should be read in conjunction with the consolidated financial statements and notes for the four months ended December 31, 1996 and for the years ended August 31, 1996, 1995 and 1994 included in the Company's 1996 Transition Report on Form 10-K. 9 NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) Because of seasonal and other factors, including the reorganization associated with the Merger, the results of operations for the three and nine months ended September 30, 1997 should not be taken as an indication of earnings for all or any part of the balance of the year. 10 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 September 30, 1997, and the related condensed statements of income for the three and nine month periods ended September 30, 1997 and condensed statement of cash flows for the nine month period ended September 30, 1997. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. The consolidated balance sheet of Southwestern Public Service Company and subsidiaries as of December 31, 1996, was not audited by us and, accordingly, we do not express an opinion on it. The consolidated condensed statements of income for the three and nine month periods ended September 30, 1996 and the consolidated condensed statement of cash flows for the nine month period ended September 30, 1996, of Southwestern Public Service Company and subsidiaries were not reviewed by us and, accordingly, we do not express an opinion on them. ARTHUR ANDERSEN LLP Denver, Colorado, November 10, 1997 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Merger Effective August 1, 1997, following receipt of all required state and Federal regulatory approvals, the Company and PSCo merged in a tax-free "merger of equals" transaction and became wholly-owned subsidiaries of NCE, which is a registered holding company under PUCHA. This transaction was accounted for as a pooling of interest for accounting purposes. Effective with the Merger, Quixx and UE, previously wholly-owned subsidiaries, were transferred through the sale by the Company of all of the outstanding common stock of such subsidiaries at net book value, to NC Enterprises, an intermediate holding company of NCE. See Note 1 in Item 1. FINANCIAL STATEMENTS for additional discussion of the Company, the Merger and the sale of UE and Quixx. The condensed statements of income and cash flows reflect the results of operations of Quixx and UE through July 31, 1997. Where relevant, additional information has been presented to discuss the impact of the transfer of these subsidiaries. Earnings Net income decreased $9.1 million for the third quarter of 1997 and $27.3 million for the nine months ended September 30, 1997, as compared to the same periods in 1996 primarily due to lower earnings of Quixx and UE, and the recognition of higher merger costs. Net income decreased approximately $7.8 million due to the recognition of a gain on the sale of certain water rights by Quixx in August 1996. The June 1997 write-off of investments in the Carolina Energy Project by Quixx and UE contributed to the lower year-to-date September 1997 earnings. Higher merger-related and business integration costs, including executive severance costs, resulting from the August 1, 1997 closing of the Merger contributed to the lower earnings. While third quarter 1997 sales were strong, the wet and mild weather during the spring and early summer of 1997 negatively impacted sales and margins for the nine months ended September 30, 1997. Operating Revenues Electric Operations Substantially all of the Company's operating revenues result from the sale of electric energy. The principal factors determining revenues are the amount and price per unit of energy sold. The following table describes the principal components of changes in electric operating revenues. Increase (Decrease) From Corresponding Prior Period -------------------------- Three Months Ended Nine Months ------------------ ----------- Ended (Thousands of Dollars) Estimated effect on revenues of variations in: Kilowatt-hour (kwh) sales*............ $ 22,394 $ 12,434 Rates and other....................... (2,168) (7,917) Fuel and purchased power cost recovery 6,708 22,132 ----- ------ Subtotal............................ 26,934 26,649 Non-firm kwh sales.................... (1,053) (623) ------ ---- Increase in electric revenue........ $ 25,881 $ 26,026 ======== ======== Percentage increase in kwh sales*........ 11.3% 2.8% ==== === Percentage decrease in non-firm kwh sales (47.9)% (30.8)% ===== ===== *Comprised of retail and wholesale excluding economy (non-firm) wholesale kwh sales. 12 Variations in Kwh Sales. Revenues during the third quarter and the nine months ended September 30, 1997, respectively increased from the comparable periods in 1996, primarily due to an increase in retail and firm wholesale Kwh sales totaling 11.3% and 2.8%. The increase in revenues for the nine months ended September 30, 1997 comparable periods, as compared to the third quarter results, are lower primarily due to the mild, wet weather experienced in the service territory during the spring and early summer months of 1997. Variations in Rates and Other. Decreased revenues for the third quarter and for the nine months ended September 30, 1997 are primarily due to lower interruptible rates available to certain classes of retail and wholesale customers. These rates were approved and implemented in Texas and New Mexico in 1996. Reductions for estimated refunds related to guaranteed merger savings, also contributed