-----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, V2jmnRqF4xwEQDSgPudIokXi8bpPcFlfJXmr/MkQhnFkHvcwAN2V9oQK1CH2jPmZ 4SIQKBGJuK3PJcjcHgKQDQ== 0000950162-96-000615.txt : 19961126 0000950162-96-000615.hdr.sgml : 19961126 ACCESSION NUMBER: 0000950162-96-000615 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961125 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: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03789 FILM NUMBER: 96671997 BUSINESS ADDRESS: STREET 1: SPS TOWER STREET 2: TYLER AT SIXTH ST CITY: AMARILLO STATE: TX ZIP: 79170 BUSINESS PHONE: 8063782121 MAIL ADDRESS: STREET 1: PO BOX 1261 CITY: AMARILLO STATE: TX ZIP: 79170 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 2054 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended August 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to _____________________ Commission file number 1-3789 SOUTHWESTERN PUBLIC SERVICE COMPANY (Exact name of registrant as specified in its charter) New Mexico 75-0575400 (State or other jurisdiction of (I.R.S. 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 Securities Registered Pursuant to Section 12(b) of the Act: Name of each exchange Title of each Class on which registered ------------------- ------------------- Common Stock New York Stock Exchange Common Stock Purchase Rights Pacific Stock Exchange Chicago Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: Not applicable Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X As of November 4, 1996, 40,917,908 shares of the Company'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 $1,411,668,000. The definitive proxy statement relating to the Annual Meeting of Stockholders to be held on January 8, 1997, is incorporated by reference in Item 10, Item 11, Item 12 and Item 13 of Part III of this Form 10-K. SOUTHWESTERN PUBLIC SERVICE COMPANY FORM 10-K For the Fiscal Year Ended August 31, 1996 TABLE OF CONTENTS Item Description Page PART I 1 Business ....................................................... 1 General ........................................................ 1 Construction Program ........................................... 4 Peak Load and Capability ....................................... 5 Interconnections ............................................... 6 Fuel Supply and Purchased Power ................................ 7 Regulation ..................................................... 9 Environmental Matters .......................................... 9 Employee Relations ............................................. 10 Nonutility Businesses .......................................... 10 Other .......................................................... 12 Statistical Summary ............................................ 12 Executive Officers of the Registrant ........................... 14 2 Properties ..................................................... 15 Electric Generating Stations ................................... 15 Water Supply ................................................... 16 3 Legal Proceedings .............................................. 16 4 Submission of Matters to a Vote of Security Holders ............ 16 PART II 5 Market for Registrant's Common Equity and Related Stockholder Matters .................................. 17 6 Selected Financial Data ........................................ 18 7 Management's Discussion and Analysis of Financial Condition and Results of Operations .......................... 18 8 Financial Statements and Supplementary Data .................... 23 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......................... 45 PART III 10 Directors and Executive Officers of the Registrant ............. 45 11 Executive Compensation ......................................... 45 12 Security Ownership of Certain Beneficial Owners and Management ............................................... 45 13 Certain Relationships and Related Transactions ................. 45 PART IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K .................................................. 45 Signatures............................................................... 47 Exhibit 12. Statements re Computation of Ratio of Earnings .............. 82 Exhibit 99. Unaudited Pro Forma Information ............................. 92 SOUTHWESTERN PUBLIC SERVICE COMPANY DEFINITIONS ARCO Atlantic Richfield Company Articles the Company's Restated Articles of Incorporation BCH BCH Energy Limited Partnership CAAA Clean Air Act Amendments of 1990 CAMU Colorado Association of Municipal Utilities CCN Certificate of Convenience & Necessity CP&L Carolina Power & Light Company CPUC Colorado Public Utility Commission CRMWA Canadian River Municipal Water Authority Cap Rock Cap Rock Electric Cooperative, Inc. Carolina Carolina Energy Limited Partnership Company Southwestern Public Service Company EDE Empire District Electric Company EPA Environmental Protection Agency EPACT Energy Policy Act of 1992 EPE El Paso Electric Company EWG exempt wholesale generator FERC Federal Energy Regulatory Commission Golden Spread Golden Spread Electric Cooperative, Inc. HSR Act Hart-Scott-Rodino Antitrust Improvements Act of 1976 HVDC high voltage direct current KCC Kansas Corporation Commission kwh kilowatt-hour LSP LS Power, L.L.C. Merger business combination between the Company and PSCo to form a registered public utility holding company Mortgage Indenture of Mortgage and Deed of Trust, dated August 1, 1946, as supplemented and amended, of the Company MW megawatts MWH megawatt-hour NCE New Century Energies, Inc. NMPUC New Mexico Public Utility Commission NOI Notice of Intent NOPR notice of proposed rulemaking NOX oxides of nitrogen NRC Nuclear Regulatory Commission OCC Oklahoma Corporation Commission OPUC Office of Public Utilities Council PNM Public Service Company of New Mexico PSCo Public Service Company of Colorado PSO Public Service Company of Oklahoma PUCT Public Utility Commission of Texas PUHCA Public Utility Holding Company Act of 1935 QF qualifying facility QPS Quixx Power Services, Inc., a wholly owned subsidiary of Quixx Quixx Quixx Corporation RECs rural electric cooperatives RFP request for proposals SAGE S. A. Garza Engineers SEC Securities and Exchange Commission SO2 sulfur dioxide SPP Southwest Power Pool TNP Texas-New Mexico Power Company TUCO TUCO INC. UE Utility Engineering Corporation WPSC Wyoming Public Service Commission WSPP Western Systems Power Pool FORWARD LOOKING INFORMATION Certain matters discussed in this 10-K are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as the Company "believes," "anticipates," "expects" or words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals are also forward-looking statements. Such statements address future events and conditions concerning capital expenditures, earnings, litigation, rate and other regulatory matters, the pending Merger, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those currently anticipated in such statements, by reason of factors such as electric utility restructuring, including the ongoing state and federal activities; future economic conditions; developments in the legislative, regulatory and competitive markets in which the Company operates; and other circumstances affecting anticipated revenues and costs. PART I ITEM 1. BUSINESS GENERAL The Company Southwestern Public Service Company was incorporated in New Mexico in 1921. The Company's principal business is the generation, transmission, distribution and sale of electric energy. Substantially all of its operating revenues were so derived during each of the fiscal years ended August 31, 1996, 1995 and 1994. The Company has two wholly owned subsidiaries, UE and Quixx. See NONUTILITY BUSINESSES and Note (1) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Electric service is provided through an interconnected system to a population of about one million 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 provides electric energy to forty-eight communities with a population of 2,000 or more, thirty-seven in Texas, nine in New Mexico, and one each in Oklahoma and Kansas. Approximately 54% of the Company's operating revenues during fiscal 1996, excluding sales to other utilities, were derived from operations in Texas. The Company's sales are made to retail and wholesale customers. Retail sales to ultimate consumers include residential, commercial and industrial customers. Wholesale sales include sales for resale to RECs, and firm and non-firm sales to other utilities. These non-firm, or economy, wholesale sales to other utilities also include sales of interruptible power made under FERC approved contracts. Firm sales are made under contract with other adjoining utilities while non-firm sales are negotiated on the spot market or sold under the WSPP agreement. See INTERCONNECTIONS. Non-firm sales are made to adjoining and other utilities. The production, transportation and processing of oil and natural gas, and chemical, mineral and light manufacturing industries are of prime importance in the area served. Agriculture and the processing of agricultural products, including wheat, cotton, corn, sugar beets and vegetables, and livestock raising and meat processing are industries of economic significance. The area also contains many other diversified industries and commercial enterprises. See STATISTICAL SUMMARY-ELECTRIC REVENUES. The Company's largest sales of electric energy are during the summer months when demand reaches a peak. The Company's 1996 maximum hourly net peak system demand of 3,876 MW occurred on August 6, 1996. The record net peak of 3,952 MW occurred on July 28, 1995. See PEAK LOAD AND CAPABILITY. The information set forth herein, unless otherwise indicated, does not take into account changes that will result from the Merger. Merger Agreement On August 22, 1995, the Company, PSCo, a Colorado corporation, and NCE, a Delaware corporation, entered into a merger agreement which provided for a "merger of equals" of the Company and PSCo. As part of the Merger process, NCE will register as a public utility holding company under the PUHCA. NCE's business will consist of utility operations and various non-utility enterprises. NCE will become the parent company of both the Company and PSCo. The corporate offices of NCE will be located in Denver, Colorado, with significant operating offices being located in Amarillo, Texas. The Company will remain headquartered in Amarillo, Texas. The Company believes that synergies from the Merger will generate substantial cost savings to the Company which would not be available without the Merger. Management of both the Company and PSCo estimated at the time of the Merger that it will result in potential cost savings of approximately $770 million to NCE during the ten-year period following the Merger. Approximately 50 percent of such savings is expected to be achieved through labor efficiencies, including personnel reductions. Other potentially significant cost savings include fuel procurement and dispatch, deferred generation capacity costs, reduced corporate and administrative programs, and other avoided or reduced operation and maintenance costs. 1 On January 31, 1996, the shareholders of the Company and PSCo voted to approve the Merger. The Merger is subject to various other closing conditions, including the receipt of all necessary governmental approvals. Subject to obtaining all requisite approvals, the parties have targeted completion of the Merger for spring 1997. Set forth below is a summary of the status of various regulatory approval proceedings. PUHCA. Upon consummation of the Merger, NCE must register as a holding company under the PUHCA. The PUHCA imposes restrictions on the operations of registered holding company systems. Among these are requirements that securities issuance, sales and acquisitions of utility assets or of securities of utility companies and acquisitions of interests in any other business be approved by the SEC. The PUHCA also limits the ability of registered holding companies to engage in non-utility ventures and regulates holding company system service companies and the rendering of services by holding company affiliates to the system's utilities. An application has been filed with the SEC under the PUHCA. Discussions among the Company, PSCo and the SEC staff are continuing. Federal Power Act. Section 203 of the Federal Power Act of 1935 requires a public utility to obtain the approval of the FERC prior to merging its jurisdictional facilities with those of any other person. The Company and PSCo reached a non-unanimous agreement with various intervenors, which settlement is supported by the FERC staff. The settlement agreement, which was filed in August 1996, provides for a comprehensive regional planning process for the proposed transmission interconnection between the Company and PSCo. Any interested party will be allowed to participate. The settlement agreement also provides protections to wholesale customers from the costs to complete the Merger. The Company does not anticipate any adverse rate or financial impact from this settlement. Hearings were held before an administrative law judge to address the concerns of CAMU, the one party not joining the settlement agreement. An initial decision by the judge is expected by January 1997. CPUC. On August 23, 1996, the CPUC issued an oral decision approving the Merger, which is expected to be confirmed in a subsequent written decision. PSCo agreed to an $18 million annual electric base rate reduction, followed by a five year base rate freeze. The CPUC's decision also provides for the formation of an earnings sharing plan for the duration of the five-year freeze period, and approves the implementation of PSCo's proposed quality of service plan for electric retail operations, as modified by the stipulation. The CPUC also indicated its preference that PSCo retain its natural gas operations. WPSC. On August 16, 1996, the WPSC issued a written order approving the Merger and reorganization of Cheyenne Light, Fuel and Power Company under NCE. The Company does not anticipate any adverse rate or financial impact from this order. NMPUC. Hearings were concluded on August 22, 1996. Though no settlement was reached, no party is opposing the Merger. On November 15, 1996, a hearing examiner filed a recommended decision that the Merger is in the public interest if certain conditions are met and the Company has substantially agreed to many of these conditions. After an opportunity for exceptions to be filed, the commission will consider the hearing examiner's recommended decision. PUCT. The Company reached a non-unanimous agreement with respect to the Merger with nine of ten intervenors, including the PUCT staff. The settlement provides for the resolution of all outstanding issues, including a finding of the Merger being consistent with the public interest and commencement of the regulatory plan. The regulatory plan, as modified by the stipulation, generally provides for an automatic annual credit for 50% of the merger-related operation and maintenance (O&M) expense savings with a guaranteed annual credit for Texas rate payers of at least $3 million for the first five years after the Merger closes, and allows for recovery of merger-related and business integration costs over the same period. The settlement was submitted to the PUCT, hearings were concluded on August 14, 1996 and the administrative law judge recommended the commission approve the Merger. The Company is awaiting a decision of the PUCT. KCC. The KCC issued its order on November 28, 1995 granting the Company the authority to issue stock certificates to NCE. Kansas law also provides that the Company must enter into an agreement to keep the KCC fully informed about transactions between NCE and the Company in matters which could affect the rates charged to the Company's Kansas retail customers. On November 12, 1996, the Company and the KCC entered into a rate agreement. OCC. No approval of the OCC is required for consummation of the Merger and the OCC has stated that they will not oppose the Merger. However, the OCC staff filed an investigation into the rate effects of the Merger on Oklahoma retail customers. The Company has entered into a rate agreement with the OCC staff and the Oklahoma Attorney General's office providing for rate treatment similar to the Texas stipulation. The OCC approved the rate agreement on September 23, 1996. The Company does not anticipate any adverse rate or financial impact from this agreement. Antitrust. An application was filed pursuant to the HSR Act on August 22, 1996. The applicable waiting period expired September 21, 1996. Therefore, the Company and PSCo may, under the HSR Act, consummate the Merger at any time during the twelve month period ending September 20, 1997. 2 NRC. The NRC has issued a letter ruling allowing the transfer of PSCo's ownership to NCE. PSCo has a nuclear plant decommissioning license issued by the NRC. The future operations and financial position of the Company will be significantly affected by the Merger. Unaudited pro forma combined financial information for NCE at September 30, 1996 and for the twelve months then ended and each of the two years ended December 31, 1995 is included in this report as Exhibit 99. Unaudited Pro Forma Financial Information. Additional information may be found in Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and in Notes (2) and (3) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Competition The EPACT significantly changed the U.S. energy policy and, together with other changes in regulation, including integrated resource planning, and developing technology, is effecting substantial changes to the electric utility industry. As permitted by the EPACT, the Company is providing wholesale transmission service to others. However, the EPACT specifically prohibits FERC mandating transmission service to retail customers. The EPACT has stimulated competition in the wholesale electric markets by creating a new class of independent power producers in addition to QFs. Revisions to the PUHCA have allowed both utilities and non-utilities to form independent power production companies called EWGs, which operate without the restrictions of the PUHCA. EWGs offer alternative sources of power supply to electric utilities across the country. Utilities are often required by state regulation to solicit to purchase power from EWGs, QFs and other utilities before seeking approval to construct new generation of their own. See CONSTRUCTION PROGRAM. Operating in this competitive environment will place pressure on utility profit margins and credit quality. However, since the Company is a low-cost producer, competition for wholesale markets and large industrial customers will create opportunities for the Company to compete for new customers and revenues. Increasing competition has recently resulted in credit rating agencies applying more stringent guidelines when making utility credit rating determinations. On May 31, 1995, the Company filed with the FERC comparable open access transmissions service tariffs to provide other utilities use of the Company's transmission system for wholesale sales. On August 1, 1995, the FERC accepted the proposed tariffs for filing, subject to hearing and refund. On December 8, 1995, the Company filed a settlement agreement covering rates for transmission services. The settlement is pending before the FERC. On April 24, 1996, the FERC issued its Order No. 888 establishing industry-wide regulations promoting wholesale competition through open access non-discriminatory transmission services by public utilities and recovery of the related stranded costs. On the same day, FERC also issued its Order No. 889 implementing regulations on standards of conduct and information availability on transmission capacity, prices, and other information that will enable power competitors to obtain open access non-discriminatory transmission service. On July 9, 1996, the Company filed its open access transmission tariff in compliance with Order No. 888. This transmission tariff is in effect subject to refund and final approval of the FERC. In January 1997 the Company must implement its standards of conduct and its computerized open access same-time information system. The recent FERC requirements will greatly increase wholesale power competition in regional markets. On May 31, 1995, the Company also filed with the FERC a tariff to allow the Company to sell wholesale power at market based rates. On September 1, 1995, the FERC accepted the Company's market based power sales tariff, subject to the refund and the final resolution of the Company's comparable open access transmission tariff filing of May 31, 1995. FERC also stated that the Company cannot use the tariff for sales of power to affiliates. State regulatory authorities are in the process of changing utility regulations in response to federal and state statutory changes and evolving competitive markets. Texas legislation enacted in 1995 recognizes the movement to a more competitive market-place by requiring the PUCT to issue new regulations relating to, among other things, allowance of less than fully costed rates in wholesale and retail markets; recognition of and essentially waiving all Texas utility regulation of EWGs and power marketers; and implementation of transmission access comparable to the owning utility's use of its transmission system for non-FERC regulated utilities (the Company is a FERC regulated utility). These new regulations are under consideration. The Company believes that these statutory and conforming regulations may result in increased wholesale competition. While increased wholesale competition is not expected to adversely affect the Company in the near term, due to the Company's low cost structure, and may favorably impact it in the long term, the Company is unable to predict what financial impact or effect the adoption of any such legislation would have on its operations. All of the Company's regulatory jurisdictions continue to evaluate utility regulations with respect to retail competition ("retail wheeling"). The New Mexico legislature, in 1996, rejected retail wheeling proposals; however, it continued post 3 session committee investigation of the matter. Texas, as well as all other jurisdictions in which the Company operates, are expected to introduce legislative proposals relating to retail wheeling in the 1997 sessions. Although the Company believes it is well positioned to take advantage of the movement towards deregulation and competition, the Company is unable to predict what financial impact or effect the adoption of these proposals would have on its operations. The Company's electric rates are among the lowest in the nation for investor-owned utilities, and its service territory is situated at the intersection of the nation's three electrical grids. These low rates permit the Company to compete effectively with other utilities, EWGs and QFs for sales to retail and wholesale customers within and outside the Company's traditional service territory, as well as retain and develop new retail load. Furthermore, the Company, together with its subsidiary UE, is able to construct new generating facilities at a cost low enough to enable it to compete with EWGs and QFs in their efforts to construct generation for sale to wholesale customers or to self-generate their own needs. The Company is also competing with independent power producers in markets through its subsidiary Quixx. See NONUTILITY BUSINESSES and CONSTRUCTION PROGRAM. In the current regulatory and competitive environments, the Company believes that all of its costs are recoverable through rates. Based on the Company's cost structure and the potential competitive market, the Company believes, but can give no assurance, that it does not have significant stranded cost exposure. See also Note (9) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CONSTRUCTION PROGRAM Cash expenditures for the Company's construction program were $112.0 million in fiscal 1996. The following general discussion of the Company's construction program and related expenditures are for a stand-alone company; that is, without consideration to the proposed Merger. On that basis, the Company's estimated construction expenditures for the next five years are as follows: Estimated for fiscal years ending August 31, -------------------------------------------- 1997 1998 1999 2000 2001 TOTAL ---- ---- ---- ---- ---- ----- (In Millions) Generating facilities $123 $189 $59 $60 $45 $476 Transmission facilities 22 31 30 31 31 145 Distribution facilities 30 33 33 34 35 165 Other 21 14 15 14 15 79 -- -- -- -- -- -- Total cash requirements $196 $267 $137 $139 $126 $865 ==== ==== ==== ==== ==== ==== Estimated annual construction expenditures are substantially higher than actual 1996 expenditures due to a projected increase in demand. In 1997, two 104 MW natural gas-fueled combustion turbines are planned for peaking service at Cunningham Station near Hobbs, New Mexico. The NMPUC has granted the Company a CCN for one of the Cunningham units; the Company's application for the CCN for the second unit is pending before the NMPUC. The costs in 1998 for generating facilities contain estimates for the construction of approximately 500 MW of additional capacity, including approximately $100 million for three gas-fueled combustion turbines contingent upon the outcome of the proposed Golden Spread project discussed below. Construction plans for 1998 also include a 200 MW natural gas-fueled cogeneration facility at the Phillips Petroleum complex near Borger, Texas. The Company was granted a NOI by the PUCT for the 1998 cogeneration facility and also for a 100 MW combustion turbine in 1999. PUCT regulations require that a solicitation be conducted before a utility seeks certification of a new generating unit located in Texas. Consequently, five RFPs were issued to prospective bidders on September 15, 1995, and the initial bids, which were due January 17, 1996, were screened by an independent evaluator, who selected short lists of qualified bidders in each of the five RFP categories. On March 1, 1996, the Company announced that twelve electric power resource proposals, representing 604 MW of capacity had been placed on short lists that may avoid or defer the 300 MW of new generating capacity associated with the Company's NOI. Preliminary analysis of the best and final offers for demand side proposals occurred this summer. However, receipt and analysis of the best and final offers for supply side proposals have been delayed pending determination by the Company of the status of the proposed Golden Spread project discussed below. If the Company's proposed rate-base 1998 cogeneration unit and 1999 combustion turbine unit are not selected through the solicitation process, the estimated total construction budget would decrease by approximately $125 million. Golden Spread, currently a significant full requirements customer of the Company, was granted an NOI by the PUCT in 1995 for construction of 400 MW of peaking generation. Subsequently, Golden Spread, LSP and Quixx entered into a memorandum of understanding to construct the Mustang Station project, a 488 MW combined cycle generating facility. Golden Spread, LSP and Quixx would own an undivided interest in 50%, 25%, and 25%, respectively, of the station. This facility, near Denver City, Texas, would be completed in two phases, one (approximately 273 MW) in 1998 and 4 one (approximately 215 MW) in 1999. Approval of this project by the PUCT would decrease the Company's total estimated construction expenditures by approximately $117 million. The Company has agreed to provide back-up, and commitment and dispatch services for this facility should the project be approved. See PEAK LOAD AND CAPABILITY and INTERCONNECTIONS. The estimates for transmission facilities in the years 1998 through 2000 include $18 million for a transmission line that will extend from the area of Amarillo, Texas to Clovis, New Mexico. This line will improve the reliability of the Company's system. These estimated expenditures have been prepared for planning purposes as part of the Company's resource planning process (discussed below), and are subject to review and revision. Actual expenditures will vary from these estimates, as they have in the past, due to a number of factors, including regulatory requirements related to the planning and siting of facilities, changes in the rate of inflation, construction scheduling, environmental matters, the cost and availability of funds, the rate of kwh sales growth and other changes in business conditions, regulation and legislation. See GENERAL - Competition. The completion of the Merger would significantly impact these estimates. The Company's resource planning process is designed to determine the optimal mix of resources that will reliably meet its load and reserve requirements at the least possible cost, while providing flexibility to respond to uncertainty in the forecasts of load, fuel prices, and financial and other conditions. The Company typically considers its load forecast, demand-side management programs, SPP reserve requirements, and new generating unit alternatives, and after consideration of these and any other relevant factors, arrives at a resource plan which balances cost and reliable system operations. During the five fiscal years ended August 31, 1996, the Company had property additions (including work in progress) to utility plant of $503 million and retirements of $45 million. At August 31, 1996, net utility plant was approximately $1.6 billion. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Liquidity and Capital Resources for information on the Company's estimated capital expenditures and financing program. Also see NONUTILITY BUSINESSES-QUIXX for information on Quixx's investment expenditures. PEAK LOAD AND CAPABILITY Plant capability, peak load, capacity margin and load factor were as follows for the last three fiscal years: Net Fiscal Capability Peak Load Increase (Decrease) Capacity Load Year (MW) (MW) Over Prior Year Margin Factor 1996 4,235* 3,876 (1.9)% 8.5% 62.9% 1995 4,135 3,952** 7.3 4.4 58.4 1994 4,062 3,682 9.3 9.4 61.7 * Includes 100 MW firm purchase from WestPlains Energy. ** This is an all-time high peak. As a member of the SPP, the Company's goal is to maintain a net capacity margin of 13%. Through the expansion of an existing interruptible program for wholesale load, new interruptible programs for retail irrigation and industrial loads, purchased power, and additional capacity installations on the system, the Company expects to be within the SPP guideline after 1997. See CONSTRUCTION PROGRAM. During the period 1997 through 2001, the Company currently estimates that its compound annual growth rates will be 4.6% for wholesale sales, excluding non-firm sales, and 2.3% for retail sales. Total kwh sales estimates show a compound annual growth rate of 2.7% for this forecast period. If the PUCT approves the Golden Spread project (as discussed in CONSTRUCTION PROGRAM), wholesale sales would decrease by approximately 11%, but the overall growth rates are expected to continue to rise. The Company periodically reviews expected growth patterns in its service area and these growth rate estimates are subject to change. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 5 INTERCONNECTIONS The Company is connected with utilities west of its service territory through two HVDC interconnections in New Mexico and has four interconnecting transmission lines with utilities of the SPP. These interconnections are described in the following table:
Voltage (kilovolts) ------------------- Location Interconnecting Utility The Company Other Utility In-Service Date - -------- ----------------------- ----------- ------------- --------------- Near Artesia, NM El Paso Electric Company and Texas-New Mexico Power Company 230* 345 9/84 Near Clovis, NM Public Service Company of New Mexico 230* 345 1/85 Near Oklaunion, TX Public Service Company of Oklahoma 345 345 6/85 Near Elk City, OK Public Service Company of Oklahoma 230 230 5/72 Near Shamrock, TX West Texas Utilities 115 115 7/72 Near Guymon, OK WestPlains Energy 115 115 3/63
* These are HVDC interconnections owned by the interconnecting utilities. The Company has scheduling capabilities over these facilities through the WSPP agreement and pursuant to the agreements with the interconnecting utilities described below. Transactions with the SPP are handled through interties near Elk City and Guymon, Oklahoma, and Shamrock and Oklaunion, Texas. These interties allow the Company to sell or to purchase energy from the eastern electrical grid. Sales through eastern interties accounted for 1.0% of fiscal 1996 total sales. HVDC interconnections link the Company with the western electrical grid of the United States. The Company purchases and sells energy through HVDC interties near Artesia and Clovis, New Mexico. Sales through these interties accounted for 3.2% of fiscal 1996 total sales. The Company is a participant in the FERC approved WSPP bulk power market. This arrangement provides for short-term energy and capacity exchanges, transmission services, flexible pricing, and electronic bulletin board postings of available power and energy. The WSPP encompasses a wide portion of Canada and the United States with over 90 members from northwestern Canada to Mississippi. In fiscal 1996, 1.0% of total sales were due to WSPP bulk power sales. Under an agreement which expires in December 1996, the Company increased sales to EPE through the HVDC interconnection in Eddy County, New Mexico, from 50 MW in 1995 to 75 MW in 1996. Additional firm power sales through this HVDC connection to TNP are made under an agreement with an initial term that expires in 2004. In accordance with this contract, TNP may increase or decrease the contract amount by up to 10% with one year's notice. TNP purchased 59 MW in calendar 1996 and plans to reduce the amount to 53 MW in calendar 1997. The Company has an interconnection agreement with PNM to sell power through the HVDC interconnection near Clovis, New Mexico. Under this agreement PNM purchased 100 MW of interruptible power service through April 1995. Beginning in May 1995, PNM began purchasing 200 MW. The agreement provides that PNM may continue purchasing 200 MW annually through May 2011 except that it may reduce purchases in 25 MW increments upon written notice given at least three years in advance of each incremental reduction. However, the purchase may not be reduced by more than one 25 MW increment in any twelve-month period. PNM has provided written notice of intent to reduce its purchases each year under this agreement, beginning in 1999 with a 25 MW reduction. Under a firm wholesale power agreement which expires in 2014, the Company has contracted to serve the West Texas requirements load of Cap Rock. Cap Rock purchased 100 MW of service in 1996 and sales to it are forecasted to increase approximately 3% annually in 1997 and beyond. The Company currently supplies power to Golden Spread under a full requirements contract approved by the FERC. As discussed under CONSTRUCTION PROGRAM, Golden Spread has announced its intention to construct generation and Quixx and an unaffiliated third party have entered preliminary arrangements with Golden Spread under which a 488 MW power plant would be constructed with approximately 273 MW being completed in 1998 and 215 MW in 1999. The amount of power purchased by Golden Spread from the Company would be reduced correspondingly upon such capacity being placed in service. 6 The Company entered into an agreement with EDE to sell interruptible wholesale power through the interconnections near Elk City, Oklahoma and Oklaunion, Texas. Under this agreement, which expires in 2001, EDE purchased 35 MW in 1996 with such purchases to increase to 45 MW by 1999. PSO provides transmission service for this power. The Company entered into an agreement with WestPlains Energy to purchase 100 MW of firm power for the summer months of 1996 and 1997. Interconnection sales for fiscal 1996 to the eastern electrical grid totaled 214,015 MWH, including 190,149 MWH of WSPP sales. Sales to the western electrical grid totaled 668,878 MWH, consisting of 175,987 MWH of firm sales and 492,891 MWH of non-firm sales, including 6,707 MWH of WSPP sales. FUEL SUPPLY AND PURCHASED POWER Fuel Supply Approximately 53% of the Company's present generating capacity is fueled by coal, 46% by gas and 1% by inert by-product gases, purchased steam and oil. See PROPERTIES for information about generating plants. The Company's actual and anticipated fuel use, as reported in the table below, is based on MMBtu use for generation of electricity excluding non-firm sales. The unpredictability of the non-firm sales market precludes its inclusion as a factor in determining these fuel use projections. Estimated for fiscal years ending August 31, -------------------------------------------- Fiscal Fuel 1996 1997 1998 1999 2000 2001 - ---- ---- ---- ---- ---- ---- ---- Coal 69.7% 71.0% 65.6% 63.0% 62.1% 61.3% Gas 29.5 28.3 33.6 36.2 37.2 37.9 Other 0.8 0.7 0.8 0.8 0.7 0.8 Anticipated fuel use is based upon numerous assumptions with respect to, among other things, regulatory requirements relating to cogeneration, environmental protection and competition, load growth, cost and availability of boiler fuels and the extent to which the Company receives and can utilize contracted-for gas, renegotiates present gas contracts and enters into new agreements. Consummation of the Merger will also impact anticipated fuel use. Actual fuel mix in future years may vary substantially from these estimates because these assumptions may not be realized. Coal The Company purchases all of its coal requirements for Harrington and Tolk Stations from TUCO, in the form of crushed, ready-to-burn coal delivered by coal-handling facilities owned by Wheelabrator Coal Services Co. to the Company's boiler bunkers located within the Company's coal-fueled stations where it is processed for burning. The coal is transported for TUCO by rail, primarily from mines located in Wyoming, to TUCO's stockpiles which are adjacent to the Company's coal-burning generating stations. At August 31, 1996, TUCO's coal inventories at the Harrington and Tolk sites were 777,978 tons and 745,392 tons (approximately 60 days supply), respectively. The Company's planned purchase of TUCO from Cabot Corporation was cancelled because the PUCT declined to grant a needed waiver in fuel-cost rules. See Note (2) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. TUCO has long-term contracts with ARCO for a supply of coal in sufficient quantities to meet all of the Company's needs for Harrington and Tolk Stations. See ITEM 3. LEGAL PROCEEDINGS. Specific coal reserves in the Powder River Basin in Wyoming have been dedicated by ARCO to meet the contract quantities. The coal is transported for TUCO by Burlington Northern Railroad to Harrington Station near Amarillo, Texas, a distance of approximately 896 railroad miles, and by Burlington Northern Railroad and the Atchison, Topeka and Santa Fe Railway Company to Tolk Station near Muleshoe, Texas, a distance of approximately 1,032 railroad miles. Transportation charges make up approximately 51% of the total cost of the coal. The coal purchased from TUCO had an average heat content of 8,683 Btu per pound at Harrington Station and 8,698 Btu per pound at Tolk Station for the twelve months ended August 31, 1996. The Company expects that the Btu content of the coal will vary between 8,200 and 9,000 Btu per pound and average 8,700 Btu per pound. The low sulfur content of this coal enables the Harrington and Tolk units to operate without the use of flue gas desulfurization scrubbers and to meet current state and federal SO2 emissions requirements. Unit No. 1 at Harrington Station is equipped with an electrostatic precipitator, and Unit Nos. 2 and 3 at Harrington Station and both units at Tolk 7 Station are equipped with fabric filtration systems. These units have historically emitted less than one pound of SO2 per MMBtu of heat input compared to the EPA New Source Performance Standard applicable to these units of 1.2 pounds of SO2 per MMBtu of heat input. See ENVIRONMENTAL MATTERS. Natural Gas The Company has a number of contracts of short and intermediate terms with various natural gas suppliers operating in gas fields with long life expectancies in or near its service area. In fiscal 1996 these gas contracts allowed the Company to maximize competition between fuel suppliers and helped minimize the Company's fuel cost during volatile market conditions. During this period, the Company had under contract sufficient firm gas to meet all its requirements. However, due to flexible contract terms, approximately 24% of the Company's gas requirements were purchased under spot agreements. Oil Certain of the Company's generating stations can burn oil in emergency situations. Oil is stored at these stations in sufficient quantities to meet anticipated emergency requirements. These stations have an aggregate capability of 975 MW. Small quantities of oil are also burned for maintenance purposes. Cost of Fuel and Purchased Power Details of the Company's cost of fuel and purchased power are presented below: Fiscal year ended August 31, 1996 1995 1994 Cost of fuel and purchased power (000): Coal $277,908 $250,551 $276,825 Natural gas 136,139 116,481 123,503 Oil (1) 97 119 49 Other (2) 2,879 2,901 2,830 Purchased power 18,010 5,241 4,604 Total fuel and purchased power cost $435,033 $375,293 $407,811 Cost of fuel per MMBtu: Coal $1.883 $1.814 $1.801 Natural gas 2.154 1.631 2.015 Oil (1) 4.194 3.635 3.741 Other (2) 1.766 1.754 1.806 Average (excluding purchased power) 1.963 1.752 1.862 Cost of fuel per net kwh generated (in cents): Coal 1.875 1.797 1.788 Natural gas 2.288 1.687 2.118 Oil (1) 4.858 3.784 4.160 Other (2) .941 .934 .953 Average cost of fuel (excluding purchased power) 1.978 1.749 1.866 Average cost of fuel (including purchased power) 1.957 1.745 1.865 Average cost of purchased power per net kwh purchased (in cents) 1.569 1.535 1.829 MMBtu of fuel consumed (000) 212,485 211,202 216,576 (1) Small quantities of fuel oil are burned for maintenance purposes. (2) Includes purchased steam used at CZ-2 plant and hot nitrogen used at CZ-1 plant. The average cost of fuel per MMBtu for fiscal 1996 increased 12.0% to $1.96 when compared to 1995; and for the three months ended August 31, 1996, the average was $2.03. The average cost of fuel per net kwh generated for fiscal 1996 increased 13.1% to 1.98 cents when compared to last year and for the three months ended August 31, 1996 was 2.09 cents. This increase in fuel cost per net kwh in fiscal 1996 was primarily the result of increased coal and gas costs. 8 Fuel Cost Recovery Fuel and purchased power costs are recoverable in Texas through a fixed fuel factor which is a part of the Company's rates. If it appears that the factor will materially overrecover or underrecover these costs, the factor may be revised upon application by the Company or action by the PUCT. The rule requires refunding and surcharging under/overrecovery amounts including interest when they exceed 4% of the utility's annual fuel and purchased power cost, as allowed by the PUCT, if this condition is expected to continue. The PUCT periodically examines the Company's fuel and purchased power costs. In all other jurisdictions, the Company currently recovers substantially all increases and refunds substantially all decreases in fuel and purchased power costs pursuant to monthly adjustment and clauses. Currently the Company has approximately $7 million in underrecovered fuel costs, and on November 1, 1996, filed with the PUCT for a change in the fuel factor. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Notes (1) and (10) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The Company is crediting certain wholesale customers' fuel cost with 75% of the margin from coordination energy sales to other utilities and is crediting its New Mexico retail customers with 75% and Texas retail customers with 100% of the margin from coordination sales to other utilities and demand charges on interruptible wholesale sales (as approved by regulatory agencies in those jurisdictions). See Note (10) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. This margin is the difference between the revenues from these sales and incremental costs to generate the power for the sales. Continued coordination and other non-firm energy sales would act to lower the electric bills of these customers; however, the Company cannot predict the extent of such sales. REGULATION General In fiscal 1996, 54.3% of total revenues were derived from sales subject to the jurisdiction of the PUCT and the Texas municipalities served by the Company. The percentages of revenue subject to the jurisdictions of the FERC, the NMPUC, and the OCC and the KCC were 28.1%, 16.2%, 1.2% and 0.2%, respectively. The PUCT has jurisdiction over the Company's Texas operations as an electric utility, and original and appellate jurisdiction over its Texas retail rates and services. The Texas municipalities exercise original jurisdiction over rates within their respective city limits. The FERC has jurisdiction over the Company's rates for sales of electricity for resale. The NMPUC, the OCC and the KCC have jurisdiction with respect to retail rates and services in their respective states. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Notes (1) and (10) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The NMPUC and the KCC also regulate the Company's issuance of securities. The NMPUC also must approve any capital investment by the Company in its subsidiaries and has limited the amount the Company can contribute to Quixx. The Company has been authorized to make investments in Quixx of up to $90 million at the cumulative rate of $15 million per year for six years. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The OCC also regulates the issuance of securities which are secured by a lien on Company assets located within the State of Oklahoma. The books of the Company are kept in accordance with the FERC's Uniform System of Accounts and all of the Company's state jurisdictions have accepted this system. OPUC recently filed a complaint urging for a rate investigation of the Company's Texas retail jurisdictional rates. OPUC is claiming that the Company is over-earning by $10 to $18 million per year on its Texas retail jurisdictional operations and has requested that the PUCT conduct a general rate investigation. The Company has filed a response to OPUC's rate investigation application and moved to dismiss the case. The Company is awaiting further action by the PUCT. ENVIRONMENTAL MATTERS The Company's facilities are regulated by federal and state environmental agencies. These agencies have jurisdiction over air emissions, water quality, wastewater discharges, solid wastes and hazardous substances. Various Company activities require registrations, permits, licenses, inspections and approvals from these agencies. The Company has received all necessary authorizations for the construction and continued operation of its generation, transmission and distribution systems. Company facilities have been designed and constructed to operate in compliance with the environmental standards. The CAAA required the Company to undertake a consolidated permitting program for its existing fossil-fueled plants. Under this permitting program, the Company is paying emissions fees of approximately $800,000 annually to the Texas 9 and New Mexico state air quality agencies. Beginning in the year 2000, Phase II of the CAAA will require more stringent limits on SO2 emissions at the Company's existing fossil-fueled plants. However, current regulations permit compliance with sulfur emissions limitations commencing in the year 2000 by using SO2 allowances allocated to plants by the EPA, using allowances generated by reducing emissions at existing plants and by using allowances purchased from other companies. Based upon information from the Company's fuel suppliers, the SO2 allowances issued by the EPA approximate the Company's projected SO2 emissions. The Company monitors options to insure that allowances will be sufficient to economically operate the Company's existing plants without significant emission reductions. The CAAA also requires the EPA to develop new NOx emission standards for existing and new plants which may be more stringent than the current standards. The Company anticipates, but can give no assurance, that it will be able to comply with Phase II NOx emission standards with no additional material capital cost. The Company continues to monitor the impact that the CAAA may have on the Company. Capital expenditures for environmental protection facilities aggregated approximately $2.8 million, $4.1 million, and $11.6 million for fiscal 1996, 1995 and 1994, respectively. Estimates of future capital expenditures for environmental protection facilities are subject to change but the Company has included $9.7 million in its construction program for these expenditures during the five years ending August 31, 2001, of which $4.2 million is for fiscal 1997. The Company has not developed any specific site removal and exit plans for its fossil fuel plants or substation sites. Plant removal and exit plans are under development. When such plans are developed, the Company intends to treat removal and exit costs as a cost of retirement in utility plant and include them in depreciation accruals. An estimated removal cost (based on historical experience) is currently included in depreciation expense. EMPLOYEE RELATIONS The Company had approximately 1,950 utility employees at August 31, 1996. Of these, approximately 900 operating, maintenance and construction personnel are represented by Local Union No. 602, International Brotherhood of Electrical Workers, AFL-CIO. Pursuant to the collective bargaining agreement with this union which expires October 31, 1999, wages increased 3% effective November 1, 1996. The contract provides for an increase on November 1, 1997 and 1998 of 3%, plus 80% of the amount by which the Consumer Price Index exceeds 3.5%. The wage increase effective November 1, 1996, was also provided to employees not represented by the union. A hiring freeze has been implemented during the Merger process. NONUTILITY BUSINESSES Utility Engineering Corporation UE is a wholly owned subsidiary formed in 1986. It is engaged in engineering, design, construction management and other miscellaneous services, employing approximately 120 employees. UE's assets at August 31, 1996, were approximately $45.9 million and total revenues for fiscal 1996 were $21.2 million. UE is currently involved in a broad array of projects for nonaffiliate customers, providing general engineering and design services. UE also is providing services to the Company, at cost, as well as working jointly with Quixx on cogeneration and waste-to-energy projects. Because of the lack of major central station power plant design and construction in the U.S. electric industry, UE is actively seeking other types of plant engineering projects and will continue to broaden its base of customers and diversity of projects. UE is currently the engineer for the Carolina Energy Project near Kinston, North Carolina, in which Quixx is an equity owner, and, during the past twelve months, has performed engineering and other services for combustion turbine projects in the Dominican Republic, Kuwait and Columbia, South America. UE also has active proposals for engineering work on projects in several other international locations. In 1996, UE created two wholly owned subsidiaries _ Universal Utility Services Company (UUC) and Precision Resource Company (PRC). UUC was created from operations and services which UE has provided since it was formed. Through UCC, UE provides cooling tower maintenance and repair, certain other industrial plant improvement services, and engineered maintenance of high voltage plant electrical equipment. Through PRC, UE provides contract professional and technical resources for customers in the energy and industrial sectors. In fiscal 1996, UE wrote off its investment in SAGE, due to unprofitability of this business. UE also owns a 49% interest in Vista Environmental Services, LLC, which performs environmental consulting for energy and industrial customers in both the private and government sectors, primarily in the southwestern United States. 