to lower revenues for both the quarter and year-to-date comparable periods. Under the various state regulatory approvals, the Company is required to provide credits to retail customers over five years for one-half of the measured non-fuel operation and maintenance expense savings associated with the Merger. The Company will provide a guaranteed minimum annual savings to retail customers of $3.0 million in Texas, $1.2 million in New Mexico, $100,000 in Oklahoma and $10,000 in Kansas. Variations in Fuel and Purchased Power Cost Recovery. The revenue increase in the current period is primarily due to the recovery of the Thunder Basin judgment (See Note 1 in Item 1. FINANCIAL STATEMENTS) and increased natural gas prices and coal costs which are recovered through cost recovery mechanisms. Variations in Non-Firm Kwh Sales. The amount of revenues arising from non-firm sales is dependent, in large part, upon the amount and cost of power available to the Company for sale, the demand for power, the availability of competing hydroelectric power from the Northwest and generation from major plants in the West. The decrease in revenues for the third quarter of 1997 and for the nine months ended September 30, 1997 is due to the availability of low cost power throughout the region. Operating Expenses and Non-Operating Items Fuel and purchased power expense as a percentage of total operating expenses approximated 63.1% and 57.6% for the third quarter of 1997 and 1996, respectively. Fuel and purchased power expense increased $21.8 million in the third quarter of 1997, as compared to the same period in 1996, primarily due to higher electric kwh sales, higher gas costs and costs recognized in connection with the Thunder Basin judgment. The effect of the judgment for the third quarter of 1997 was approximately 0.03 cents per net kwh generated. Overall, fuel expense increased from 2.03 to 2.19 cents per net kwh generated. For the nine months end September 30, 1997 and 1996, fuel and purchased power as a percentage of total operating expenses, approximated 60.5% and 56.9%, respectively. The increase in fuel and purchased power during the nine months ended September 30, 1997, as compared to the same period in 1996, was due primarily to the effects of the Thunder Basin judgment and a slight increase in electric kwh sales for the comparable periods. The effect of the judgment on the cost per kwh generated for the nine months ended September 30, 1997 was 0.12 cents. Overall, fuel expense increased from 2.04 to 2.18 cents per net kwh generated. Operating and maintenance costs decreased for the third quarter of 1997 and for the nine months ended September 30, 1997, as compared to the same period in 1996, primarily due to lower labor and employee benefit costs and other decreases attributable to the Company's overall cost containment efforts. Income taxes decreased for the third quarter of 1997 and for the nine months ended September 30, 1997, as compared to the same periods in 1996, primarily due to lower pre-tax income offset, in part, by the effect of higher 1997 non-deductible merger and executive severance costs. 13 Other Income and Deductions Other income and deductions decreased $14.7 million for the third quarter of 1997, as compared to the third quarter of 1996, primarily due to the 1996 gain recognized by Quixx on the sale of certain water rights and increased 1997 merger and business integration costs, including executive severance costs. This decrease was offset, in part, by higher interest income primarily due to the note receivable from NC Enterprises for the sale of UE and Quixx. Other income and deductions decreased $33.5 million for the nine months ended September 30, 1997, as compared to the same period of 1996, primarily due to the write-off of the Carolina Energy Project, the 1996 gain recognized by Quixx on the sale of certain water rights (approximately $11.8 million) and higher 1997 merger and business integration costs. While costs associated with the Merger, transition planning and implementation have negatively impacted earnings during 1997 and 1996, management anticipates that future operating results will benefit from synergies resulting from the Merger. (For further discussion of the Carolina Energy Project, see Note 2 Commitments and Contingencies in Item 1. FINANCIAL STATEMENTS). Commitments and Contingencies Issues relating to regulatory matters are discussed in Note 2. Commitments and Contingencies 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. Based on a preliminary analysis, NCE and its subsidiaries expect to incur costs of approximately $50-65 million over the next two years to modify its computer software, hardware and other automated systems used in operationsenabling proper data processing relating to the year 2000 and beyond. Approximately one-third of these costs are expected to be incurred by or allocated to the Company. The Company continues to evaluate appropriate courses of corrective action, including the replacement of certain systems. A significant portion of these costs will represent the redeployment of existing information technology resources. Management does not anticipate these activities will have a material adverse impact on the Company's financial position, results of operations or cash flows. Liquidity and Capital Resources Cash Flows - Nine Months Ended September 30 1997 1996 Decrease ---- ---- -------- Net cash provided by operating activities (in millions) ......................... $71.1 $141.9 $(70.8) Cash provided by operating activities decreased in the nine months end September 30, 1997, when compared to the same period in 1996, primarily due to lower earnings (which included the write-off of investments in the Carolina Energy Project by Quixx and UE), the effects resulting from the August 1, 1997 sale of Quixx and UE, and the payment in April 1997 of the Thunder Basin judgment. 