10 Quixx Corporation Quixx is a wholly owned subsidiary formed in 1986. Its primary business is investing in and developing cogeneration and energy-related projects. Quixx also holds water rights and certain other nonutility assets. Quixx employs approximately 65 employees. Quixx's assets at August 31, 1996, were approximately $99.0 million and total revenues for fiscal 1996 were $17.7 million. In 1996 Quixx invested $10.8 million in independent power projects and expects to continue to make similar investments in the future dependent upon suitable investment opportunities and the availability of capital. The NMPUC has authorized the Company to make investments in Quixx of up to $90 million at the cumulative rate of $15 million per year for six years. Quixx holds a 42% limited partnership interest in BCH which owns a waste-to-energy cogeneration facility located near Fayetteville, North Carolina. The facility provides steam to a nearby DuPont plant and electric power is sold to CP&L. The facility provides 17 MW of power to the CP&L grid. Limited commercial operation of the BCH project began in June 1996; however, the facility has not yet achieved the expected performance level. Quixx has invested approximately $14.3 million in this project to meet its capital requirements. Improvement plans are currently being evaluated, some of which may require additional capital. Quixx is currently negotiating with the project debt and equity holders concerning the restructuring of the project to achieve the required improvements on economically viable terms. This investment in BCH was funded with a capital contribution from the Company. QPS is the contract operator of the BCH project. Quixx also holds a 95% interest in Vedco Louisville L.L.C., a Delaware limited liability company, which owns a facility consisting of two gas-fired boilers providing steam to a DuPont plant in Louisville, Kentucky. Quixx's investment of approximately $6.0 million in this facility was funded by a capital contribution from the Company. Commercial operation began in December 1994. Quixx Jamaica, Inc., a Delaware corporation and a wholly owned subsidiary of Quixx, holds a 99% limited partnership interest in KES Jamaica, L.P. which owns a facility consisting of two oil-fired combustion turbines located in Montego Bay, Jamaica, W.I. The facility receives fuel from Jamaica Public Service Company, Ltd. and returns up to 43 MW of power to their grid. Commercial operation began in December 1994. Quixx's investment of approximately $10.8 million in this facility was funded by a capital contribution from the Company. Quixx holds a 32 1/3% limited partnership interest, and through Quixx Carolina, Inc., a Delaware corporation and a wholly owned subsidiary of Quixx, a 1% general partnership interest in Carolina which is constructing waste-to-energy cogeneration facilities in Wilson and Lenoir Counties, North Carolina. The facilities will provide steam to a DuPont plant located near Kinston, North Carolina and up to 5 MW of electric power to the CP&L grid. Quixx's investment of approximately $13.4 million in this facility was funded primarily by a capital contribution from the Company. QPS will be the contract operator for the Carolina project. Commercial operation is scheduled for July 1997. Quixx provided $5.5 million for a 24.67% limited liability partnership interest and through Quixx WPP94, Inc., a wholly owned subsidiary of Quixx, a 0.33% general partnership interest in Windpower Partners, 1994, L.P. which constructed a 35 MW wind generation facility in Culberson County, Texas. Electricity from the facility is being provided to the Lower Colorado River Authority and the City of Austin. Commercial operation began in September 1995. Quixx owns and operates Amarillo Railcar Services, a railcar maintenance facility which provides inspection, light and heavy maintenance and storage for unit trains. Quixx also finances sales of heat pumps and continues to market other nonutility goods and services. In addition Quixx has royalty interests in coal and other minerals produced and to be produced from certain New Mexico properties owned by the Pittsburgh and Midway Coal Mining Company. In August 1996 Quixx completed the sale of certain water rights to the CRMWA for $14.5 million which resulted in an after-tax gain of approximately $7.7 million. Quixx holds a 99% limited partner interest and through Quixlin Corp., a Nevada corporation and a wholly owned subsidiary, a 1% general partner interest in Quixx Linden, L.P. which will construct a 23 MW natural gas fired cogeneration facility located in Linden, New Jersey. This facility, estimated to be completed in mid-1998, will provide steam, compressed air and electricity to General Motors. Fifty percent of this ownership interest will be sold to an unaffiliated party on or prior to completion of this project. QPS will operate this facility. 11 OTHER City of Las Cruces The City of Las Cruces (the City) continues to pursue a municipal electric utility system by purchase or through condemnation of the EPE facilities serving the City. In August 1994 the Company and the City entered into a fifteen year contract for the Company to provide all of the wholesale electric power and energy required by the City during the term of the contract if the City establishes a municipal system. The City's wholesale requirements are expected to be approximately 86 MW in 1997, the earliest it is believed service could commence. The contract becomes effective on the acquisition of (i) a distribution system by the City; (ii) the necessary transmission delivery and back-up agreements by the Company; and (iii) the required regulatory approvals by the City and the Company. If the specified events are not completed by July 1, 1998, either the Company or the City has the right to cancel the contract. Under the contract, the rates and charges for service to the City are fixed until January 1, 2001. The Company and the City also entered into a System Purchase Option and Rate Agreement in August 1994. That agreement grants the City the option to sell to the Company the electric utility system serving the City (including distribution, subtransmission, and transmission facilities) which the City plans to acquire by purchase or through condemnation proceedings. The agreement has a three-year term beginning at the time the City acquires the facilities and ending no later than January 1, 2002. The purchase price that would be paid by the Company would be equal to the amount required to retire the unamortized outstanding debt incurred by the City in acquiring the facilities from EPE plus the City's reasonable costs in acquiring the facilities. The agreement provides that the Company will charge a total rate that shall be less than the projected rate to be charged by EPE and the cost of fuel EPE would bill to its customers. The Company has the right to terminate the agreement if, in the Company's sole discretion, it deems any proposed condemnation award to be excessive, or upon the occurrence of certain other events. The agreement further provides, that if the City abandons or dismisses condemnation proceedings as a consequence of the Company's termination of the agreement, the Company will reimburse the City for one-half of its reasonable litigation expenses and for any of EPE's damages and litigation expenses that the City is obligated to pay by final court order. In conjunction with the agreement, the NMPUC has initiated Case 2651 to investigate whether the agreement constitutes a security, or the guarantee of a security, under the New Mexico Public Utility Act. The Company has responded to the Commission's Order to Show Cause and does not believe the agreement to be a security or the guarantee of a security. A hearing is expected in 1997. STATISTICAL SUMMARY Electric Revenues Operating revenues attributable to commercial and industrial sales of electric energy accounted for 50% of total operating revenues in fiscal 1996. Selected operating revenues and kwh sales follow: Fiscal year ended August 31, ---------------------------- 1996 1995 1994 ---- ---- ---- Revenue Kwh Revenue Kwh Revenue Kwh ------- --- ------- --- ------- --- (Dollars In Thousands - Kwh In Millions) Commercial and Industrial: Oil and gas related $140,076 4,225 $137,646 4,117 $146,251 4,217 Chemical, mineral and other manufacturing 49,395 1,522 47,579 1,489 49,793 1,477 Petroleum refining 36,285 991 35,123 978 35,273 941 Agricultural 18,738 388 19,545 417 20,199 411 Feedlots and packing plants 10,247 284 9,592 263 9,589 258 Irrigation 13,240 205 12,118 190 11,370 174 The Company's largest system customer in fiscal 1996 was Amoco Corporation, which purchased approximately 1.5 billion kwh resulting in approximately $30.4 million in revenues. 12 Electric Operating Statistics Fiscal year ended August 31, ---------------------------- 1996 1995 1994 ---- ---- ---- Energy generated and purchased (kwh-000): Generated _ net output 21,082,150 21,159,953 21,609,287 Purchased and other 1,226,856 350,183 253,314 Net interchange 120 469 53 ---------- ---------- ---------- Total 22,309,126 21,510,605 21,862,654 Company use, lost and unaccounted for (1,420,687) (1,175,029) (1,459,717) ----------- ---------- ---------- Energy generated and purchased, net 20,888,439 20,335,576 20,402,937 ========== ========== ========== Sales (kwh-000): Retail: Residential 2,868,982 2,709,089 2,684,365 Commercial 2,886,807 2,809,692 2,692,848 Industrial 7,813,433 7,685,938 7,635,066 Other 571,579 548,012 533,305 Wholesale: Rural electric cooperatives 5,239,474 4,682,975 4,157,209 Other utilities _ firm 604,860 614,609 768,850 Other utilities _ non-firm 903,304 1,285,261 1,931,294 ------- --------- --------- Total sales 20,888,439 20,335,576 20,402,937 ========== ========== ========== Electric revenues (000): Retail: Residential $175,167 $60,908 $163,614 Commercial 157,629 147,764 146,901 Industrial 281,863 267,842 276,335 Other 29,813 27,331 27,531 Wholesale: Rural electric cooperatives 189,480 165,930 147,010 Other utilities _ firm 27,839 29,494 31,644 Other utilities _ non-firm 33,720 31,351 47,150 Miscellaneous* 4,612 4,194 3,956 ----- ----- ----- Total electric revenues* $900,123 $834,814 $844,141 ======== ======== ======== *Includes intercompany revenues. Customers (end of period): Retail: Residential 308,554 300,459 297,853 Commercial 57,204 54,330 53,489 Industrial 12,418 11,896 11,422 Other 750 665 656 Wholesale: Rural electric cooperatives 17 17 17 Other utilities 180 157 128 ------- ------- ------- Total customers 379,123 367,524 363,565 ======= ======= ======= Cost per net kwh generated (in cents): Operation 2.51 2.26 2.36 Maintenance .15 .14 .13 Average revenue per kwh sold (in cents): Residential 6.11 5.94 6.10 Commercial 5.46 5.26 5.46 Industrial 3.61 3.48 3.62 Wholesale excluding non-firm sales to other utilities 3.72 3.69 3.63 Total sales 4.31 4.11 4.14 13 EXECUTIVE OFFICERS OF THE REGISTRANT
Years Continuous Present office, date elected thereto, and Age at Service with Name previous title if in current office less than 5 years 11-1-96 Company - ---- ----------------------------------------------------- ------- ------- Bill D. Helton Chairman of the Board and Chief Executive Officer since 3-1-91; 58 32 President and Chief Executive Officer, 10-23-90 to 3-1-91 David M. Wilks President and Chief Operating Officer since 9-1-95; 49 19 Senior Vice President, 1-9-91 to 9-1-95; Doyle R. Bunch II Executive Vice President, Accounting and Corporate Development 50 20 since 9-25-92; Executive Vice President and Chief Financial Officer, 10-23-90 to 9-25-92 Kenneth L. Ladd, Jr. Senior Vice President since 1-9-91; 57 35 John L. Anderson Vice President, Personnel since 1-11-89 62 37 Robert D. Dickerson Secretary and Treasurer since 1-13-88 47 21 Gerald J. Diller Vice President, Rates and Regulation since 7-27-93; 62 30 Group Manager, Rates and Regulation, 2-1-89 to 7-27-93 Gary L. Gibson Vice President, Marketing since 1-1-85 54 32 Henry H. Hamilton Vice President, Production since 1-14-87 58 32 Carl E. Jeans Vice President, Management Systems since 1-9-85 55 30 John McAfee Vice President, Engineering and Operations since 9-1-95; 51 23 Vice President, Panhandle Division and Corporate Communication, 2-1-95 to 9-1-95; Vice President, Corporate Services, 7-25-89 to 2-1-95
None of the above executive officers of the Company are family related. Officers of the Registrant are elected by, and hold office at the will of, the Board of Directors and do not serve a "term of office" as such. There is no arrangement or understanding between any officer and any other person pursuant to which the officer was selected. 14 ITEM 2. PROPERTIES. ELECTRIC GENERATING STATIONS at August 31, 1996
Maximum Station Totals Generator Maximum Net Name-plate Generator Net Generation Rating Name-plate Capability (Mwh) Fiscal Year (Kilowatts) Principal Rating (Kilowatts) Year Ended Generating Station Location New (A) Fuel (Kilowatts) (B) August 31, 1996 - ------------------ -------- --- --- ---- ----------- --- --------------- Steam Harrington Near Amarillo, TX 1976 360,000 Coal 1978 360,000 1980 360,000 1,080,000 1,066,000 7,587,731 Tolk Near Muleshoe, TX 1982 568,000 Coal 1985 568,000 1,136,000 1,080,000 7,336,317 Jones Near Lubbock, TX 1971 247,500 Natural gas 1974 247,500 495,000 486,000 2,172,003 Plant X Near Earth, TX 1952 48,000 Natural gas 1953 98,000 1955 98,000 1964 190,400 434,400 442,000 901,672 Nichols Near Amarillo, TX 1960 113,635 Natural gas 1962 113,635 1968 247,500 474,770 457,000 1,062,550 Cunningham Near Hobbs, NM 1957 75,000 Natural gas 1965 190,400 265,400 267,000 1,099,466 Maddox Near Hobbs, NM 1967 113,636 Natural gas 113,636 118,000 499,587 CZ-2 Near Pampa, TX 1979 37,440 Purchased steam 37,440 26,000 207,265 Moore County Near Sunray, TX 1954 49,000 Natural gas 49,000 48,000 60,384 --------- --------- ---------- Subtotal, steam 4,085,646 3,990,000 20,926,975 --------- --------- ---------- Other Gas Turbine Carlsbad Carlsbad, NM 1968 16,320 Natural gas 16,320 16,000 7,600 CZ-1 Near Pampa, TX 1964 13,281 Hot nitrogen 13,281 13,000 98,640 Maddox Near Hobbs, NM 1976 86,850 Natural gas 1963 11,500 98,350 76,000 40,220 Riverview Near Borger, TX 1916 25,000 Natural gas 25,000 25,000 7,681 Diesel Engines Tucumcari Tucumcari, NM 1975 1,000 Diesel 1959 2,250 1963 1,000 1964 3,000 1968 4,100 1977 4,800 16,150 15,000 1,034 ---- ----- ------ ------ ----- Subtotal, other 169,101 145,000 155,175 ------- ------- ------- Total, all generating stations 4,254,747 4,135,000 21,082,150 ========= ========= ==========
(A) Pursuant to FERC instructions, name-plate ratings show the manufacturer's maximum generator rating of each unit. (B) Capability as used herein represents the demonstrated dependable carrying abilities of the respective stations during peak periods as proven under actual operating conditions. 15 WATER SUPPLY The Company has an adequate supply of water for condensing and other purposes at its principal generating stations for the design life of the stations. To ensure future flexibility in the use of these stations beyond their original design lives, the Company is negotiating additional water supplies for certain generating stations. In an effort to conserve the fresh, potable water of the area, the Company purchases for its Harrington and Nichols Stations located near Amarillo, Texas, and its Jones Station located near Lubbock, Texas, an aggregate of approximately 15,000,000 gallons of water per day from sewage treatment plants owned by the respective cities, which it processes to a point which permits its use as cooling tower water. The water is subsequently used for irrigation. ITEM 3. LEGAL PROCEEDINGS. The Company has been named as a defendant in a case entitled Thunder Basin Coal Co. v. Southwestern Public Service Co., No. 93-CV-304B (D. Wyo.). The action was served on the Company on February 14, 1994 and it involves a dispute over the interpretation of a clause in a contract between Thunder Basin and TUCO for the supply of coal for use by the Company. The suit sought a determination that there has been a partial repudiation of the agreement by TUCO which has damaged Thunder Basin, and that the Company is liable for that damage as a result of its guarantee of TUCO's performance. Thunder Basin also claimed that the Company interfered with the contract between Thunder Basin and TUCO, causing Thunder Basin damage. The total alleged damages sought by Thunder Basin was in excess of $20 million. The Company denied any liability, and asked the court to determine that its interpretation of the contract was correct. Thunder Basin's Wyoming lawsuit in federal court went to trial in late October 1994. On November 1, 1994 the jury returned a verdict in favor of Thunder Basin and against the Company finding that there had been a partial repudiation of the contract and that the Company had interfered with Thunder Basin's contract with TUCO. The jury awarded damages to Thunder Basin of approximately $18.8 million. The Company has appealed the judgement to the Tenth Circuit Court of Appeals and the appeal is progressing. The Company, in conjunction with TUCO, has commenced a related case against Thunder Basin and its parent ARCO in state court in Amarillo, Texas (No. 80,280-E, TUCO, Inc. v. Thunder Basin Coal Company). This suit involves some of the same issues of contract interpretation raised in the Thunder Basin Wyoming suit, as well as the Company's claims that it has been overcharged approximately $40 million for coal during the course of the contract. This litigation is proceeding. TUCO requested an audit of Thunder Basin's and ARCO's costs and expenses used to calculate the cost escalation under the contracts which supply coal for the Company. Thunder Basin and ARCO filed suit in Wyoming state court (No. 20041, Thunder Basin Coal Company v. TUCO, Inc. and Southwestern Public Service Company) on June 26, 1995, seeking a declaratory judgment of the extent of the information which must be revealed to TUCO under the coal supply contracts. That suit was amended in September 1995 to request a declaratory judgment of the issues pending in the Texas state court litigation. Management believes that if a payment must ultimately be made to Thunder Basin it would be recoverable from ratepayers, although any such recovery would be subject to regulatory review. The FERC has ruled that the portion of the $18.8 million in potential damages attributable to rates regulated by it would be recoverable from ratepayers to the extent of demonstrated benefits. Management believes that ultimate resolution will not have a material adverse effect on the Company's consolidated financial statements. The Company is involved in ordinary routine litigation incidental to the business which litigation is not considered material. See REGULATION, ENVIRONMENTAL MATTERS and Notes (7), (9) and (10) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for information on regulation, environmental and rate matters. See also OTHER - City of Las Cruces. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted during the fourth quarter of the Company's 1996 fiscal year to a vote of its security holders. 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The principal markets on which the Company's common stock is traded are the New York, Chicago and Pacific Stock Exchanges. The common stock has unlisted trading privileges on the Boston and Philadelphia Stock Exchanges. The table below presents the high and low market prices as reported by the National Quotations Bureau, Inc., and dividend information for the Company's common stock. Market Price Dividends High Low Declared 1996 - Fiscal Quarter Ended: November 30, 1995 $33-7/8 $30 $0.55 February 29, 1996 33-7/8 32-1/8 0.55 May 31, 1996 34-1/8 30-5/8 0.55 August 31, 1996 33-3/8 30-1/4 0.55 1995 - Fiscal Quarter Ended: November 30, 1994 $27 $25-1/8 $0.55 February 28, 1995 29-3/8 25-7/8 0.55 May 31, 1995 29 27-1/4 0.55 August 31, 1995 30-3/4 28-5/8 0.55 The Company declared dividends on its common stock of $2.20 in 1996 and 1995. The Company has agreed with PSCo in the merger agreement that it will not raise its common stock dividend rate without the consent of PSCo. The Company's dividend payout on its common stock was 87% in 1996 and 79% in 1995. At August 31, 1996, the number of holders of record of the Company's common stock was 28,744. The Company covenants, in the Mortgage pursuant to which First Mortgage Bonds are issued, that it will not declare any dividends (other than dividends payable in its stock) upon its common stock, or make any payment on account of the purchase, redemption or other retirement of, or make any distribution in respect of, any shares of its stock except to the extent that the sum of (1) $1,278,243.59, (2) net income of the Company, as defined, since June 1, 1946, and (3) net proceeds received by the Company from the issue since such date of any shares of its stock (but only up to an amount equal to the aggregate amount of all payments since such date on account of the acquisition of any shares of its stock) shall be (after giving effect to such dividends or distributions) greater than the aggregate amount of dividends declared on all classes of the Company's stock and of all payments made on account of the acquisition of, or distribution in respect of, any shares of its stock since such date. See Note (5) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. In 1991 the Company adopted a Shareholder Rights Plan, which has been amended so that it is not applicable to the Merger. See Note (1) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 17 ITEM 6. SELECTED FINANCIAL DATA.
Fiscal year ended August 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Dollars In Thousands Except Per Share Amounts) Operating revenues $899,397 $834,083 $843,448 $809,753 $749,154 Operating income $150,666 $154,211 $139,719 $140,684 $137,755 Net earnings $105,773 $119,477 $102,168 $105,254 $102,987 Earnings per weighted average common share outstanding $2.52* $2.80** $2.38 $2.43 $2.34 Dividends per share $2.20 $2.20 $2.20 $2.20 $2.20 Ratio of earnings to fixed charges 4.21 5.10 4.76 4.82 4.53 Ratio of earnings to fixed charges and preferred dividend requirements combined 3.91 4.37 4.04 4.01 3.63 Return on average common equity 14.2% 16.2% 14.1% 14.5% 14.2% Operating income as a percent of operating revenue 16.8% 18.5% 16.6% 17.4% 18.4% Total assets $1,997,817 $1,909,005 $1,821,235 $1,718,546 $1,705,734 Long-term debt and redeemable preferred stock*** $638,107 $582,552 $523,228 $548,772 $554,117 Weighted average common stock outstanding 40,917,908 40,917,908 40,917,908 40,917,908 40,917,908 Book value per common share $17.97 $17.61 $17.01 $16.84 $16.61
* Includes a $0.19 increase in earnings per share attributable to the sale of water rights owned by Quixx. ** Includes a $0.13 increase in earnings per share attributable to a change in the estimated delivered not billed kwh sales and an $0.11 increase in earnings per share attributable to a one-time adjustment resulting from settlement of the 1985 FERC rate case with New Mexico wholesale customers. *** Includes current maturities of long-term debt. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. References to "years" in this discussion pertain to the Company's fiscal years which begin September 1, and end August 31. References to "Notes" pertain to the Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS Operating Revenues and Kilowatt-Hour Sales 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 revenues. Increase (Decrease) From Prior Year ----------------------------------- 1996 1995 ---- ---- (Dollars In Thousands) Estimated effect on revenues of: Variations in kilowatt-hour (kwh) sales* $40,001 $19,943 Variations in rates (7,321) 9,110 Variations in fuel and purchased power cost recovery 31,191 (22,583) ------ ------- Subtotal 63,871 6,470 Variations in non-firm kwh sales 1,443 (15,835) ----- ------- Total revenue increase (decrease) $65,314 $(9,365) ======= ======= Increase in kwh sales* (in millions) 935 579 ======= ======= Decrease in non-firm kwh sales (in millions) (382) (646) ======= ======= * Comprised of retail and wholesale sales excluding economy and interruptible wholesale (non-firm) kwh sales. Variations in Kwh Sales. The revenue increase in 1996 was due primarily to increased kwh sales to all retail (ultimate) customers and to rural electric cooperatives (RECs) due primarily to a hotter than normal late spring and early 18 summer. These conditions increased air conditioning load for the year. A dry winter and early spring increased irrigation while oil-related industry activity in some areas also contributed to increased REC sales. Sales to Cap Rock also contributed to increased REC sales in 1996. Sales began in February 1994 and increased to 100% of Cap Rock's West Texas requirements in February 1995. Contributing to the 1996 increase was the acquisition of electric properties in the Texas panhandle from Texas-New Mexico Power Company (TNP). The increase in 1995 was due primarily to increased kwh sales to RECs and retail (ultimate) customers. This increase in REC sales was due primarily to Cap Rock. Accounting adjustments to the estimate of delivered not billed kwh sales also increased kwh revenues by approximately $8.3 million in 1995. These estimated kwh sales relate to energy used by customers but not billed until the subsequent month. The Company expects modest growth in kwh sales (excluding non-firm sales) in 1997, given normal weather conditions. Current estimates of the compound annual growth rates in kwh sales for the five-year period 1997-2001 are 4.6% for wholesale sales (excluding non-firm sales) and 2.3% for retail sales. Last year the Company estimated for the period 1996-2000 that its wholesale sales growth rate would be 2.5% and the retail sales growth rate would be 2.0%. If Golden Spread Electric Cooperative builds generating capacity (which may occur in 1998 and 1999), it is anticipated that the Company's wholesale sales will decline by approximately 11% when this capacity is placed in service, but the overall growth rate is expected to rise. Actual kwh sales by class of customer are shown in the following table: 1996 1995 1994 ---- ---- ---- (Kwh In Millions) Retail Sales: Residential 2,869 2,709 2,685 Commercial 2,887 2,810 2,693 Industrial 7,813 7,686 7,635 Other 572 548 533 ------ ------ ------ Total Retail Sales 14,141 13,753 13,546 ------ ------ ------ Wholesale Sales: Rural electric cooperatives 5,239 4,683 4,157 Other utilities: Firm 605 615 769 Non-firm* 903 1,285 1,931 --- ----- ----- Total Whole- sale Sales 6,747 6,583 6,857 ----- ----- ----- Total Sales 20,888 20,336 20,403 ====== ====== ====== * Comprised of economy and interruptible sales. Variations in Rates. Decreased revenues for 1996 resulted primarily from decreased demand charges per kwh received from certain wholesale customers. Increased revenues for 1995 resulted primarily from additional demand charge revenues paid by certain wholesale customers. Additionally for 1995, a settlement of the 1985 Federal Energy Regulatory Commission (FERC) rate case with the Company's New Mexico wholesale REC customers contributed increased revenues of approximately $4.0 million (and interest of $3.0 million that is included in other income) (see Note 10). Variations in Fuel and Purchased Power Cost Recovery. Revenues increased in 1996 primarily due to increased gas costs with higher coal costs also contributing to the increase. These revenues decreased in 1995 due to substantially lower natural gas prices. Fuel and purchased power costs are recoverable in Texas under a rule that provides for a fixed factor (based on known or reasonably measurable fuel costs) to be used for fuel cost collection with final approval of the amount of recoverable fuel cost being determined at the time of a utility's fuel reconciliation proceeding. If reasonably unforeseeable circumstances result in a material underrecovery of fuel costs, the utility may file a petition with Public Utility Commission of Texas (PUCT) requesting a surcharge and change in its fuel factors. The Company's current fixed factor, set by the PUCT in May 1996, is based on then reasonably predictable fuel and purchased power costs. In all other jurisdictions, the Company currently recovers substantially all increases and refunds substantially all decreases in fuel and purchased power costs pursuant to monthly adjustment clauses. At August 31, 1996, the Company has $7.5 million in net underrecovered costs. These costs are comprised of underrecovered fuel costs totaling $7.7 million, net of off-system sales margin credits totaling $0.2 million. In connection with these costs, the Company is filing with the PUCT for a change in the fuel factor. In April 1996, the Company refunded to its Texas retail customers overrecovered fuel costs totaling $3.9 million, consisting of $2.1 million of overrecovered fuel costs and $1.8 million of disallowed fuel costs. The Company also refunded to its Texas retail customers margin credits on non-firm sales totaling $5.4 million during 1996 (see Note 10). 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 declines in non-firm sales in 1996 and 1995 were due primarily to available power from major western plants and excess hydroelectric power in the Northwest. Additionally, Company load growth in 1996 contributed to the decline for that year. In 1995 mild weather throughout the region, particularly in the winter, also contributed to the decline for that year. 19 Operating Expenses and Non-Operating Items Fuel and purchased power expense comprised 58.1% of total operating expenses in 1996 and 55.2% in 1995. Such expenses, when compared to prior years, increased 15.9% in 1996 and decreased 8.0% in 1995. The increase in 1996 is due primarily to increased natural gas prices and a slight rise in coal costs. The decrease in 1995 is due primarily to decreased natural gas prices and decreased kwh generation. When the Company requires less generation, more efficient plants that use less fuel are utilized. The fuel cost per net kwh generated was 1.98 cents, 1.75 cents and 1.87 cents in 1996, 1995 and 1994, respectively. The increase in 1996 was due to the rise in natural gas prices and increased coal costs. The decline in 1995 was due to decreased natural gas prices. Although fuel costs are expected to rise marginally throughout 1997, the Company plans to mitigate any such increases through the purchase of lower-priced gas on the open market and under short-term contracts, as well as using low-priced coal purchased on the spot market for generation of off-system sales. Operating expenses, excluding fuel and purchased power, increased 3.0% in 1996 and 2.9% in 1995. The increase in 1996 was due primarily to increased steam production maintenance expense and expenses associated with the acquisition of the TNP electric properties. Maintenance expenses were higher due to the normal recurring eighteen month repair cycle and expenses associated with additional cooling tower and coal feeder maintenance. The increase in 1995 was due primarily to increased federal income taxes as a result of larger taxable income. The Company continues to have a hiring freeze in effect during the merger process (see Note 2). The Company's expenses in 1996 and 1995 were not significantly impacted by inflation. Other Income. Other income decreased 34.8% in 1996 and increased 150.7% in 1995. The decrease in 1996 was due to increased merger and business integration expenses. Other income was favorably impacted by the approximate $7.7 million after-tax gain on the sale of certain Texas Panhandle water rights by Quixx Corporation. However, the effect of such gain was offset by merger-related expenses that totaled approximately $5.7 million and business integration expenses that totaled approximately $2.1 million. Also contributing to the decrease was the non-deductibility of these merger-related expenses for federal income tax purposes. The increase in 1995 was due primarily to approximately $3.0 million of interest realized on the rate case settlement with New Mexico wholesale customers and greater subsidiary earnings. The write-off in 1994 of nonrecurring items caused a $3.4 million decline in such income that year. Subsidiary operations contributed approximately 29 cents per share to earnings in 1996 (19 cents per share from the Quixx water rights sale) and 13 cents in 1995. Earnings Operating income and earnings applicable to common stock decreased in 1996 due to the increased operating, merger-related and business integration expenses. The operating expense increase was due to greater maintenance expenses and costs associated with the acquisition of electric properties from TNP. Additionally, greater interest expense contributed to the decline in income. The increase in interest expense was the result of higher levels of debt throughout the year caused by the retirement of preferred stock, the TNP electric property acquisition and increased construction expenditures. Operating income and earnings applicable to common stock increased in 1995 due primarily to greater sales to RECs, the change in estimate of delivered not billed kwh sales ($5.4 million or 13 cents per share) and the rate settlement with wholesale customers in New Mexico ($4.5 million or 11 cents per share). Assuming normal weather conditions, 1997 operating income is expected to remain relatively flat, but net earnings for 1997 will be negatively impacted by increased merger-related and business integration expenses. A resolution of the 1985 FERC rate case with Texas wholesale REC customers, by settlement or otherwise, would favorably affect income and earnings in the year received. 20 The Company's average common equity for the years 1996, 1995 and 1994 was $727,935,000, $708,462,000 and $692,537,000, respectively. The rate of return on average common equity for these years was 14.2%, 16.2% and 14.1%, respectively. The components of such return are presented as follows: 1996 1995 1994 ---- ---- ---- Components of Return on Average Common Equity: Rate-related income 13.3% 13.5% 13.5% Subsidiary and other income .7 1.0 .4 Allowance for funds used during construction (AFUDC) .2 .3 .2 New Mexico wholesale settlement - .6 - Delivered not billed adjustment - .8 - ---- ---- ---- Total 14.2% 16.2% 14.1% LIQUIDITY AND CAPITAL RESOURCES The Company's demand for capital is normally related to the construction of utility plant and equipment. Cash construction expenditures excluding AFUDC were $112.0 million, $94.7 million and $91.8 million in 1996, 1995 and 1994, respectively. During 1996 the Company generated approximately 75% of its capital requirements for such purposes internally. Also in 1996, the Company received regulatory approval to make investments in Quixx of up to $90 million at the cumulative rate of $15 million per year for six years. Quixx's investment in independent power projects is dependent upon suitable investment opportunities and the availability of capital. Estimated construction expenditures excluding AFUDC are $196.0 million for 1997 and $865 million for the five-year period 1997-2001. The portion of the Company's construction expenditures to be provided by internally generated funds cannot be accurately forecast, but the Company expects that it will be approximately 40% in 1997. To the extent the capital required in 1997 is not supplied by internally generated funds, the Company will obtain such capital from short-term borrowing or from the sale of long-term debt, preferred stock and/or common stock. The Company's estimates of capital needs, in particular those related to construction, and the generation of internal funds are subject to review and revision, and may vary substantially from the foregoing especially in a more competitive environment (see Note 9). Due to the merger, Standard & Poor's is reviewing the Company's rated debt for possible downgrade. During the period 1997-2001, the Company will be required to retire $105 million of long-term debt, comprised of $15 million First Mortgage Bonds (Bonds), 5.70% Series due 1997, and $90 million Bonds 6.875% Series due 1999. The Company currently contemplates the sale of preferred stock, common stock and long-term debt during the five-year period 1997-2001 in connection with the financing of its construction program and retirement of Bonds. In August 1994 the Company entered in a forward interest rate swap agreement in anticipation of redeeming its $25 million principal amount of 13-1/2% Pollution Control Revenue Bonds (PCRBs) due 2001 with a new issuance of variable rate PCRBs. Such bonds were redeemed October 1, 1996, and replaced with a variable rate PCRB issue due July 1, 2016 that has been swapped for a fixed rate of 6.435%. Additionally, the Company redeemed on September 26, 1996, the $25 million 6-1/2% PCRBs due 2004 and the $32.3 million 6-5/8% PCRBs due 2009 and replaced these series on September 18, 1996, with $57.3 million 5-3/4% PCRBs due September 1, 2016 (see Note 5). In October 1996 the Company issued $100 million of 7.85% SPS Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust holding solely Subordinated Debentures. The funds from this financing were used to reduce short-term debt. The Company also has an effective shelf registration statement under which $220 million of debt securities and/or preferred stock are available for issuance. OTHER MATTERS 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 (see 21 Note 9). In part in response to these changing conditions, the Company has entered into a definitive merger agreement with Public Service Company of Colorado (the Merger). Consummation of the Merger is subject to customary conditions including receiving regulatory authority approvals. The two utilities are working toward a completion date in spring 1997. The foregoing discussions of the Company's "Results of Operations" and "Liquidity and Capital Resources" do not take into account any changes that could arise as a result of the Merger (see Item 1 Business General and Note 2). ---------- The foregoing discussion and analysis by management is intended to provide a summary of information relevant to an assessment of the financial condition and results of operations of the Company and should be read together with the Consolidated Financial Statements and Notes to Consolidated Financial Statements in order to arrive at a more complete understanding of such matters. 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Southwestern Public Service Company: We have audited the accompanying consolidated balance sheets and statements of capitalization of Southwestern Public Service Company and subsidiaries as of August 31, 1996 and 1995, and the related consolidated statements of earnings, common shareholders' equity and cash flows for each of the three years in the period ended August 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Southwestern Public Service Company and subsidiaries as of August 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1996, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Dallas, Texas October 10, 1996 23 SOUTHWESTERN PUBLIC SERVICE COMPANY Consolidated Balance Sheets August 31, 1996 and 1995
1996 1995 ---- ---- (In Thousands) Assets Utility Plant: Utility plant in service ............................. $ 2,484,025 $ 2,366,435 Accumulated depreciation ............................. (911,422) (854,015) -------- -------- Net plant in service ................................. 1,572,603 1,512,420 Construction work in progress ........................ 49,143 31,026 ------ ------ Net utility plant .................................... 1,621,746 1,543,446 --------- --------- Nonutility Property and Investments .......................... 71,855 70,087 ------ ------ Current Assets: Cash and temporary investments ....................... 31,223 36,860 Accounts receivable, net ............................. 77,959 73,262 Undercollected fuel and purchased power cost, net .... 7,193 - Accrual for unbilled revenues ........................ 23,152 28,626 Materials and supplies, at average cost .............. 21,513 21,647 Prepayments and other current assets ................. 7,452 10,734 ----- ------ Total current assets ................................. 168,492 171,129 ------- ------- Deferred Debits 135,724 124,343 ------- ------- Total Assets ................................. $ 1,997,817 $ 1,909,005 =========== =========== Capitalization and Liabilities Capitalization (See Consolidated Statements of Capitalization): Common shareholders' equity .......................... $ 735,119 $ 720,752 Preferred stock ...................................... - 72,680 Long-term debt ....................................... 622,931 582,276 ------- ------- Total capitalization ................................. 1,358,050 1,375,708 --------- --------- Current Liabilities: Short-term debt ...................................... 69,624 - Current maturities of long-term debt ................. 15,176 276 Accounts payable ..................................... 15,979 12,187 Overcollected fuel and purchased power cost, net ..... - 5,969 Interest accrued ..................................... 10,962 9,067 Fuel and purchased power expense accrued ............. 46,396 40,164 Taxes accrued ........................................ 32,486 39,757 Dividends payable on common stock .................... 22,505 22,505 Other current liabilities ............................ 43,441 39,843 ------ ------ Total current liabilities ............................ 256,569 169,768 ------- ------- Deferred Credits: Deferred income taxes ................................ 365,911 344,794 Unamortized investment tax credits ................... 5,803 6,053 Other ................................................ 11,484 12,682 ------ ------ Total deferred credits ............................... 383,198 363,529 ------- ------- Commitments and Contingencies Total Capitalization and Liabilities ................. $ 1,997,817 $ 1,909,005 =========== ===========
See accompanying notes to consolidated financial statements 24 SOUTHWESTERN PUBLIC SERVICE COMPANY Consolidated Statements of Capitalization August 31, 1996 and 1995 1996 1995 ---- ---- (In Thousands) Common Shareholders' Equity: Common stock, $1 par value, authorized 100,000,000 shares in 1996 and 1995; outstanding 40,917,908 shares in 1996 and 1995 .......................... $ 40,918 $ 40,918 Premium on capital stock ........................... 307,484 306,376 Retained earnings .................................. 386,717 373,458 ------- ------- Total common shareholders' equity .......... 735,119 720,752 ------- ------- Cumulative Preferred Stock: Preferred stock, $25 par value, authorized 3,000,000 shares; outstanding 920,000 shares in 1995; dividend rates from 4.36% to 8.88% .............................. - 23,000 Preferred stock, $100 par value, authorized 2,000,000 shares; outstanding 496,800 shares in 1995; dividend rates from 3.70% to 14.50% ............................. - 49,680 Preferred stock, $1 par value, authorized 10,000,000 shares; none outstanding .............. - - ------- ------- Total cumulative preferred stock ........... - 72,680 ------- ------- Long-Term Debt: First Mortgage Bonds: Rate Maturity 5.70% February 1997 ........................ 15,000 15,000 7-1/4 July 2004 ............................ 135,000 135,000 8-1/4 July 2022 ............................ 40,000 40,000 6.875 December 1999 ........................ 90,000 90,000 8.20 December 2022 ........................ 100,000 100,000 8.50 February 2025 ........................ 70,000 70,000 6-1/2 March 2006 ........................... 60,000 - Unamortized debt discount, net ....... (1,323) (1,418) ------ ------ Total first mortgage bonds ........... 508,677 448,582 ------- ------- Pollution control obligations, securing Red River Authority Pollution Control Revenue Bonds, net: Series Rate Maturity Not collateralized by First Mortgage Bonds: 1991 adjustable July 2011 .......... 44,500 44,500 Collateralized by First Mortgage Bonds: 1979 6-1/2% March 2004 ................. 25,000 25,000 1979 6-5/8 March 2009 ................. 32,300 32,300 1981 13-1/2 October 2001 ............... 25,000 25,000 Funds held and invested by Trustee ........... (120) (55) ---- --- Total pollution control obligations, net ................... 126,680 126,745 ------- ------- Other long-term debt ......................... 2,750 7,225 ----- ----- Total long-term debt, including current maturities ................. 638,107 582,552 Current maturities ........................... (15,176) (276) ------- ---- Total long-term debt ................. 622,931 582,276 ------- ------- Total Capitalization ........................$1,358,050 $1,375,708 ========== ========== See accompanying notes to consolidated financial statements. 25 SOUTHWESTERN PUBLIC SERVICE COMPANY Consolidated Statements of Earnings For the years ended August 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- (In Thousands, Except Per Share Amounts) Operating Revenues .................. $899,397 $834,083 $843,448 -------- -------- -------- Operating Expenses: Operation: Fuel .............................. 417,023 370,052 403,207 Purchased power ................... 18,010 5,241 4,604 Other ............................. 111,255 107,467 107,295 Maintenance ....................... 32,534 29,039 28,276 Depreciation and amortization ..... 65,448 61,069 60,551 Taxes other than property and income taxes .................... 21,109 19,122 19,471 Property taxes .................... 23,472 24,009 22,468 Income taxes ...................... 59,880 63,873 57,857 ------ ------ ------ Total operating expenses .. 748,731 679,872 703,729 ------- ------- ------- Operating Income .................... 150,666 154,211 139,719 ------- ------- ------- Other Income, Net: Allowance for equity funds used during construction ............. 60 229 559 Income taxes ...................... (5,417) (3,775) (531) Other, net ........................ 10,050 10,746 2,844 ------ ------ ----- Total other income, net ... 4,693 7,200 2,872 ----- ----- ----- Interest Charges: Interest on long-term debt ........ 44,964 40,644 37,881 Allowance for borrowed funds used during construction ............. (2,516) (2,463) (1,044) Other interest .................... 7,138 3,753 3,586 ----- ----- ----- Total interest charges .... 49,586 41,934 40,423 ------ ------ ------ Net Earnings ........................ 105,773 119,477 102,168 Dividends and premiums on cumulative preferred stock ................. 2,494 4,878 4,878 ----- ----- ----- Earnings Applicable to Common Stock . $103,279 $114,599 $97,290 ======== ======== ======= Weighted Average Shares Outstanding . 40,918 40,918 40,918 ====== ====== ====== Earnings per Common Share ........... $2.52 $2.80 $2.38 ===== ===== ===== Dividends Declared per Common Share $2.20 $2.20 $2.20 ===== ===== ===== See accompanying notes to consolidated financial statements. 26 SOUTHWESTERN PUBLIC SERVICE COMPANY Consolidated Statements of Common Shareholders' Equity For the years ended August 31, 1996, 1995 and 1994
Shares of Amount of Premium Common Common on Capital Retained Stock Stock Stock Earnings Total (In Thousands) Balance at August 31, 1993 ........................................ 40,918 $40,918 $306,376 $ 341,608 $ 688,902 Net earnings ...................................................... - - - 102,168 102,168 Dividends declared: Cumulative preferred stock ................................ - - - (4,878) Common stock, $2.20 per share ............................. - - - (90,020) (90,020) ------ ------ ------- ------- ------- Balance at August 31, 1994 ........................................ 40,918 40,918 306,376 348,878 696,172 Net earnings ...................................................... - - - 119,477 119,477 Dividends declared: Cumulative preferred stock ................................ - - - (4,878) Common stock, $2.20 per share ............................. - - - (90,019) (90,019) ------ ------ ------- ------- ------- Balance at August 31, 1995 ........................................ 40,918 40,918 306,376 373,458 720,752 Net earnings ...................................................... - - - 105,773 105,773 Retirement of cumulative preferred stock and other ................ - - 1,108 (921) 187 Dividends declared: Cumulative preferred stock ................................ - - - (1,573) Common stock, $2.20 per share ............................. - - - (90,020) (90,020) ------ ------- -------- --------- --------- Balance at August 31, 1996 ........................................ 40,918 $40,918 $307,484 $ 386,717 $ 735,119 ====== ======= ======== ========= =========
See accompanying notes to consolidated financial statements ....... 27 SOUTHWESTERN PUBLIC SERVICE COMPANY Consolidated Statements of Cash Flows For the years ended August 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- (In Thousands) Operating Activities: Cash received from customers ....................... $ 886,116 $ 824,103 $ 851,602 Cash paid to suppliers and employees ............... (564,122) (510,319) (536,618) Interest paid ...................................... (48,126) (42,090) (39,569) Income taxes paid .................................. (55,425) (50,088) (47,126) Taxes other than income taxes paid ................. (45,600) (41,898) (41,388) Other operating cash receipts and payments, net .... 7,243 9,819 12,751 ----- ----- ------ Net cash provided by operating activities .. 180,086 189,527 199,652 ------- ------- ------- Investing Activities: Construction expenditures .......................... (111,986) (94,662) (91,788) Nonutility property and investments ................ (1,768) (28,219) (12,763) Acquisition of TNP properties ...................... (29,200) - - ------- ------- -------- Net cash used in investing activities ...... (142,954) (122,881) (104,551) -------- -------- -------- Financing Activities: Issuance of long-term debt ......................... 60,000 76,204 - Retirement of long-term debt ....................... (4,445) (16,880) (25,544) Change in short-term debt .......................... 69,624 (14,994) 14,994 Retirement of cumulative preferred stock ........... (75,434) - - Dividends paid (common and preferred) .............. (92,514) (94,898) (94,898) ------- ------- ------- Net cash used in financing activities ...... (42,769) (50,568) (105,448) ------- ------- -------- Net Increase (Decrease) in Cash and Temporary Investments .. (5,637) 16,078 (10,347) Cash and Temporary Investments at Beginning of Year ........ 36,860 20,782 31,129 ------ ------ ------ Cash and Temporary Investments at End of Year .............. $31,223 $36,860 $20,782 ======= ======= ======= Reconciliation of Net Earnings to Net Cash Provided by Operating Activities: Net earnings ....................................... $ 105,773 $ 119,477 $ 102,168 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization ...................... 65,448 61,069 60,551 Deferred income taxes and investment tax credits ... 16,173 9,467 11,314 Allowance for equity funds used during construction ..................................... (60) (229) (559) Cash flows impacted by changes in: Accounts receivable ................................ (4,697) (3,905) 4,080 Accrual for unbilled revenues ...................... 5,474 (7,308) 2,304 Materials and supplies ............................. 134 (3,409) (1,495) Accounts payable ................................... 3,792 (114) 1,071 Fuel and purchased power expense accrued ........... 6,232 (720) (306) Taxes accrued ...................................... (7,271) 9,398 4,612 Over (under) collected fuel and purchased power cost ............................................. (13,162) 2,165 2,768 Other, net ......................................... 2,250 3,636 13,144 ----- ----- ------ Net cash provided by operating activities .. $ 180,086 $ 189,527 $ 199,652 ========= ========= =========