1997 1996 Increase ---- ---- -------- Net cash used in investing activities (in millions) ........................ $(121.8) $(87.2) $34.6 Cash used in investing activities increased during the nine months end September 30, 1997, when compared to the same period in 1996, primarily due to the sale of Quixx and UE to NC Enterprises in connection with the Merger. 1997 1996 Increase ---- ---- -------- Net cash provided by (used in) financing activities (in millions) ............. $23.6 $(34.1) $57.7 14 Cash provided by financing activities increased (indicating that there were more borrowings) in the nine months end September 30, 1997, when compared to the same period in 1996, primarily due to a net increase in short-term borrowings, offset in part by a decrease in the proceeds from the sale of long-term debt. These proceeds were used to finance on-going capital expenditures. Electric Utility Industry Electric utilities have historically operated in a highly regulated environment in which they have an obligation to provide electric service to their customers in return for an exclusive franchise within their service territory with an opportunity to earn a regulated rate of return. This regulatory environment is changing. The generation sector has experienced competition from nonutility power producers and the FERC is requiring utilities, including the Company, to provide wholesale transmission service to others and may order electric utilities to enlarge their transmission systems to facilitate transmission services without impairing reliability. State regulatory authorities are in the process of changing utility regulations in response to federal and state statutory changes and evolving markets, including consideration of providing open access to retail customers. All of the Company's jurisdictions continue to evaluate utility regulations with respect to competition. The Company is unable to predict what financial impact or effect the adoption of these proposals would have on its operations. The Merger between the Company and PSCo was, in part, in response to these changing conditions. 15 PART II OTHER INFORMATION Item 1. Legal Proceedings. Thunder Basin Lawsuit - see Note (1). Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 12 Computation of Ratio of Earnings to Fixed Charges for the nine months ended September 30, 1997 and 1996. 15 Letter from Arthur Andersen LLP regarding unaudited interim information. 27 Financial Data Schedule UT. (b) Reports on Form 8-K: - A report dated April 22, 1997 and filed on August 8, 1997 which included Item 4. Changes in Registrant's Certifying Accountant. 16 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOUTHWESTERN PUBLIC SERVICE COMPANY By /s/ R. C. Kelly --------------------------------- R. C. KELLY Executive Vice President and and Chief Financial Officer Dated: November 14, 1997 17 EXHIBIT 12 SOUTHWESTERN PUBLIC SERVICE COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (not covered by Report of Independent Public Accountants) Nine Months Ended September 30, 1997 1996 ---- ---- (Thousands of Dollars, except ratios) Fixed charges: Interest on long-term debt................... $33,057 $34,859 Other interest............................... 4,710 5,623 Dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust .......................... 5,888 - Amortization of debt discount and expense less premium .............................. 1,683 1,581 Interest component of rental expense......... 934 934 --- --- Total ..................................... $46,272 $42,997 ======= ======= Earnings (before fixed charges and taxes on income): Net income .................................. $55,709 $83,021 Fixed charges as above....................... 46,272 42,997 Provisions for Federal and state taxes on income, net of investment tax credit amortization.... 36,894 50,845 ------ ------ Total...................................... $138,875 $176,863 ======== ======== Ratio of earnings to fixed charges.............. 3.00 4.11 ==== ==== 18 EXHIBIT 15 November 10, 1997 Southwestern Public Service Company: We are aware that Southwestern Public Service Company has incorporated by reference in its Registration Statement No. 333-05199 on Form S-3 and Registration Statements No. 33-27452 and 33-57869 on Form S-8, its Form 10-Q for the quarter ended September 30, 1997, which includes our report dated November 10, 1997, covering the unaudited condensed financial statements contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our Firm or a report prepared or certified by our Firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP 19 EX-27 2 SPS FINANCIAL DATA SCHEDULE 3RD QTR. 97
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND CONDENSED STATEMENTS OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 SEP-30-1997 PER-BOOK 1,700,333 124,812 174,566 175,707 0 2,175,418 0 348,402 352,668 701,070 100,000 0 620,572 25,160 0 155,175 173 0 0 0 573,268 2,175,418 748,672 36,894 584,600 621,494 127,178 (29,178) 98,000 42,291 55,709 0 55,709 86,391 33,057 71,126 0.000 0.000
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