See accompanying notes to consolidated financial statements 28 SOUTHWESTERN PUBLIC SERVICE COMPANY Notes To Consolidated Financial Statements August 31, 1996 (1) Nature of Operations and Summary of Significant Accounting Policies GENERAL Southwestern Public Service Company (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. Approximately 71% of the Company's operating revenues during fiscal 1996, excluding sales to other utilities, were derived from operations in Texas and New Mexico. The Company maintains its accounts in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (FERC) and as adopted by the Public Utility Commission of Texas (PUCT), the New Mexico Public Utility Commission (NMPUC), the Oklahoma Corporation Commission (OCC) and the Kansas Corporation Commission (KCC). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Utility Engineering Corporation and its subsidiaries (UE) and Quixx Corporation and its subsidiaries (Quixx). UE is primarily engaged in engineering, design and construction management. Quixx invests in cogeneration projects and holds water rights and certain other nonutility assets. The aggregate net earnings of UE and Quixx of $11,956,000, $5,216,000 and $3,335,000 in 1996, 1995 and 1994, respectively, are included in other income, net in the Consolidated Statements of Earnings. Net earnings in 1996 includes a $7,700,000 after-tax gain on the sale of water rights by Quixx. All significant intercompany transactions and balances are eliminated in consolidation. UTILITY PLANT Utility plant is stated at the historical cost of construction, which includes labor, materials, an allowance for funds used during construction and indirect charges for such items as engineering, supervision and general administrative costs. Maintenance, repairs and minor replacements are charged to operating expense; major replacements and betterments are capitalized. The cost of depreciable units of utility plant retired or disposed of in the normal course of business is eliminated from utility plant accounts and such cost plus removal expenses and less salvage value is charged to accumulated depreciation. When complete operating units are disposed of, appropriate adjustments are made to accumulated depreciation, and the resulting gains or losses, if any, are recognized. The provision for depreciation is computed on a straight-line method at rates based on the estimated service lives and salvage values of the several classes of depreciable property as indicated by periodic depreciation studies. Depreciation as a percentage of average depreciable cost was 2.91% in 1996, 2.86% in 1995 and 2.83% in 1994. OPERATING REVENUES Electric rates include estimates of fuel costs incurred by the Company in the generation or purchase of electricity. Differences between amounts collected and allowable costs are recorded as over/undercollected fuel and purchased power costs in accordance with rate-making policies of regulatory authorities. Such over/undercollected fuel and purchased power costs are reflected as a current liability or current asset in the accompanying consolidated financial statements. Included in operating revenues is an estimate of revenues for electric services provided but not billed. In 1995 the Company made accounting adjustments to the estimate of delivered not billed kilowatt-hour (kwh) sales which increased operating revenues by approximately $8,300,000 and net income by approximately $5,400,000, or 13 cents per share. DEFERRED DEBITS Losses on Early Retirements of Debt Losses on early retirements of debt refinanced by new lower interest rate debt are amortized on a straight-line basis over the term of the new debt. Losses on early debt retirements not refinanced by new debt are amortized on a straight-line 29 SOUTHWESTERN PUBLIC SERVICE COMPANY Notes To Consolidated Financial Statements (Continued) August 31, 1996 (1) Nature of Operations and Summary of Significant Accounting Policies basis over the remaining original term of the retired debt. Amortization of such amounts is included in other interest charges in the Consolidated Statements of Earnings. The unamortized balance of losses on early retirements of debt are approximately $19,757,000 and $21,262,000 as of August 31, 1996 and 1995, respectively (see Note 5). Debt Premium, Discount and Expense Expenses incurred in connection with the issuance of long-term debt, and premiums and discounts relating to such debt, are being amortized or accreted on a straight-line basis over the term of the respective debt issues. Other Assets Included in deferred debits are assets that are expected to benefit future periods and certain other costs that, for rate-making purposes, are recorded as deferred charges and amortized over periods allowed by regulatory authorities. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION The allowance for funds used during construction (AFUDC) is designed to allow the Company to capitalize the net composite interest and equity costs of capital funds used to finance plant additions during construction periods and does not represent current cash income. Established regulatory rate practices permit the Company to recover these costs in future periods by fixing rates to include a fair return on, and a recovery of, these capital costs through their inclusion in the rate base and cost of service. The composite rates used for AFUDC were 6.0% in 1996, 6.5% in 1995 and 6.2% in 1994. Such rates reflect semiannual compounding. INCOME TAXES The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109). Under Statement 109, the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted tax rates applicable to the differences between the financial statement amounts and the tax bases of existing assets and liabilities. Certain provisions of Statement 109 provide that regulated enterprises are permitted to recognize adjustments resulting from the adoption of Statement 109 as regulatory assets or liabilities if it is probable that such amounts will be recovered from or returned to customers through future rates. Investment tax credits have been deferred and are being amortized to income over the life of the related property. CASH FLOWS The Company uses the direct method of presentation for cash flows from operating activities. For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents ("temporary investments"). The Company records such investments at cost which approximates market value. EARNINGS PER COMMON SHARE Earnings per share of common stock is computed for each year based upon the weighted average number of common shares outstanding. The effect of stock awards and options outstanding under the Company's 1989 Stock Incentive Plan is not significant (see Note 8). SHAREHOLDER RIGHTS PLAN The Company has a Shareholder Rights Plan (the Rights Plan) designed to ensure that all shareholders receive fair and equal treatment in the event of any proposal to acquire control of the Company. Under the Rights Plan, each shareholder holds one right for each share of the Company's common stock held of record. Each right entitles the holder 30 SOUTHWESTERN PUBLIC SERVICE COMPANY Notes To Consolidated Financial Statements (Continued) August 31, 1996 (1) Nature of Operations and Summary of Significant Accounting Policies to purchase one share of the Company's common stock for $70 in the event a person or group acquires 10% or more of the Company's common stock. Under certain circumstances, the holders of the rights will be entitled to purchase common shares of the Company at one half of the current market price. In addition, any time after a person or group acquires 10% or more of the Company's outstanding common shares, the board of directors may, at its option, exchange part or all of the rights for shares of common stock of the Company. The Company will be entitled to redeem the rights for $0.01 per right at any time until the tenth day following a public announcement of the acquisition of 10% of its common shares. The rights expire in 2001, unless earlier redeemed or exchanged by the Company, and have no effect on operating results or earnings per share. The Rights Plan has been amended to provide that the merger agreement with Public Service Company of Colorado (PSCo) will not trigger the provisions of the Rights Plan. FAIR VALUES OF FINANCIAL INSTRUMENTS The fair value amounts of certain financial instruments included in the accompanying Consolidated Balance Sheets as of August 31, 1996 and 1995 are as follows: The fair values of cash and temporary investments approximate the carrying amount because of the short maturity and market rates of those instruments. The estimated fair values of long-term debt and preferred stock are based on quoted market prices of the same or similar issues. The estimated fair values of long-term debt and preferred stock are as follows: 1996 1995 Carrying Amount Fair Value Carrying Amount Fair Value -------------------------- -------------------------- (In Thousands) Long-term debt $622,931 $624,232 $582,276 $579,924 Preferred stock - - $ 72,680 $ 61,382 The fair values of other financial instruments for which estimated fair values have not been presented are not materially different than the related book values. The fair value estimates presented herein are based on pertinent information available to management as of August 31, 1996 and 1995. These fair value estimates have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair values may differ significantly from the amounts presented herein. NEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (Statement 121). Statement 121 requires that long lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The statement also requires that rate-regulated enterprises recognize an impairment for the amount of costs excluded when a regulator excludes all or part of a cost from the enterprise's rate base. The adoption of Statement 121, which will be required in fiscal 1997, is not expected to have a material effect on the Company's consolidated financial position or results of operations. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement 123). This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. The adoption of Statement 123, which will be required in 1997, is not expected to have a material effect on the Company's consolidated financial position or results of operations. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 31 SOUTHWESTERN PUBLIC SERVICE COMPANY Notes To Consolidated Financial Statements (Continued) August 31, 1996 of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the event estimates and/or assumptions prove to be different from actual amounts, adjustments are made to reflect more current information in subsequent periods. No material adjustments were made to estimates during the current period. (2) Merger and Acquisitions MERGER WITH PUBLIC SERVICE COMPANY OF COLORADO The Company and Denver-based PSCo entered into a definitive merger agreement (the Merger) on August 22, 1995, to form a registered public utility holding company, New Century Energies, Inc. (NCE), which will be the parent company for the Company and PSCo. The transaction, which was approved by the shareholders of the Company and PSCo on January 31, 1996, is subject to approval by various regulators and the taking of other action by the Securities and Exchange Commission, the Federal Trade Commission, the Department of Justice, the Nuclear Regulatory Commission, the Federal Energy Regulatory Commission, and the state public utility commissions in Texas, Colorado, New Mexico, Wyoming, and Kansas. The Merger, with a targeted completion date in spring 1997, is conditioned on qualifying as a tax-free reorganization and being accounted for as a pooling of interests. Upon completion of the Merger, holders of the Company and PSCo common stock will receive 0.95 of one share and one share of the new holding company common stock, respectively, for each share of stock held. As of August 31, 1996, the Company and PSCo had 40,917,908 and 64,276,318 shares, respectively, of common stock outstanding. Based on that number of shares outstanding and the conversion ratios, the Company and PSCo shareholders would own 37.7 percent and 62.3 percent, respectively, of the common equity of the new holding company. The debt (including mortgage bonds) and any preferred stock outstanding at the time of the effectiveness of the Merger will remain outstanding debt and preferred stock of the Company. The board of directors of NCE will consist of 14 directors; six and eight current directors of the Company and PSCo, respectively. ACQUISITION OF TNP PROPERTIES In September 1995, the Company purchased properties of Texas-New Mexico Power Company (TNP) located in the Texas Panhandle area for $29,200,000. The purchase added approximately 8,000 customers. The purchase amount in excess of book value was approximately $15,000,000. Cost recovery of this amount was allowed by the PUCT through a rate surcharge over a ten-year period. This purchase did not have a significant impact on results of operations of the Company. TUCO INC. In August 1995, the Company agreed to purchase TUCO, a wholly owned subsidiary of Cabot Corporation, for $77 million subject to regulatory approval and other conditions. TUCO owns the coal inventory maintained at the Company's Harrington and Tolk generating stations. The PUCT declined to grant a needed waiver in fuel-cost rules and the Company did not complete the purchase. (3) Pro Forma Information (Unaudited) The following unaudited pro forma condensed balance sheet information at September 30, 1996, gives effect to the Merger as if it had occurred at September 30, 1996. The unaudited pro forma condensed operating information for the twelve-months ended September 30, 1996, and each of the two years ended December 31, 1995, give effect to the Merger as if it had occurred on January 1, 1994. These statements are prepared on the basis of accounting as required under a pooling of interests and do not reflect any cost savings or other synergies anticipated by management as a result of the 32 SOUTHWESTERN PUBLIC SERVICE COMPANY Notes To Consolidated Financial Statements (Continued) August 31, 1996 (3) Pro Forma Information (Unaudited), continued Merger. Accordingly, the pro forma information is not necessarily indicative of the financial position or results of operations that would have occurred had the Merger been consummated for the periods for which it is given effect, nor is it necessarily indicative of future operating results or financial condition. NEW CENTURY ENERGIES, INC.
Unaudited SPS PSCo Pro Forma (Historical) (Historical) Combined ------------ ------------ -------- (In thousands, except per share amounts) As of September 30, 1996: Property, plant and equipment - net ................................. $1,656,261 $3,538,939 $5,195,200 Current assets 155,037 445,922 594,200 Other assets ........................................................ 191,561 420,768 612,329 ------- ------- ------- Total assets ................................................ $2,002,859 $4,405,629 $6,401,729 ========== ========== ========== Common shareholders' equity ......................................... $ 743,314 $1,415,521 $2,149,299 Preferred stock and premium ......................................... -- 179,921 179,921 Long-term debt ...................................................... 620,467 1,270,716 1,891,183 ------- --------- --------- Total capitalization ........................................ 1,363,781 2,866,158 4,220,403 Current liabilities ................................................. 249,638 731,619 984,034 Other liabilities ................................................... 389,440 807,852 1,197,292 ------- ------- --------- Total equity and liabilities ................................ $2,002,859 $4,405,629 $6,401,729 ========== ========== ========== For the Twelve Months Ended September 30, 1996: Operating revenues .................................................. $ 899,938 $2,107,417 $3,007,355 Operating income .................................................... $ 147,033 $ 355,008 $ 502,041 Net income, after preferred dividend requirements ................... $ 103,805 $ 177,483 $ 281,288 Earnings per common share: As reported ................................................. $ 2.54 $ 2.78 - New Century Energies ........................................ - - $ 2.74 For the Twelve Months Ended December 31, 1995: Operating revenues .................................................. $ 852,510 $2,110,601 $2,963,111 Operating income .................................................... $ 157,768 $ 325,818 $ 483,586 Net income, after preferred dividend requirements ................... $ 117,109 $ 166,893 $ 284,002 Earnings per common share: As reported ................................................. $ 2.86 $ 2.65 - New Century Energies ........................................ - - $ 2.79 For the Twelve Months Ended December 31, 1994: Operating revenues .................................................. $ 824,008 $2,057,384 $2,881,392 Operating income .................................................... $ 136,041 $ 270,792 $ 406,833 Net income, after preferred dividend requirements ................... $ 92,754 $ 158,255 $ 251,009 Earnings per common share: As reported ................................................. $ 2.27 $ 2.57 - New Century Energies ........................................ - - $ 2.50
33 SOUTHWESTERN PUBLIC SERVICE COMPANY Notes To Consolidated Financial Statements (Continued) August 31, 1996 (4) Short-Term Debt
Weighted Weighted Category of Balance at Average Maximum Amount Average Amount Average Short-term End of Interest Outstanding Outstanding Interest Rate Borrowings Year Rate During the Year (A) During the Year (B) For the Year (C) - ---------- ---- ---- ------------------- ------------------- ---------------- (Dollars In Thousands) 1996: Notes payable to banks - - - - - Commercial paper $69,624 5.31% $138,834 $72,418 5.54% 1995: Notes payable to banks - - $ 8,000 $ 679 6.25% Commercial paper - - 66,826 16,548 5.78
(A) Maximum amount outstanding at any month-end for the year. (B) The average amount outstanding for the period was computed by dividing the total of daily outstanding principal balances by 365. (C) The weighted average interest rate during the period was computed by dividing actual interest expense by the average short-term debt outstanding for the period. Unsecured borrowings permitted under bank lines of credit were $180,000,000 in 1996 and $128,000,000 in 1995. (5) Capitalization PREFERRED STOCK The Company redeemed on December 27, 1995, all of its outstanding preferred stock that was redeemable by its terms. The Company also purchased on January 9, 1996, all of the outstanding 2,600 shares of its 14.50% cumulative preferred stock that was not redeemable by its terms. The aggregate cost to retire the preferred stock was approximately $76,000,000, including accrued dividends. On January 31, 1996, the shareholders approved an amendment to the Restated Articles of Incorporation to delete the designations, preferences, limitations, and relative rights of authorized shares of existing authorized preferred stock and to provide for a class of 10,000,000 authorized shares of preferred stock, $1.00 par value, issuable from time to time in such series and having such designations, preferences, limitations, and relative rights as the Board of Directors may determine. LONG-TERM DEBT First Mortgage Bonds (Bonds) issued under the Indenture of Mortgage and Deed of Trust, dated August 1, 1946, as supplemented and amended (Mortgage) are secured by substantially all of the Company's utility plant. The Mortgage limits the maximum principal amount of Bonds that may be outstanding thereunder to $3,000,000,000 and contains provisions relating to the restriction of the payment of dividends on common stock. At August 31, 1996, approximately $948,000 of total retained earnings of $386,717,000 was so restricted. The Company is limited in the amount of Bonds that it can issue by certain restrictions contained in the Mortgage. The Mortgage permits the issuance of Bonds against 60% of certain property additions, against certain retired Bonds or against deposited cash. Property additions and retired Bonds available for the issuance of Bonds were approximately $398,200,000 and $55,300,000, respectively, at August 31, 1996, which would permit issuance of $294,210,000 of additional Bonds. Substantial amounts of property additions are used by the Company to satisfy a maintenance fund covenant and improvement fund obligations under the Mortgage. The Mortgage also provides that, with certain exceptions, additional Bonds may not be issued unless net earnings, as defined, are at least twice the annual interest requirements on all Bonds outstanding and then to be issued and on all prior lien indebtedness. Such ratio for the year ended August 31, 1996, was 4.92. The Red River Authority of Texas has issued certain obligations, based on long-term installment sale agreements executed by the Company, that relate to the pollution control facilities installed at the Company's coal-fueled generating units. The Company's payments under the pollution control obligations are pledged to secure the Red River Authority Pollution Control Revenue Bonds. 34 SOUTHWESTERN PUBLIC SERVICE COMPANY Notes To Consolidated Financial Statements (Continued) August 31, 1996 (5) Capitalization, continued In October 1996, the Company called its $25,000,000 principal amount of 13-1/2% pollution control revenue bonds (PCRBs) and issued $25,000,000 of new variable rate PCRBs. In connection with the new issuance of variable rate PCRBs, the Company has an interest rate swap agreement, which, in effect, fixes the interest rate on a $25,000,000 notional amount at 6.435%. Amounts paid or received under this agreement are accrued as interest rates change and are recognized over the life of the agreement as an adjustment to interest expense. The Company is exposed to interest rate risk in the event of nonperformance by counterparties; however, the Company does not anticipate such nonperformance. The trust indenture for the 1991 Series of pollution control obligations permits the Company to choose between various interest rate options, including the option to convert to a fixed rate. Currently, the interest rate is adjusted weekly and as of August 31, 1996 and 1995, the interest rate was 3.35% and 3.45%, respectively. The 1991 Series may be subject to tender for purchase at the option of the holder and will be subject to mandatory tender at certain times. The Company entered into a credit agreement with a bank to provide liquidity support in connection with the optional and mandatory tenders. The Company has also entered into a remarketing agreement to provide for the remarketing of any tendered bonds. The credit agreement is scheduled to expire on July 1, 1998. Based upon the Company's intent and ability to remarket such obligations, the 1991 Series obligations have been classified as long-term debt. The Company redeemed in September 1996, the $25,000,000 6-1/2% PCRBs due 2004 and the $32,300,000 6-5/8% PCRBs due 2009 and replaced these series in September 1996, with $57,300,000 5-3/4% PCRBs due 2016. In October 1996, the Company issued $100,000,000 of 7.85% SPS Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust holding solely Subordinated Debentures. The funds from this financing were used to reduce short-term debt. At August 31, 1996, aggregate maturities of long-term debt for each of the years in the five-year period are as follows: 1997, $15,176,000; 1998, $2,444,000; 1999, $113,000; 2000, $90,000,000; and 2001, $0. Sinking fund and improvement fund requirements are not significant. The Company has an effective shelf registration statement under which $220,000,000 of debt securities and/or preferred stock are available for issuance. (6) Income Taxes The components of income tax expense (benefit) for the years ended August 31, 1996, 1995 and 1994 are as follows: 1996 1995 1994 ---- ---- ---- (In Thousands) Taxes on operating income: Federal - current ............ $40,191 $51,594 $43,878 Federal - deferred ........... 17,297 10,671 12,387 Investment tax credits ....... (250) (250) (250) State - current 2,642 1,858 1,842 ----- ----- ----- 59,880 63,873 57,857 ------ ------ ------ Taxes on other income: Federal - current ............ 6,244 4,703 1,354 Federal - deferred ........... (874) (954) (823) State - current 47 26 - ----- ----- ------ 5,417 3,775 531 ----- ----- --- Total income taxes ... $65,297 $67,648 $58,388 ======= ======= ======= 35 SOUTHWESTERN PUBLIC SERVICE COMPANY Notes To Consolidated Financial Statements (Continued) August 31, 1996 (6) Income Taxes, continued The provisions (credits) for deferred income taxes that arise from temporary differences between financial and tax reporting for the years ended August 31, 1996, 1995 and 1994, are as follows: 1996 1995 1994 ---- ---- ---- (In Thousands) Deferred income taxes on operating income: Depreciation differences .................. $10,797 $12,205 $10,856 Under/(over)collected fuel and purchased power cost ...................... 5,138 (1,848) (186) Losses on reacquisition of long-term debt . (439) (439) (439) Postretirement benefits other than pensions 832 (2) (761) Other ..................................... 969 755 2,917 --- --- ----- Subtotal .......................... 17,297 10,671 2,387 Deferred taxes on other income ............ (874) (954) (823) ---- ---- ---- Total deferred income taxes ....... $16,423 $9,717 $ 11,564 ======= ====== ======== Total income tax expense for the years ended August 31, 1996, 1995, and 1994 differs from the amounts computed by applying the statutory federal tax rate to earnings before income taxes for the following reasons: 1996 1995 1994 ---- ---- ---- (In Thousands) Statutory federal income tax expense at 35% 59,874 $65,494 $56,194 Increase (decrease) due to: State income taxes ......................... 1,748 1,225 1,197 Tax exempt interest and dividends .......... (29) (93) (83) Non-deductible merger costs ................ 2,006 -- -- Amortization of investment tax credits ..... (250) (250) (250) Property-related differences ............... 2,628 2,602 2,562 Dividends paid on EIP shares ............... (1,662) (1,118) (640) Other ...................................... 982 (212) (592) --- ---- ---- Actual income tax expense .......... $65,297 $67,648 $58,388 ======= ======= ======= Effective tax rate ................. 38.2% 36.2% 36.4% ==== ==== ==== Property-related differences increase income tax expense due primarily to the reversal of depreciation and basis differences. 36 SOUTHWESTERN PUBLIC SERVICE COMPANY Notes To Consolidated Financial Statements (Continued) August 31, 1996 (6) Income Taxes, continued The significant components of the Company's deferred tax assets and liabilities, which are reflected net in the accompanying Consolidated Balance Sheets at August 31, 1996 and 1995, are as follows: 1996 1995 ---- ---- (In Thousands) Deferred Tax Assets: Current (included in prepayments and other current assets): Over (under) recovered fuel revenue ............... $ (2,773) $ 2,365 --------- --------- Total current assets ............................ (2,773) 2,365 ------ ----- Noncurrent: Employee benefit plans ............................ 1,794 3,068 Interest on pollution control obligations ......... 1,802 1,812 Avoided cost method of capitalized interest ....... 1,942 1,942 Contributions in aid of construction .............. 2,172 2,172 Deferred compensation ............................. 4,201 3,578 Unamortized investment tax credits ................ 3,253 3,398 Deferred promotional cost ......................... 3,746 4,624 Other ............................................. 2,609 2,880 ----- ----- Total noncurrent assets ......................... 21,519 23,474 ------ ------ Total deferred tax assets ....................... $18,746 $25,839 ======= ======= Deferred Tax Liabilities: Noncurrent: Differences related to depreciation ............... $ 271,520 $ 260,744 Capitalized construction costs .................... 31,679 28,954 Previously unrecognized temporary differences net of the tax rate adjustment of previously normalized temporary differences .................. 56,517 51,581 Losses on reacquisition of long-term debt ......... 5,906 6,345 Other ............................................. 21,808 20,644 ------ ------ Total noncurrent deferred tax liabilities ......... $ 387,430 $ 368,268 ========= ========= (7) Commitments, Contingencies and Financial Guarantees SYSTEM PURCHASE OPTION The Company and the City of Las Cruces, New Mexico (the City) entered into a System Purchase Option and Rate Agreement in August 1994, which grants the City the option to sell to the Company the electric utility system serving the City (including distribution, subtransmission, and transmission facilities), which the City plans to acquire from El Paso Electric Company (EPE) by purchase or through condemnation proceedings. The agreement has a three-year term beginning at the time the City acquires the facilities and ending no later than January 1, 2002. The purchase price which would be paid by the Company would be equal to the amount required to retire all outstanding debt incurred by the City in acquiring the facilities plus the City's reasonable costs in acquiring the facilities. The Company has the right to terminate the agreement if, in the Company's sole discretion, it determines that any proposed condemnation award is excessive or upon the occurrence of certain other events. The agreement also provides that, if the City abandons or dismisses condemnation proceedings as a consequence of the Company's termination of the agreement, the Company will reimburse the City for one-half of its reasonable litigation expenses and for any of EPE's damages and litigation expenses that the City is obligated to pay by final court order. 37 SOUTHWESTERN PUBLIC SERVICE COMPANY Notes To Consolidated Financial Statements (Continued) August 31, 1996 (7) Commitments, Contingencies and Financial Guarantees, continued FUEL PURCHASE COMMITMENTS In the ordinary course of business, the Company has made substantial commitments with respect to the purchase of coal and natural gas for use as fuel in its generating units. To provide fuel for its coal-fueled generating units, the Company has various long-term commitments with TUCO for the purchasing and processing of coal which is delivered to the Company's coal bunkers in the form of crushed, ready-to-burn coal. The commitments include the use of rail coal cars, unloading facilities and related services. Such commitments in 1996 dollars for the remaining term of the contract are approximately $1,540,000,000. The contracts for coal supply, transportation and other services expire in 2001, 2002 and 2017, respectively. FINANCIAL GUARANTEES In connection with an agreement for the sale of electric power, the Company guaranteed certain obligations of a customer totaling $48,000,000. These obligations related to the construction of certain utility property that, in the event of default by the customer, would revert to the Company. ENVIRONMENTAL MATTERS The Company's facilities are regulated by federal and state environmental agencies. These agencies have jurisdiction over air emissions, water quality, wastewater discharges, solid wastes and hazardous substances. The Company has received all necessary authorizations for the construction and continued operation of its generation, transmission and distribution systems. Company facilities have been designed and constructed to operate in compliance with environmental standards. Beginning in the year 2000, the Clean Air Act Amendments of 1990 (CAAA) Phase II will require more stringent limits on sulfur dioxide (SO2) emissions at the Company's existing fossil-fueled plants. However, current regulations permit compliance with sulfur emissions limitations in the year 2000 by using SO2 allowances allocated to plants by the Environmental Protection Agency (EPA), using allowances generated by reducing emissions at existing plants and by using allowances purchased from other companies. Based upon information from the Company's fuel suppliers, the SO2 allowances issued by the EPA approximate the Company's projected SO2 emissions. The Company monitors options to ensure that allowances will be sufficient to economically operate the Company's existing plants without significant emission reductions. The CAAA also requires the EPA to develop new oxides of nitrogen (NOx) emission standards for existing and new plants which may be more stringent than the current standards. The Company anticipates being able to comply with Phase II NOx emission standards with no additional material capital cost. The Company continues to monitor the impact that the CAAA may have on the Company. Capital expenditures for environmental protection facilities aggregated approximately $2,800,000, $4,100,000, and $11,600,000 for 1996, 1995 and 1994, respectively. Estimates of future capital expenditures for environmental protection facilities are subject to change but the Company has included approximately $9,700,000 in its construction program for these expenditures during the five years ending August 31, 2001, of which approximately $4,200,000 is for 1997. The Company has not developed any specific site removal and exit plans for its fossil fuel plants or substation sites. Plant removal and exit plans are under development, and when such plans are developed in the future, the Company intends to treat removal and exit costs as a cost of retirement in utility plant and include them in depreciation accruals. An estimated removal cost (based on historical experience) is currently included in depreciation expense. 38 SOUTHWESTERN PUBLIC SERVICE COMPANY Notes To Consolidated Financial Statements (Continued) August 31, 1996 (7) Commitments, Contingencies and Financial Guarantees, continued THUNDER BASIN LAWSUIT 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.). Thunder Basin's Wyoming lawsuit in federal court went to trial in late October 1994. On November 1, 1994 the jury returned a verdict in favor of Thunder Basin and against the Company finding that there had been a partial repudiation of the contract and that the Company had interfered with Thunder Basin's contract with TUCO. The jury awarded damages to Thunder Basin of approximately $18,800,000. The Company has appealed the judgment to the Tenth Circuit Court of Appeals and the appeal is progressing. Management believes that in the event a payment is ultimately required to be made to Thunder Basin it would be recoverable from ratepayers, although any such recovery would be subject to regulatory review. Management believes that the ultimate resolution will not have a material adverse effect on the Company's consolidated financial statements. OTHER The Company is a defendant in various claims and legal actions, primarily workers' compensation, contractual matters and general liability lawsuits, all arising in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial statements. (8) Employee Benefit Plans DEFINED BENEFIT PLANS The Company has a noncontributory defined benefit retirement plan (Retirement Plan) which provides retirement and certain other benefits to its officers and employees. The Company's policy is to fund the accrued costs of the Retirement Plan. Assets of the Retirement Plan consist primarily of U.S. government and agency obligations, bonds and common stocks (including 586,236 shares of common stock of the Company with an estimated fair market value of $19,126,000 as of August 31, 1996). Additionally, the Company has a noncontributory defined benefit supplemental retirement income plan(Supplemental Plan) for qualifying executive personnel. The Supplemental Plan is unfunded, and benefits due under the plan are paid out of the Company's general funds. Net periodic pension cost for the Retirement and Supplemental Plans, as determined using the projected unit credit actuarial cost method for the years ended August 31, 1996, 1995 and 1994, is presented below: 1996 1995 1994 ---- ---- ---- (In Thousands) Net periodic pension cost: Service cost for benefits earned during the period ............ $ 6,846 $ 6,606 $ 6,394 Interest cost on projected benefit obligation ........... 20,266 19,563 18,444 Actual return on plan assets ... (53,666) (37,912) 2,729 Net amortization and deferral .. 27,409 12,840 (26,806) ------ ------ ------- Net periodic pension cost $ 855 $ 1,097 $ 761 ======== ======== ======== 39 SOUTHWESTERN PUBLIC SERVICE COMPANY Notes To Consolidated Financial Statements (Continued) August 31, 1996 (8) Employee Benefit Plans, continued The funded status of the Retirement and Supplemental Plans and amounts recognized in the Company's Consolidated Balance Sheets as of August 31, 1996 and 1995 is presented below:
1996 1995 -------------------------- ------------------------- Supplemental Supplemental Retirement Retirement Retirement Retirement Plan Plan Plan Plan ---- ---- ---- ---- (In Thousands) Actuarial present value of benefit obligations: Vested benefit obligation ....................................... $ 198,196 $ 5,774 $ 190,848 $ 5,749 Nonvested benefit obligation .................................... 14,458 1,505 13,139 1,255 ------ ----- ------- ------- Accumulated benefit obligation .......................... $ 212,654 $ 7,279 $ 203,987 $ 7,004 ========= ========= ========= ========= Plan assets at fair value ....................................... $ 345,699 -- $ 306,783 -- Projected benefit obligation .................................... (265,317) $ (7,647) (253,793) $ (7,421) -------- --------- -------- --------- Plan assets in excess of (less than) projected benefit obligation 80,382 (7,647) 52,990 (7,421) Unrecognized prior service costs ................................ 1,184 288 1,320 330 Unrecognized net loss (gain) from past experience ............... (67,527) 1,682 (36,847) 1,520 Additional minimum liability .................................... -- (2,023) - (2,112) Unrecognized transition obligation (asset) ...................... (20,944) 421 (24,508) 679 ------- --- ------- --- Accrued pension liability ............................... $ (6,905) $ (7,279) $ (7,045) $ (7,004) ========= ========= ========= =========
The current and noncurrent portions of the accrued pension liability are included in other current liabilities and other deferred credits, respectively, in the accompanying Consolidated Balance Sheets. The assumed discount rate and the rate of increase in compensation levels used in determining the actuarial present value of the projected benefit obligations were 8% and 6%, respectively. The expected long-term rate of return on plan assets was 8%. Plan assets and liabilities are valued each year using a measurement date of June 30. HEALTH AND WELFARE BENEFIT PLANS The Company provides health care and life insurance benefits to its active and retired employees (primarily group term life insurance, medical and dental benefits provided to retired employees) through various health and welfare benefit plans. Postretirement costs are comprised of: (1) the portion of the expected postretirement benefit obligation attributable to employee service during the year, (2) amortization of the transition obligation and (3) interest costs associated with the unfunded accumulated obligation for future benefits. An assumed discount rate of 8% was used to develop the associated interest costs. The assumed health care cost trend rate used to measure the expected cost of benefits was 11% for 1996 and was assumed to diminish to a level of 5.5% in 2007 and thereafter. The transition obligation of approximately $58,000,000 is being amortized over a 20-year period. A one percentage point increase in the assumed health care cost trend rate in each future year would increase the accumulated postretirement benefit obligation (APBO) at August 31, 1996, by approximately $10,000,000 and other postretirement benefits cost for 1996 by approximately $300,000. Postretirement costs have historically been included in rates when paid. Federal and state agencies that regulate the Company have issued guidelines permitting recovery of such additional costs on an accrual basis. In Texas and New Mexico, which represent approximately 71% of the Company's revenues, the Company was permitted in its rate settlements to recover the additional costs. The Company is required to deposit the amounts included in Texas and New Mexico rates in an irrevocable external trust dedicated to the payment of these postretirement benefits. In remaining jurisdictions, the Company is permitted to recognize regulatory assets for the difference between any amounts paid currently and those accrued. At August 31, 1996 and 1995, deferred debits in the Consolidated Balance Sheets include $3,300,000 and $2,500,000, respectively, that represent the future revenues expected to be realized at the time the additional postretirement benefits are included in the Company's rates. 40 SOUTHWESTERN PUBLIC SERVICE COMPANY Notes To Consolidated Financial Statements (Continued) August 31, 1996 (8) Employee Benefit Plans, continued The Company's net periodic postretirement benefits cost other than pensions for the years ended August 31, 1996, 1995 and 1994, including amounts capitalized, were comprised of the following components: 1996 1995 1994 ---- ---- ---- (In Thousands) Service cost for benefits earned during the period .................... $ 1,266 $ 1,213 $ 1,280 Interest cost on the APBO .............. 5,109 4,843 4,715 Actual return on plan assets ........... (1,964) (723) (134) Net amortization and deferral .......... 3,049 2,476 2,138 ----- ----- ----- Net postretirement benefits cost ..... $ 7,460 $ 7,809 $ 7,999 ======= ======= ======= The funded status for other postretirement benefits and amounts recognized by the Company at August 31, 1996 and 1995, is presented below: 1996 1995 ---- ---- (In Thousands) APBO: Retirees ........................................... $36,240 $40,210 Fully eligible active employees .................... 2,529 2,307 Other active employees ............................. 22,929 22,753 ------ ------ Total APBO ................................. $61,698 $65,270 ======= ======= Plan assets at fair value .......................... $23,400 $17,129 APBO ............................................... (61,698) (65,270) ------- ------- APBO in excess of plan assets ...................... (38,298) (48,141) Unrecognized net loss .............................. (10,238) (2,671) Unrecognized transition obligation ................. 45,464 48,138 ------ ------ Accrued postretirement benefits cost ....... $ (3,072) $ (2,674) ======== ======== DEFINED CONTRIBUTION PLANS The Company has an Employee Stock Ownership Plan and a 401(k) plan. Total contributions to the plans by the Company for the years ended August 31, 1996, 1995 and 1994 were approximately $1,909,000, $1,469,000 and $983,000, respectively. Effective March 1, 1995, the plan assets of the Employee Stock Ownership Plan and 401(k) plan were combined into one plan called the Employee Investment Plan. OTHER BENEFIT PLANS The Company's 1989 Stock Incentive Plan provides for awards of share options and restricted shares, and delivery of shares in certain cases. The number of shares of common stock of the Company registered in connection with this plan is 800,000, the maximum amount that may be awarded prior to July 25, 1998. 41 SOUTHWESTERN PUBLIC SERVICE COMPANY Notes To Consolidated Financial Statements (Continued) August 31, 1996 (8) Employee Benefit Plans, continued Stock options have been awarded to key employees under the 1989 Stock Incentive Plan. Options granted under the plan have an exercise price equal to the fair market value of the common stock on its award date. At August 31, 1996, there were 19 participants that had share options. Options generally become exercisable evenly over nine years and expire ten years after the date of the grant. Number of Options ----------------- 1996 Price Range 1996 1995 1994 ---------------- ---- ---- ---- Summary of stock option activity: Outstanding - beginning of year $28.63-$33.31 67,759 70,724 74,816 Granted - .......................... - - - - 5,645 Exercised* ......................... $28.63-$33.31 (21,647) (245) (6,581) Canceled or expired ................ - - - - (2,720) ------ ------ ------ Outstanding - end of year .......... $28.63-$33.31 46,112 67,759 70,724 ====== ====== ====== ====== ====== Exercisable ........................ - - - 9,345 1,348 ===== ===== *The prices of options exercised in 1995 and 1994 are $33.31 and $30.81. At August 31, 1996, approximately 132,017 restricted shares of common stock have been awarded to employees, generally subject to a ten-year vesting requirement. Previously, the cost of shares awarded were charged to expense over a ten-year period based on the fair market value at date of the award. However, because there is a provision in the 1989 Stock Incentive Plan which provides that the restricted shares fully vest upon shareholder approval of a change in control of the Company, these shares vested late in fiscal 1996. Consequently, the Company has recognized an expense of approximately $1,400,000 in the current year. The Company has a Directors' Deferred Compensation Plan under which directors of the Company or its subsidiaries may elect to defer the distribution of all or a percentage of the annual retainer or meeting fees, or both, otherwise currently payable to such directors. (9) Competitive Environment and Regulatory Assets and Liabilities Electric utilities have historically been recognized as natural monopolies and have 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 open-access transmission service to others and may order electric utilities to enlarge their transmission systems to facilitate transmission services. The changing regulatory environment has stimulated competition in the wholesale electric markets by creating a new class of independent power producers. Revisions to the Public Utility Holding Company Act of 1935 (PUHCA) have allowed both utilities and non-utilities to form independent power production companies called exempt wholesale generators (EWGs), which operate without the restrictions of the PUHCA. EWGs offer alternative sources of power supply to electric utilities across the country. Utilities are often required by state regulation to solicit to purchase power from nonutility power producers and other utilities before seeking approval to construct new generation of their own. Some state regulatory authorities are in the process of changing utility regulations in response to federal and state statutory changes and evolving competitive markets. Texas legislation enacted in 1995 recognizes the movement to a more competitive marketplace by requiring the PUCT to issue new regulations including: allowance of less than fully costed rates in wholesale and retail markets; recognition of and essentially waiving all Texas utility regulation of EWGs and power marketers; and implementation of transmission access comparable to the owning utility's use of its transmission system for non-FERC regulated utilities (the Company is FERC regulated). The Company believes that these statutory and conforming regulations may result in increased wholesale competition. However, due to the Company's low cost structure, increased wholesale competition is not expected to adversely affect it in the near term and may favorably impact it in the long term. The Company also anticipates that opening access to retail customers ("retail wheeling") will be considered by Texas legislators in 1997. The Company is unable to predict what financial impact or effect the adoption of any such legislation would have on its operations. 42 SOUTHWESTERN PUBLIC SERVICE COMPANY Notes To Consolidated Financial Statements (Continued) August 31, 1996 (9) Competitive Environment and Regulatory Assets and Liabilities, continued The New Mexico legislature in 1996 rejected retail wheeling proposals; however, it continued post-session committee investigation of the matter. All of the Company's jurisdictions continue to evaluate utility regulations with respect to competition, and legislative proposals to effect retail wheeling are expected to be introduced in 1997. The Company is unable to predict what financial impact or effect the adoption of these proposals would have on its operations. The Company currently applies accounting standards that recognize the economic effects of rate regulation. Regulatory assets represent probable future revenue associated with certain costs which will be recovered from customers through the ratemaking process. Regulatory liabilities represent costs previously collected that are refundable in future rates. If rate recovery of generation-related and other costs becomes unlikely or uncertain, whether due to competition or regulatory action, these accounting standards may no longer apply to the Company. Regulatory assets and liabilities reflected as deferred debits and deferred credits, respectively, in the Consolidated Balance Sheets as of August 31, 1996 and 1995, are as follows: 1996 1995 ---- ---- (In Thousands) Regulatory assets: Income taxes ...................................... $89,763 $83,286 Deferred refinancing costs ........................ 19,757 21,262 Deferred costs related to a development project 4,256 4,921 Deferred employee benefit costs ................... 5,310 4,310 Other ............................................. 7,120 4,110 ----- ----- Total ..................................... $126,206 $117,889 ======== ======== Regulatory liabilities: Deferred investment tax credits ................... $ 5,803 $ 6,053 Deferred fuel revenue ............................. 6,759 5,969 ----- ----- Total ..................................... $ 12,562 $ 12,022 ======== ======== As of August 31, 1996, the Company's regulatory assets are being recovered through rates charged to customers over periods ranging from ten to thirty years. Under current rates, the Company is recovering approximately $8,000,000 of regulatory costs per year. Based on prior and current rate treatment of such costs, management believes it is probable that the Company will continue to recover from ratepayers the regulatory assets described above. In July 1995, the Company negotiated a settlement with the PUCT and various intervenors. As part of this agreement, the Company is required to perform certain demand side management activities and is allowed to defer the costs of these activities and include them in rate base and cost of service in future PUCT proceedings. (10) Rate Matters The Company may effect changes in its rates only as approved by the regulatory authorities governing its jurisdictions. Amounts ultimately realized will differ from amounts approved because kilowatt-hour sales and other factors will vary from those approved in the rate proceedings. 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. A hearing was held in September 1995, and in January 1996 an order was issued which required 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 rule waiver. The Company filed a motion for rehearing on January 25, 1996. The PUCT issued an order 43 SOUTHWESTERN PUBLIC SERVICE COMPANY Notes To Consolidated Financial Statements (Continued) August 31, 1996 (10)Rate Matters, continued on March 14 denying rehearing on the fuel disallowance (which was adjusted to $1.9 million), and ordered the flow through of 100% of the margin effective with the first billing cycle after the date of the order. The Company filed a motion for rehearing of the March 14 order on April 3, which was also denied. On May 24, 1996, the Company filed an appeal in the Travis County District Court on the PUCT's decision with respect to the $1.9 million of disallowed fuel costs in which the hearing of merits will be held on November 1, 1996. The ultimate outcome of this matter will not significantly affect consolidated financial results. Currently the Company has approximately $7 million in underrecovered fuel costs and is filing with the PUCT for a change in the fuel factor. On December 19, 1989, the FERC issued its final order regarding the 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 TNP were approved by the FERC in July 1993 and September 1993, respectively, and the Company received approximately $2,800,000, including interest. In a settlement with the Company's New Mexico cooperative customers the Company received approximately $7,000,000, including interest. The FERC approved this settlement in July 1995. Resolutions of these matters with the remaining wholesale customers, Golden Spread member cooperatives and Lyntegar Electric Cooperative, have not been reached. The Company cannot reasonably estimate the remaining amount recoverable from these proceedings; however, a favorable resolution could materially improve consolidated earnings in the year in which it is resolved. (11) Quarterly Operating Results (Unaudited) The following quarterly operating results are unaudited, but, in the opinion of management, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the Company's operating results for the periods indicated. Quarter Ended 11-30-95 2-29-96 5-31-96 8-31-96 -------- ------- ------- ------- (In Thousands, Except Per Share Amounts) 1996 Total kilowatt hours sold .... 4,709,152 4,809,272 5,344,286 6,025,729 Operating revenues ........... $ 200,957 $ 203,785 $ 225,029 $ 269,626 Operating income ............. 33,238 28,801 31,980 56,647 Net earnings ................. 23,168 18,081 19,878 44,645 Earnings applicable to common stock ............... 21,949 16,806 19,878 44,645 Earnings per common share .... .54 .41 .49 1.08* 11-30-94 2-28-95 5-31-95 8-31-95 -------- ------- ------- ------- (In Thousands, Except Per Share Amounts) 1995 Total kilowatt hours sold .... 4,732,246 4,467,149 5,035,896 6,100,285 Operating revenues ........... $ 187,216 $ 181,848 $ 205,187 $ 259,832 Operating income ............. 30,088 27,785 36,037 60,301 Net earnings ................. 21,169 18,677 26,429 53,202 Earnings applicable to common stock 19,950 17,457 25,210 51,982 Earnings per common share .... .49 .43 .62 1.26** * Includes an increase of $0.19 attributable to the sale of water rights by Quixx. ** Includes an increase of $0.13 attributable to a change in the estimated delivered not billed kwh sales (see Note 1) and an increase of $0.11 attributable to a one-time adjustment resulting from the 1985 FERC rate case (see Note 10). 44 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.* ITEM 11. EXECUTIVE COMPENSATION.* ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.* The following table contains certain information regarding persons who the Company has been advised are beneficial owners of more than 5 percent of the Common Stock as of the date indicated in the footnote to the table. Name and Address of Amount and Nature of Beneficial Owner Beneficial Ownership Percent of Class Franklin Resources, Inc. 3,380,250(1) 8.3 777 Mariners Island Boulevard San Mateo, California 94403-7777 - ---------- (1) According to Schedule 13G filed as of December 31, 1995, with the Securities and Exchange Commission by Franklin Resources, Inc. ("Franklin"), Franklin had (i) sole voting power with respect to 3,367,000 shares; (ii) sole dispositive power with respect to 1,100 shares; and (iii) shared dispositive power with respect to 3,379,150 shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.* *The information required by Items 10, 11, 12 and 13 with respect to directors and officers to the extent not set forth under Item 1 of Part I in this Form 10-K (pursuant to instruction 3 of paragraph (b) of Item 401 of Regulation S-K) under "Executive Officers of the Registrant," is set forth in the Company's proxy statement for its Annual Meeting of Shareholders to be held January 8, 1997, which is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. FINANCIAL STATEMENTS Page ---- Independent Auditors' Report .................................... 23 Consolidated Balance Sheets as of August 31, 1996 and 1995 Consolidated Statements of Capitalization as of August 31, 1996.. 24 and 1995....................................................... 25 Consolidated Statements of Earnings for the years ended August 31, 1996, 1995 and 1994 ................................ 26 Consolidated Statements of Common Shareholders' Equity for the years ended August 31, 1996, 1995 and 1994 ................................................. 27 Consolidated Statements of Cash Flows for the years ended August 31, 1996, 1995 and 1994 .................... 28 Notes to Consolidated Financial Statements ...................... 29-44 FINANCIAL STATEMENT SCHEDULES All schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the Consolidated Financial Statements or notes thereto. REPORTS ON FORM 8-K Item reported - Item 5. Other Events Financial Statements filed - None Date of report filed - July 1, 1996 45 EXHIBITS Filed with this Form 10-K: 10(a) Incentive Compensation Plan (an Executive Management Plan) as amended July 23, 1996. (b) 1989 Stock Incentive Plan as amended April 23, 1991. (c) Directors' Deferred Compensation Plan as amended January 10, 1990. (d) Supplemental Retirement Income Plan as amended July 23, 1991. (e) EPS Performance Unit Plan dated October 27, 1992. 12 Statements re computation of ratio of earnings 21 Subsidiaries of the registrant 23 Consent of DELOITTE & TOUCHE LLP 24 Power of attorney 27 Financial Data Schedule 99 Unaudited Pro Forma Financial Information Incorporated in this Form 10-K by reference: 2 Agreement and Plan of Reorganization dated as of August 22, 1995, among Southwestern Public Service Company, M-P New Co. and Public Service Company of Colorado, filed as exhibit 2, Form 8-K dated August 22, 1995. 3(a) Restated Articles of Incorporation as amended through February 1, 1996, filed as exhibit 3(i), Form 8-K dated February 1, 1996. (b) Restated Bylaws as amended through July 23, 1991, filed as exhibit 3, Form 10-K for the fiscal year ended August 31, 1991. 4(a) First Mortgage Indenture dated August 1, 1946, filed as exhibit 7-A, Registration No. 2-6910. (b) Supplemental Indentures to the First Mortgage Indenture: Dated File Reference Exhibit February 1, 1967 2-25983 2-S October 1, 1970 2-38566 2-T February 9, 1977 2-58209 2-Y March 1, 1979 2-64022 b(28) April 1, 1983 (two) Form 10-Q, May 1983 4(a) February 1, 1985 Form 10-K, August 1985 4(c) July 15, 1992 (two) Form 10-K, August 1992 4(a) December 1, 1992 (two) Form 10-Q, February 1993 4 February 15, 1995 Form 10-Q, May 1995 4 March 1, 1996 333-05199 4(c) (c) Standby Credit Agreement with Union Bank of Switzerland (Houston Agency) dated July 1, 1991, filed as exhibit 4(a), Form 10-K for the fiscal year ended August 31, 1991. (d) Red River Authority for Texas Indenture of Trust dated July 1, 1991, filed as exhibit 4(b), Form 10-K for the fiscal year ended August 31, 1991. (e) Rights Agreement between the Company and Society National Bank, dated July 23, 1991, filed as exhibit 2, Form 8-A dated July 23, 1991. (f) Amendment No. 1 dated August 22, 1995, to the Rights Agreement between the Company and Society National Bank, filed as exhibit 4, Form 8-K dated August 30, 1995. 10(f) Coal Supply Agreement (Harrington Station) between Southwestern Public Service Company and TUCO, dated May 1, 1979, filed as exhibit 3, Form 8-K dated May 14, 1979. (g) Master Coal Service Agreement between Swindell-Dressler Energy Supply Company and TUCO, dated July 1, 1978, filed as exhibit 5A, Form 8-K dated May 14, 1979. (h) Guaranty of Master Coal Service Agreement between Swindell-Dressler Energy Supply Company and TUCO, filed as exhibit 5B, Form 8-K dated May 14, 1979. (i) Coal Supply Agreement (Tolk Station) between Southwestern Public Service Company and TUCO, dated April 30, 1979, as amended November 1, 1979 and December 30, 1981, filed as exhibit 10(b), Form 10-Q for the quarter ended February 28, 1982. (j) Master Coal Service Agreement between Wheelabrator Coal Services Co. and TUCO, dated December 30, 1981, filed as exhibit 10(c), Form 10-Q for the quarter ended February 28, 1982. 46 SIGNATURES 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/ Bill D. Helton ---------------------------------- (Bill D. Helton, Chairman and Chief Executive Officer) DATE: November 22, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the date indicated: Signature Title Date /s/ Bill D. Helton Chairman and Chief Executive Officer November 22, 1996 (Principal Executive & Financial Officer & Director) /s/ Doyle R. Bunch II Executive Vice President, Accounting and Corporate Development (Principal Accounting Officer) C. Coney Burgess* Directors J. C. Chambers* Danny H. Conklin* Don Maddox* Shirley Bird Perry* David M. Wilks* By/s/ Doyle R. Bunch II* ------------------------------ (Doyle R. Bunch II, Attorney-in-fact) 47 EX-10.A 2 INCENTIVE COMPENSATION PLAN SOUTHWESTERN PUBLIC SERVICE COMPANY INCENTIVE COMPENSATION PLAN (AN EXECUTIVE MANAGEMENT PLAN) (As amended July 23, 1996) I. PLAN GOAL: The goal of the incentive compensation plan here described is to encourage selected officers and certain other named key salaried managerial personnel of Southwestern Public Service Company (Corporation) to develop and apply their managerial and administrative skills and abilities to the fullest possible extent, to attract and retain in the employ of the Corporation executive managerial personnel of outstanding competence and to provide sufficient motivation of the Corporation's executive management to assure the maximizing of profitability, the minimizing of customer cost for electric ser vice, and the general continued improvement in overall corporate performance. II. CONTROL: The plan shall be administered by the Compensation Committee (Committee) as designated by the Board of Directors. No person appointed to the Compensation Committee shall be eligible for an award under the plan while serving on the Committee. The Committee shall interpret the plan, amend and resci nd rules, select eligible plan participants, grant awards, and take other action deemed necessary for the effective control and administration of the plan. Decisions made and action ordered by the Committee shall be subject to the approval of the Board of Directors and be final and binding on all p lan participants. III. PLAN PARTICIPANTS: The Committee shall designate from year to year the officers and other key salaried managerial personnel who shall be eligible to receive incentive compensation for the designated performance year. Participants in general shall be limited to those officers and key salaried personnel who, because of their position and responsibility, materially affect the cost of customer service, corporate profitability, and the daily operating efficiency of the Corporation. Directors of the Corporation who are full-time officers of the Corporation shall be eligible to participate in the plan. IV. PERFORMANCE PERIOD: The standards, judgment criteria, performance statistics, and management objectives constituting the guidelines for determining distribution of incentive compensation shall be measured from September 1 through August 31 (corporate fiscal year). V. THE INCENTIVE COMPENSATION ASSET POOL: A. Committee Consideration: Incentive compensation for the performance year ending August 31 shall be considered and recommendation made to the Board of Directors by the Committee at the regular meeting of the Board scheduled in October. B. Funding Guidelines: The amount available to be placed into an Incentive Compensation Asset Pool (Pool), for incentive compensation awards, shall be one-half of one percent of the Corporation's fiscal year Earnings Applicable to Common Stock, as reflected on the Corporation's Statement of Earnings. (Example: assuming 48 actual earnings to be $112,301,000 the amount available to be placed into the Pool would be $112,301,000 x .0050 = $561,505.) C. Authorization Criteria: The Pool shall be funded according to the following guidelines: 1. If the Corporation's actual return on average common stockholders' equity is at least 90% of the Corporation's budgeted return on average common stockholders' equity for the designated performance period, 50% of the amount available for incentive compensation awards, as established according t o paragraph B of section V, shall be placed in the Pool. 2. Fifty percent of the amount available for incentive compensation awards, as established according to paragraph B of section V, may be placed in the Pool if, in the Committee's opinion, management substantially meets the goals approved by the Committee for the performance period, and such other criteria as the Committee shall find appropriate under the circumstances. VI. INCENTIVE PAYMENT METHODOLOGY: The Pool shall be divided into two equal parts. One part of the Pool (50%) shall be distributed according to paragraph A, below and the other part (50%) shall be distributed according to paragraph B, below. A. Corporate Performance: Distribution of 50% of the Pool (the corporate performance part of the Pool) shall be made according to the following formula. The annual base compensation of each plan participant shall be divided by the aggregate base compensation of all plan participants. The percent derived from the above com putation shall represent the share of the corporate performance portion of the Pool to be distributed to an individual participant. B. Individual Performance: The remaining 50% of the Pool (the individual performance part of the Pool) shall be distributed, by the Corporation's Board of Directors and Chief Executive Officer, or his designee, in the following manner, based upon the individual performance of each plan participant. The Board of Directors w ill first determine the amount of the individual performance portion of the Pool to be allocated to the Corporation's Chairman of the Board and/or President. Division of the remainder of the individual performance portion of the Pool shall be made by the Chief Executive Officer, or his designee. This division shall be based on an individual performance appraisal of each plan participant. The appraisal shall include an evaluation of overall demonstrated managerial and leadership qualities and will specifically address the following performance factors: .....Overall performance of responsibilities managed .....Cooperation with other responsibility centers .....Utilization of manpower and financial resources .....Community and public affairs involvement .....Positive action taken to improve productivity and control expenses .....Initiative and innovation .....Positive action to control overtime .....Safety performance and EEO profile .....Quality of decisions .....Value of individual contributions to corporate objectives. The Chief Executive Officer, or his designee, has the discretion to withhold individual performance payments. 49 VII. INCENTIVE AVAILABILITY (LIMITATION): The amount available for annual incentive awards under this compensation plan shall not exceed the amount designated by the Board of Directors for the stipulated performance year. Compensation available but not awarded for a stipulated performance year shall not be carried forward for distributio n in subsequent performance years. VIII. DEFERRAL OPTIONS: A. Establishment of Deferral Account: A participant may elect at any time prior to the beginning of a performance year to irrevocably defer incentive compensation payment for that year of all or a fraction of any incentive compensation which would otherwise be paid to him as a result of this Incentive Compensation Plan to a time foll owing his retirement with benefits under the Retirement Plan for Employees of Southwestern Public Service Company. The optional fractional amount shall be expressed as a percent of the total incentive compensation payment anticipated, but such deferred declaration shall not be less than ten (10) pe rcent of the performance year distribution. The compensation amounts established by deferral shall be credited by the Corporation with interest equivalents in an amount equal to the prime rate of interest established by Bank One, Texas, N. A., Dallas, Texas, or its successors or assigns, compounded quarterly as of the first day of January, April, July, and October of each year during the deferral period. The prime rate in effect the first day of January, April, July, and October shall be deemed the prime rate in effect for the preceding quarterly period. B. Distribution at Retirement: Distribution of the deferred accumulation shall commence in the January following retirement as conditioned in Section VIII, A of this plan. A plan participant may, claiming personal hardship, petition the Compensation Committee for distribution prior to retirement of all or part of the deferred accumulation. The Committee shall identify and evaluate the claimed hardship and make final ruling on the petition. Retirement Distribution shall be in five annual installments beginning in January of the first year following retirement in increments determined by the distribution table presented on the following page: DISTRIBUTION TABLE Deferred Compensation (Installment Payments Following Retirement) Payment Due Date Amount I. First January immediately following retirement 20% of accumulation II. Second January following retirement 25% of balance III. Third January following retirement 33% of balance IV. Fourth January following retirement 50% of balance V. Fifth January following retirement Remaining balance Modification to the deferred distribution schedule here presented may, at the discretion of the Compensation Committee, be authorized, provided a written request is tendered by the retiree to the Committee detailing the circumstance for such petition, and in the reason of the Committee the retire e's circumstance as presented warrants special treatment. In the event 50 the participant's employment is terminated through death or any other means than retirement, the deferred account will be distributed to the designated beneficiary in January of the year following such termination of employment. In the event a retired participant should die before complete distribution of the deferred account has occurred, payments shall continue to the designated beneficiary in accordance with the annual distribution schedule displayed in this plan. THE AMOUNT DEFERRED ALONG WITH INTEREST ACCRUAL ARE TO BE SATISFIED FROM THE GENERAL CORPORATE FUNDS WHICH ARE SUBJECT TO THE CLAIMS OF CREDITORS. IX. GENERAL PLAN PROVISIONS: A. Termination of Employment: No incentive compensation payment shall be made to a participant for a plan year performance who resigns or is discharged, with or without cause, prior to the close of the performance year. B. Vesting: A participant shall have no vested right to an incentive compensation payment prior to such payment having been determined by the Committee. C. Death or Retirement: In the event a participant dies or retires during a performance year with respect to which incentive compensation payment is made, the Committee may, in its discretion, grant such retired participant, or in the case of a participant's death, the designated beneficiary, a prorata portion of the pa yment that would have otherwise been paid at the end of the performance year, but based upon the number of months of actual service worked during the performance year. D. Category of Incentive Compensation: Annual incentive compensation paid in accordance with the terms of this plan shall not be considered as earnings for purposes of ESOP, TRASOP, retirement income calculations, Group Life Insurance Coverage, disability income calculations under the Employee Retirement Plan for Employees of Southwes tern Public Service Company, and other Corporation-sponsored benefit programs as may be based upon gross earnings. E. Contractual Limitation: This plan shall not constitute a contract of employment, and participation in this plan shall not affect the Corporation's right to discharge a participating employee. F. Change of Control: Notwithstanding anything contained herein to the contrary, in the event of a "Change of Control" (as defined below) during a performance year with respect to which incentive compensation is made, the amount available to be placed into the Pool pursuant to the Funding Guidelines and Authorization Criteria of Sections B and C of Article V hereof, respectively, will be determined on the basis of the Corporation's performance for the period beginning on the first day of such performance year through the last day of the month preceding the 51 month in which a Change of Control occurs. Payment of s uch incentive compensation will be made to a participant as soon as practicable following the Change of Control. A "Change of Control" shall be deemed to have occurred on any of the following: a. The acquisition (other than from the Corporation) by any person, entity, or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (excluding, for this purpose, the Corporation or its subsidiaries, or any written plan providing benefits for employees of the Corporation which acquires beneficial ownership of voting securities of the Corporation), of beneficial ownership (within the meaning of Rule 13(d)(3) promulgated under the Exchange Act) of 20 percent or more of either the then outstanding shares of the Comm on Stock or the combined voting power of the Corporation's then outstanding voting securities entitled to vote generally in the election of directors; or b. Individuals who, as of the date hereof, constitute the Board of Directors of the Corporation (the "Incumbent Board") and cease for any reason to constitute at least a majority of the Board of Directors of the Corporation, provided that any person who first becomes a director after the date her eof whose recommendation, election, or nomination for election by the Corporation's stockholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connect ion with an actual or threatened election contest relating to the election of the directors of the Corporation, as described in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this plan, considered as though such person were a member of the Incumbent Board; or c. The consummation by the Corporation of a reorganization, share exchange, merger, or consolidation with respect to which the persons who were the stockholders of the Corporation immediately before the reorganization, share exchange, merger, or consolidation do not, immediately thereafter, own m ore than 50 percent of the combined voting power entitled to vote in the election of directors of the reorganized, merged, or consolidated company; or d. The liquidation or dissolution of the Corporation or a sale of all or substantially all assets of the Corporation. X. AMENDMENT, SUSPENSION, OR TERMINATION OF THE PLAN: The Board of Directors may, upon recommendation of the Committee, from time to time, amend, suspend, or terminate the plan in whole or part, and if the plan is suspended or terminated, the Board may reinstate any or all of its provisions. NOTATION The executive compensation plan here presented in no way opts to include nor provide personal planning services to plan participants. Personal investment counseling, tax control, income tax preparation, and estate planning are essential elements to maximizing and preserving personal assets, and t he Corporation hastens to urge the plan participants to avail themselves of the expertise available in these areas at the marketplace. 52 EX-10.B 3 1989 STOCK INCENTIVE PLAN SOUTHWESTERN PUBLIC SERVICE COMPANY 1989 STOCK INCENTIVE PLAN (as amended April 23, 1991) 1. PURPOSE The Southwestern Public Service Company 1989 Stock Incentive Plan is designed to enable and encourage key employees of Southwestern Public Service Company and Subsidiaries to acquire or increase their ownership of the $1 par value common stock of the Company on reasonable terms or as an incentive bonus. The Plan also enables Directors of Southwestern Public Service Company and Subsidiaries to acquire such common stock at Fair Market Value. The opportunity so provided and the receipt of Shares as compensation are intended to foster in participants a strong incentive to put forth maximum eff ort for the continued success and growth of the Company for the benefit of customers and stockholders, to aid in retaining individuals who put forth such efforts, and to assist in attracting the best available individuals in the future. 2. DEFINITIONS When used herein, the following terms shall have the meanings set forth below: 2.1 "Award" shall mean an Option or a Restricted Stock Award. 2.2 "Base Rate" means at any time the rate of interest per annum then most recently announced publicly by MBank Dallas, National Association, Dallas, Texas, as its base rate. The Base Rate shall also mean any successor rate that may be established by MBank Dallas, National Association, Dallas, T exas, from time to time. 2.3 "Board" means the Board of Directors of Southwestern Public Service Company. 2.4 "Code" means the Internal Revenue Code of 1986, as amended. 2.5 "Committee" means the members of the Board's Officers' Compensation Committee who are "disinterested persons" as defined in Rule 16b-3 adopted pursuant to the Securities Exchange Act of 1934 and, as such, are not eligible, and have not at any time during the one year period prior to commenci ng service on the Committee been eligible, for selection as persons to whom Shares (including restricted stock) may be allocated or to whom Options on Shares may be granted pursuant to the Plan or any other plan of the Company or any of its affiliates entitling the participants therein to acquire S hares (including restricted stock), stock options, or stock appreciation rights of the Company or any of its affiliates. 2.6 "Company" means Southwestern Public Service Company, a New Mexico corporation. 2.7 "Corporate Transaction" means a transaction in which the Company is wholly or partially liquidated, or participates in a merger, consolidation, or reorganization. 2.8 "Fair Market Value" means with respect to the Company's Shares the mean between the high and low prices of Shares on the New York Stock Exchange Composite Tape on the day on which an Award is granted (or Shares delivered in lieu of current cash compensation as permitted by the Plan) or, if t here should be no sale on that date, on the next preceding day on which there was a sale. 53 2.9 "Grantee" means a person to whom an Award is made. 2.10 "Incentive Stock Option" or "ISO" means an Option awarded under the Plan which meets the terms and conditions established by Section 422A of the Code and applicable regulations. 2.11 "Non-Qualified Stock Option" or "NQSO" means an Option awarded under the Plan other than an ISO. 2.12 "Operating Committee" means a committee consisting of the Chief Executive Officer of the Company and such other officers of the Company as the Chief Executive Officer may designate to serve thereon at the pleasure of the Chief Executive Officer. 2.13 "Option" means the right to purchase a number of Shares, at a price, for a term, under conditions, and for cash or other consideration fixed by the Committee and expressed in the written instrument evidencing the Option. An Option may be either an ISO or NQSO. 2.14 "Plan" means the Company's 1989 Stock Incentive Plan. 2.15 "Restricted Stock Award" means the grant of a right to receive a number of Shares at a time or times fixed by the Committee in the case of a grant to an officer of the Company or of a Subsidiary and by the Operating Committee in the case of a grant to an employee who is not such an officer, in each case in accordance with the Plan and subject to such limitations and restrictions as the Plan and the Committee or Operating Committee, as the case may be, shall impose, all as expressed in the written instrument evidencing the Restricted Stock Award. A Restricted Stock Award may be implem ented (i) by credit to a bookkeeping account maintained by the Company evidencing the accrual to a Grantee of unsecured and unfunded rights to Shares, or (ii) by delivery of certificates for Shares to the Grantee, who must endorse the certificates in blank and return them to the Company Treasurer o r other designated Company officer to be held for future delivery in accordance with the terms of the Restricted Stock Award. 2.16 "Shares" means shares of the Company's $1 par value common stock except that, if any rights under an Award under the Plan pertain to any other security due to the operation of the adjustment provisions of the Plan, the term "Shares" shall include such other security. 2.17 "Subsidiary" means any business, whether or not incorporated, in which the Company, at the time an Award is granted to an employee thereof, or in other cases, at the time of reference, owns directly or indirectly not less than 50 percent of the voting equity interest, except that with respe ct to an ISO the term "Subsidiary" shall have the meaning set forth in Section 425(f) of the Code. 2.18 "Successor" means the legal representative of the estate of a deceased Grantee or the person or persons who shall acquire the right to exercise an Option, or to receive Shares issuable in satisfaction of a Restricted Stock Award, by bequest or inheritance or by reason of the death of the Gr antee, as provided in accordance with Section 9 hereof. 2.19 "Term" means the period during which an Option may be exercised or the period during which the restrictions placed on a Restricted Stock Award are in effect. 54 3. ADMINISTRATION OF THE PLAN 3.1 The Plan shall be administered by the Committee. 3.2 Subject to the provisions of the Plan, the Committee as respects an Award to an officer of the Company or of a Subsidiary and the Operating Committee as respects an Award to an employee who is not such an officer shall have the authority to determine: (a) to whom Awards shall be granted; (b) the number of Shares to be covered by each Award; (c) the price to be paid for the Shares upon the exercise of each Option; (d) the Term; (e) the terms and conditions of each Option, which may include provisions for payment of the Option price in Shares at the Fair Market Value of such Shares on the day of their delivery for such purpose; (f) the restrictions on transfer and forfeiture conditions with respect to a Restricted Stock Award; and (g) any other terms and conditions of the Award, including whether or not the Option price, in the case of an Award of an Option, may be paid by a promissory note in accordance with Section 12.2. Awards to officers of the Company or of a Subsidiary shall be made only in accordance with the recommendation of the Committee and with the approval of the Board of Directors. Awards to employees who are not officers shall be made in accordance with the recommendation of the Operating Committee a nd with the approval of the Committee. 3.3 The Committee may construe and interpret the Plan, reconcile inconsistencies thereunder, and supply omissions therefrom. Any decision or action taken by the Committee in the exercise of such powers or otherwise, arising out of or in connection with the construction, administration, interpret ation, and effect of the Plan and of its rules and regulations, shall be conclusive and binding upon each Grantee and his or her Successor. 3.4 The Committee may appoint a secretary, who need not be a member of the Committee but must be an officer or other employee of the Company, and may establish and amend such rules and regulations for the conduct of its business and the administration of the Plan as it shall deem advisable. 3.5 No member of the Committee or Operating Committee shall be liable, in the absence of bad faith, for any act or omission with respect to his or her service on the Committee or service on the Operating Committee as respects the Plan. Service on the Committee is declared to constitute service a s a Director of the Company, to the end that the members of the Committee shall, in respect of their acts and omissions as such, be entitled to the benefits of the Company's Restated Articles of Incorporation, as amended, and to indemnification and reimbursement as Directors of the Company pursuant to its Bylaws or any contract and to the benefits of any letter of credit, insurance policy, or other arrangement maintained by the Company providing coverage with respect to acts or omissions of Directors of the Company or benefits with respect to the payment by or on behalf of the Company of suc h indemnification and reimbursement. 55 Service on the Operating Committee as respects the Plan is declared to be service as an officer of the Company, to the end that the members of the Operating Committee as respects their acts and omissions as such with respect to the Plan shall be entitled to indemnification and reimbursement as of ficers of the Company pursuant to its Bylaws or any contract and to the benefits of any letter of credit, insurance policy, or other arrangement maintained by the Company providing coverage with respect to acts or omissions of officers of the Company or benefits with respect to the payment by or on behalf of the Company of such indemnification and reimbursement. 3.6 The Operating Committee shall inform the Committee as to its actions with respect to the Plan in such manner, at such times, and in such form as the Committee may request. The Committee shall regularly inform the Board as to its actions under the Plan in such manner, at such times, and in su ch form as the Board may request. 4. ELIGIBILITY Awards may be made under the Plan only to a key employee of the Company or of a Subsidiary, including officers. A Director who is not an employee shall not be eligible to receive an Award. Awards may be made to eligible employees whether or not they have received prior Awards under the Plan or un der any other plan, and whether or not they are participants in other benefit plans of the Company. 5. SHARES SUBJECT TO THE PLAN Eight hundred thousand Shares are reserved for use in connection with Awards under the Plan. The Shares so used may be Shares held in the treasury, however acquired, or Shares which are authorized but unissued. Any Shares subject to Options which lapse unexercised and any Shares forming part of a Restricted Stock Award which do not vest in the Grantee shall once again be available for grant of Awards. 6. GRANTING OF OPTIONS 6.1 Subject to the terms of the Plan, the Committee may from time to time grant Options to officers of the Company or of a Subsidiary and the Operating Committee may from time to time grant Options to other eligible employees. 6.2 Pursuant to the Code and applicable regulations, the aggregate Fair Market Value (determined as of the date or dates of grant of the ISO or ISOs involved) of the Shares with respect to which one or more ISOs are exercisable for the first time by an individual during any calendar year (includ ing all ISOs granted under all plans of the Company and its Subsidiaries) shall not exceed $100,000. No ISO shall be granted to an individual who, at the time the ISO is granted, owns (within the meaning of Section 422(A)(b)(6) of the Code) Shares possessing more than 10 percent of the total combin ed voting power of all classes of stock of the Company or any of its Subsidiaries unless, at the time the ISO is granted, the Option price is at least 110 percent of the Fair Market Value of the Shares subject to the ISO, and the ISO by its terms is not exercisable after the expiration of five year s from the date the ISO is granted. 6.3 The purchase price of each Share subject to an Option shall be fixed by the Committee or Operating Committee, as the case may be, but shall, in the case of an ISO, be not less than the greater of (i) the par value of the Share 56 or (ii) 100 percent of the Fair Market Value of the Share on the date the Option is granted. In the case of a NQSO, the purchase price of each Share subject to the NQSO shall not be less than the lesser of (i) the Fair Market Value of the Share on the date the NQSO is granted or (ii) 110 percent of the per Share book value determined as of the close of the most recently ended fiscal year of the Company. 6.4 Each Option shall expire and all rights to purchase Shares thereunder shall terminate on the date fixed and expressed in the written instrument evidencing the Option, which date shall not be after the expiration of ten years from the date the Option is granted. 6.5 Subject to the terms of the Plan, each Option shall become exercisable at the time, and for the number of Shares, expressed in the written instrument evidencing the Option. Except to the extent otherwise provided in or pursuant to Sections 9 and 10, no Option shall become exercisable as to a ny Shares prior to the first anniversary of the date on which the Option was granted. 7. RESTRICTED STOCK AWARDS 7.1 Subject to the terms of the Plan, the Committee may also grant Restricted Stock Awards to officers of the Company or of a Subsidiary and the Operating Committee may also grant Restricted Stock Awards to other eligible employees. 7.2 The number of Shares covered thereby and other terms and conditions of any such Restricted Stock Award, including the period for which and the conditions on which the Shares included in the Award will be subject to forfeiture and restrictions on transfer or on the ability of the Grantee to m ake elections with respect to the taxation of the Award without the consent of the Committee or Operating Committee, as the case may be, shall be expressed in the written instrument evidencing the Award. Except as provided in or pursuant to Sections 9 and 10, no such restrictions shall lapse earlie r than the first, or later than the tenth, anniversary of the date on which the Award was granted. 7.3 The Committee, in the case of a grant of an Award to an officer of the Company or of a Subsidiary, and the Operating Committee, in the case of a grant of an Award to an eligible employee who is not such an officer, may establish and express in the written instrument evidencing the Award term s and conditions under which the Grantee of a Restricted Stock Award other than an Award of Shares represented by a stock certificate shall be entitled to receive an amount equivalent to any dividend payable with respect to the number of Shares which, as of the record date for which dividends are p ayable, have been credited to him but not delivered to him. Any such dividend equivalents (i) shall be paid to the Grantee of the Restricted Stock Award at such time or times during the period when the Shares are as yet undelivered pursuant to the terms of the Restricted Stock Award, or (ii) shall be paid to the Grantee at the time the Shares to which the dividend equivalents apply are delivered to the Grantee, or (iii) may be reflected by the credit of additional full or fractional Shares to three decimal places in an amount equal to the amount of such dividend equivalents divided by the Fa ir Market Value of a full Share on the date of payment of the dividend on which the dividend equivalent is based, all as shall be expressed in the written instrument evidencing the Restricted Stock Award. Dividends on Restricted Stock Awards consisting of Shares represented by a stock certificate s hall be paid to the Grantee. Any arrangement for the payment or credit of dividend equivalents shall be terminated if, and to the extent that, under the terms 57 and conditions so established, the right to receive Shares pursuant to the terms of the Restricted Stock Award shall terminate or lapse. 8. NONTRANSFERABILITY OF RIGHTS No Option and no rights under any Restricted Stock Award shall be transferable by the Grantee otherwise than by will or the laws of descent and distribution, and the written instrument evidencing each Option and each Restricted Stock Award shall so state. 9. DEATH OR TERMINATION OF EMPLOYMENT 9.1 Subject to the provisions of the Plan, there may be included in the written instrument evidencing an Option such provisions concerning exercise or lapse of the Option on death or termination of employment as may be determined by the Committee in the case of the grant of an Option to an offic er of the Company or of a Subsidiary or by the Operating Committee in the case of the grant of an Option to an eligible employee who is not such an officer. No such provision shall permit an Option to be exercised later than the expiration date of the Option determined pursuant to Section 6.4. No s uch provision shall permit an Option to be exercised prior to the first anniversary of the date on which it was granted, except in the event of death or termination of employment by reason of disability. 9.2 No ISO shall be exercisable after the date which is three months following the Grantee's termination of employment for any reason other than death or disability. No ISO shall be exercisable after the date which is twelve months following the Grantee's termination of employment by reason of d eath or disability. 9.3 The effect of death or termination of employment on Shares issuable or deliverable pursuant to any Restricted Stock Award shall be as stated in the written instrument evidencing the Award. 9.4 A transfer of employment between the Company and a Subsidiary, or between Subsidiaries, shall not constitute a termination of employment for purposes of any Award. The written instrument evidencing the Award may specify whether or not, and if at all to what extent, any authorized leave of ab sence or absence for military or governmental service or for any other reason shall constitute a termination of employment for purposes of the Award and the Plan. 10. PROVISIONS RELATING TO TERMINATION OF THE COMPANY'S SEPARATE EXISTENCE The written instrument evidencing an Award may provide that in the event a Corporate Transaction occurs in which the Company is not the surviving entity, the Option so evidenced shall be immediately exercisable in full and the Restricted Stock Award so evidenced shall be immediately payable in fu ll. The written instrument may also provide that if a Corporate Transaction occurs in which the Company is not the surviving entity (i) such an Option or Restricted Stock Award shall be continued with appropriate adjustments or (ii) a revised option or restricted stock award of equal value shall be substituted for the previously outstanding Option or Restricted Stock Award, as the case may be. 11. WRITTEN INSTRUMENTS EVIDENCING AWARDS Each Award granted under the Plan shall be evidenced by a written instrument which may be in the form of an agreement to be signed by the Grantee. The written instrument shall set forth the nature and size of the Award, its Term, the other terms and conditions thereof, and such other matters as t he Committee or Operating Committee, as the case may be, directs. Acceptance of 58 any benefits of an Award by the Grantee shall be an assent to the terms and conditions set forth therein, whether or not the written instrument is in the form of an agreement signed by the Grantee. 12. EXERCISE OF RIGHTS UNDER AWARDS 12.1 A person entitled to exercise an Option may do so only by delivery of a written notice to that effect specifying the number of Shares with respect to which the Option is being exercised and any other information which the Committee or Operating Committee, as the case may be, has previously required be furnished in connection with the exercise and of which such person has been notified. 12.2 Such a notice shall be accompanied by payment in full for the purchase price of any Shares to be purchased thereunder, with such payment being made in cash or Shares having a Fair Market Value on the date of exercise of the Option equal to the purchase price payable under the Option or, if and only if the Option document so provides, a promissory note of the person exercising the Option secured by a pledge of some or all of the Shares so acquired in an amount not less than the good faith loan value of the Shares pledged to secure the loan, payable on a date or dates not more than fiv e years after issuance and bearing interest at a rate equal to the greater of (i) the minimum rate required to prevent the existence of "unstated interest" under Section 483 of the Code with respect to the Option price and (ii) the Base Rate, or a combination of cash and Shares and such a promissor y note. No Shares shall be issued or delivered upon exercise until full payment has been made therefor. If MBank Dallas, National Association, Dallas, Texas, is no longer in existence or has made no announcement of such rate for the period stated, the Committee shall select another reasonable rate in lieu of the above described rate as announced by MBank Dallas, National Association, Dallas, Texas. 12.3 Upon exercise of an Option, or after grant of a Restricted Stock Award but before delivery of Shares in satisfaction thereof, the Grantee may request in writing that the Shares to be issued or delivered be in the name of the Grantee and another person as joint tenants with right of survivor ship or, in the case of a Restricted Stock Award or NQSO, as tenants in common. 12.4 All notices or requests by a Grantee provided for herein shall be delivered to the President of the Company. 13. EFFECTIVE DATE AND DURATION OF THE PLAN 13.1 The Plan shall become effective on July 26, 1988, the date of its adoption, subject to approval (i) within twelve months thereafter by the stockholders of the Company at a meeting duly held in accordance with applicable law and (ii) within applicable time limits by any governmental body, th e approval of the Plan by which body is required under applicable law. No Option shall be exercisable nor shall any Shares be deliverable or vest under a Restricted Stock Award prior to receipt of all required approvals. 13.2 No Awards may be granted under the Plan after July 25, 1998, although the terms of any Award may at any time prior to the expiration of the Award be amended in accordance with the Plan. 14. DATE OF AWARD The date of an Award shall be the date on which the Committee's or Operating Committee's determination to grant the same is final, or such later date as shall be specified by the Committee or Operating Committee in connection with such determination. 59 15. STOCKHOLDER STATUS No person shall have any rights as a stockholder by virtue of the grant of an Award under the Plan except with respect to Shares actually issued or delivered to that person. 16. POSTPONEMENT OF EXERCISE The Committee or Operating Committee, as the case may be, may postpone any exercise of an Option or the issuance or delivery of any Shares pursuant to a Restricted Stock Award for such period as the Committee or Operating Committee, as the case may be, in its discretion may deem necessary in orde r to permit the Company (i) to effect or maintain registration of the Plan or the Shares issuable upon the exercise of an Option or distributable in satisfaction of a Restricted Stock Award or both under the Securities Act of 1933, as amended, or the applicable securities laws of any jurisdiction, (ii) to permit any action to be taken in order to comply with restrictions or regulations incident to the maintenance of a public market for its Shares or to list the Shares on a national securities exchange, or (iii) to determine that such Shares and the Plan are exempt from such registration or t hat no action of the kind referred to in (ii) above shall or need be taken; and the Company shall not be obligated by virtue of any terms and conditions of any Award or any provision of the Plan to permit the exercise of an Option or to sell, issue, or deliver Shares in violation of the Securities Act of 1933 or other applicable law. Any such postponement shall not extend the Term of an Option nor shorten the Term of any restriction applicable under any Restricted Stock Award; and neither the Company nor its Directors or officers or any of them shall have any obligation or liability to the G rantee of an Award, to any Successor of a Grantee, or to any other person with respect to any Shares as to which an Option shall lapse because of such postponement or as to which issuance or delivery under a Restricted Stock Award was thereby delayed. 17. TERMINATION, SUSPENSION, OR MODIFICATION OF THE PLAN The Board may at any time terminate, suspend, or modify the Plan, except that the Board shall not, without authorization of the stockholders of the Company, effect any change (other than through adjustment for changes in capitalization or in connection with Corporate Transactions as herein provid ed) which: (a) increases the aggregate number of Shares for which Awards may be granted; (b) lowers the minimum Option price; (c) lengthens the maximum period during which an Option may be exercised; (d) renders any member of the Committee eligible to receive an Award while serving thereon; (e) changes the class of employees eligible to receive Awards; (f) extends the period of time during which Awards may be granted; or (g) removes the restrictions set forth in the last sentence of this section. No termination, suspension, or modification of the Plan shall adversely affect any right acquired by any Grantee or any Successor of a Grantee under an Award granted before the date of such termination, suspension, or modification unless such Grantee or Successor shall consent thereto. 60 Adjustments for changes in capitalization or Corporate Transactions as provided for herein shall not, however, be deemed to adversely affect any such right. To the extent required by applicable law, no member of the Board who is an officer or employee of the Company or a Subsidiary shall vote on any proposed amendment to the Plan, or on any other matter or question arising under the Plan, relating solely to his or her own individual interest thereunder. 18. ADJUSTMENT FOR CHANGES IN CAPITALIZATION AND CORPORATE TRANSACTIONS Any change in the number of outstanding Shares of the Company occurring through stock splits, combination of Shares, recapitalization, or dividends consisting of Shares after the adoption of the Plan shall be appropriately reflected in an increase or decrease in the aggregate number of Shares the n available for the grant of Awards under the Plan, or to become available through the termination, surrender, or lapse of Awards previously granted, and in the number of Shares subject to Restricted Stock Awards then outstanding; and appropriate adjustments shall be made in the per Share option pr ice or number of Shares subject to the Option as to any outstanding Options. No fractional Shares shall become available for Awards as a result of such adjustments. Similar adjustments shall be made in the event of distribution of other securities or other consideration in respect of outstanding Sh ares or in the event of a Corporate Transaction or any other change in the corporate structure, if and to the extent that the Committee deems such adjustments appropriate to maintain the interest of the Grantee (or the Grantee's Successor) as it existed before the occurrence of the event. In the ca se of an ISO, only those adjustments shall be made which do not constitute a modification of the ISO as that term is defined in Section 425 of the Code. 19. DELIVERY OF SHARES IN LIEU OF CASH INCENTIVE AWARDS OR DIRECTORS' FEES 19.1 Any employee eligible for an Award under the Plan who is entitled to receive a cash payment from the Company under any management bonus or incentive plan of the Company may make application to the Committee in such manner as may be prescribed from time to time by the Committee to receive Sh ares available under the Plan in lieu of all or any portion of such cash payment. 19.2 The Committee may in its discretion honor an employee's application made pursuant to this Section 19.1, by delivering Shares available under the Plan to such employee, equal in Fair Market Value at the delivery date to that portion of the cash payment otherwise payable to the employee under such bonus or incentive plan for which a Share delivery is to be made in lieu of cash payment. 19.3 Any Director who is entitled to a cash payment for services rendered as a Director ("Remuneration") and who makes the election described below may receive Shares available under the Plan in lieu of all or any portion of such Remuneration. An election under the Plan must be in writing and mu st be irrevocable. An election effective for a given fiscal year commencing September 1 and subsequent fiscal years (until terminated) (the "Election") must be made not later than August 15. The Election will be effective for any Remuneration otherwise payable to the Director for services and for a ny Remuneration otherwise payable to the Director for services performed in each subsequent fiscal year until the Election is terminated. An individual elected as a Director who was not a Director at any time during the twelve-month period preceding the date of his or her election may file an elect ion with respect to Remuneration for services in the fiscal year of his or her election and in subsequent fiscal years (until terminated) (a "newly-elected Director election"). In order to be effective for the fiscal year in which an 61 individual is elected a Director, the individual must file his or her newly-elected Director election not later than the day preceding the day on which he or she is elected as a Director. Any Director who does not have in effect either the Election or a newly-elected Director election may make an election, effective for any Remuneration otherwise payable to the Director for services performed in the first fiscal year beginning subsequent to the filing of such election and fiscal years subsequent thereto (until terminated), by filing such an election not later than August 15 preceding the first fiscal year for which the election is to be effective. Such an election must be in writing and must be irrevocable. A termination of any Director's election must be in writing and must be filed not later than August 15 in order to be effective for Remuneration otherwise payable for services in the succeeding fiscal year and subsequent fiscal years. Each election shall be made by filing with the Secretary of th e Company the Director's written irrevocable election. No such election or notice shall be effective prior to its receipt by the Secretary of the Company. 19.4 Shares which are available under the Plan shall be delivered to a Director who makes an election in compliance with Section 19.3 equal in Fair Market Value at the delivery date to that portion of the Remuneration for which a Share delivery is to be made in lieu of Remuneration. Such deliver y of Shares to a Director under the Plan will be in addition to and wholly apart from any delivery of Shares to such Director pursuant to the Southwestern Public Service Company Directors' Deferred Compensation Plan. 19.5 Any Shares delivered to an employee under the Plan in lieu of cash bonus or incentive payments, or to a Director in lieu of Remuneration, shall reduce the aggregate number of Shares authorized for issuance and delivery under the Plan. The provisions of this Section 19 shall be operative onl y with respect to the delivery of whole Shares in lieu of cash bonus or incentive payments or Remuneration, as the case may be. 19.6 Such application and such delivery of Shares shall not be permitted under the Plan after the expiration of ten years from the date the Plan is adopted. Delivery of such Shares shall be deemed to occur on the date certificates therefor are sent by United States mail or hand delivered to the recipient. 20. NONUNIFORM DETERMINATION PERMISSIBLE The Committee's or Operating Committee's determinations under the Plan, including, without limitation, determinations as to the persons to receive Awards, the form, amount, and type of Awards, the terms and provisions of Awards, the written instruments evidencing Awards, and the granting or rejec ting of applications for delivery of Shares in lieu of cash bonus or incentive payments to an employee or compensation of a director need not be uniform as among persons similarly situated and may be made selectively among eligible employees or directors. 21. TAXES The Company shall be entitled to withhold the amount of any withholding tax payable with respect to any Awards or Share delivery in lieu of cash payments and to sell such number of Shares as may be necessary to produce the amount so required to be withheld, unless the recipient supplies to the Co mpany cash in the amount requested by the Company for the purpose. The person entitled to receive Shares pursuant to an Award will be given notice as far in advance as practicable to permit such cash payment to be made to the Company. The Company 62 may, in lieu of sale of Shares, defer making delivery of Shares until indemnified to its satisfaction with respect to any such withholding tax. 22. TENURE An employee's right, if any, to continue in the employ of the Company or a Subsidiary shall not be affected by the fact that the employee is a participant under the Plan; and the Company or Subsidiary shall retain the right to terminate his or her employment without regard to the effect such term ination may have on any rights he or she may have under the Plan. 23. APPLICATION OF PROCEEDS The proceeds received by the Company from the sale of its Shares pursuant to Options granted under the Plan shall be used for general corporate purposes. 24. OTHER ACTIONS Nothing in the Plan shall be construed to limit the authority of the Company to exercise all of its corporate rights and powers, including, by way of illustration and not by way of limitation, the right to grant options for proper corporate purposes otherwise than under the Plan to any employee o r any other person, firm, corporation, association, or other entity, or to grant options to, or assume options of, any person in connection with the acquisition by purchase, lease, merger, consolidation, or otherwise of all or any part of the business or assets of any person, firm, corporation, ass ociation, or other entity. 63 EX-10.C 4 DIRECTORS' DEFERRED COMPENSATION PLAN SOUTHWESTERN PUBLIC SERVICE COMPANY DIRECTORS' DEFERRED COMPENSATION PLAN (as amended January 10, 1990) A Director of Southwestern Public Service Company (the "Company") or a Director of a subsidiary of the Company which has by a resolution of its Board of Directors currently in effect elected to permit its Directors to participate in the Plan (a "Participating Subsidiary") may elect under the Sout hwestern Public Service Company Directors' Deferred Compensation Plan (the "Plan") to defer the distribution to him or her of all or a percentage of the annual retainer or meeting fees or both (whether such meeting fees are for attending a meeting of the Board of Directors of the Company or a meeti ng of the Board of Directors of a Participating Subsidiary or a meeting of a Committee of either such Board) otherwise currently payable to the Director. For the purposes of the Plan, the annual retainer and meeting fees of a Director are called "Remuneration." A Participating Subsidiary is a corporation not less than 50 percent of the voting equity interest in which is at all times while the corporation is a Participating Subsidiary owned directly or indirectly by the Company. Participation in the Plan by a Participating Subsidiary shall automatically terminate prospectively, effective as of the date such Participating Subsidiary ceases to meet the requirements for classification as a Participating Subsidiary set forth in the preceding sentence. Furthermore, a Participating Subsidiary may, at any time by resolutions of its Board of Directors and by notification to the Company, prospectively terminate its election to be a Participating Subsidiary. Such a termination of Participating Subsidiary status, whether automatic or by resolution of the Board of Directors of the Participating Subsidiary, shall not affect the Accounts of any Director under the Plan attributable to Remuneration earned prior to the effective date of such termination. An amount equal to any payments made under the Plan attributable to Remuneration of a Director of a Participating Subsidiary which is deferred under the Plan shall be paid by the Participating Subsidiary or its successors or assigns to the Company at the time such payments are made under the Plan by the Company. The Plan will be submitted to the stockholders of the Company for their approval at the Company's 1989 Annual Meeting of Stockholders and will not become effective unless so approved. A deferral election under the Plan must be in writing and must be irrevocable. A deferral election effective for 1989 and subsequent calendar years (until terminated) (a "1989 election") must be made not later than December 15, 1988. A 1989 election will be effective for any Remuneration otherwis e payable to the Director for 1989 services and for any Remuneration otherwise payable to the Director for services performed in each subsequent calendar year until the 1989 election is terminated. An individual elected as a Director who was not a Director at any time during the twelve-month period preceding the date of his or her election may file a deferral election with respect to Remuneration for services in the calendar year of his or her election and in subsequent calendar years (until terminated) (a "newly-elected Director deferral election"). In order to be effective for the calendar year in which such a Director's election as Director occurs, the individual must file his or her deferral election not later than the day preceding the day on which he or she is elected as a Director. Any Director who does not have in effect either a 1989 election or a newly-elected Director defer ral election may make a deferral election, effective for any Remuneration otherwise payable to the Director for services performed in the first calendar year beginning subsequent to the filing of such election and calendar years subsequent 64 thereto (until terminated), by filing such an election not later than December 15 preceding the first calendar year for which the deferral election is to be effective. Such a deferral election must be in writing and must be irrevocable. A termination of any Director's deferral election must be in writing and must be filed not later than December 15 in order to be effective for Remuneration otherwise payable for services in the succeeding calendar year and subsequent calendar years. Each deferral election shall be made by filing with the Secretary of the Company the Director's written irrevocable deferral election, together with a written designation of any beneficiary or beneficiaries to receive any balance the Director has to his or her credit under the Plan upon his or her death. A notice of termination or a statement o f change in a designated beneficiary shall be in writing and similarly filed. No such election or notice shall be effective prior to its receipt by the Secretary of the Company. Any amount of Remuneration elected to be deferred by a deferral election shall be credited to a bookkeeping account maintained on the books of the Company. Such bookkeeping account shall be a Dollar Account or a Stock Account, as elected by the Director in his or her written deferral election. On the date on which the Remuneration of a Director affected by a deferral election would otherwise be paid, the Dollar Account of the Director shall be credited with the portion of the Remuneration which he or she elected to defer and have so credited. All Dollar Accounts shall be increased by a n interest equivalent credited monthly at a rate equal to the Base Rate. "Base Rate" means at any time the rate of interest per annum then most recently announced publicly by BANK ONE, TEXAS, N.A., Dallas, Texas ("BANK ONE"), as its base rate. The Base Rate shall also mean any successor rate that m ay be established by BANK ONE from time to time. If BANK ONE is no longer in existence or has made no announcement of such rate for the period stated, the Officers' Compensation Committee of the Board of Directors of the Company shall select another reasonable rate in lieu of the above described ra te as announced by BANK ONE. On the date on which the Remuneration of a Director affected by a deferral election would otherwise be paid, the Stock Account of the Director shall be credited with a stock equivalent equal to that portion of the Remuneration which he or she elected to have so credited. Such stock equivalent sha ll be equal to the number of shares of common stock of the Company, par value $1 per share ("SPS stock"), to three decimal places, that could be purchased on the day that such portion of the Director's Remuneration would otherwise be paid, at a per share price equal to the arithmetical mean of the highest and lowest quoted selling prices on the New York Stock Exchange Composite Tape for such day. If there are no sales on that day, then such mean on the next preceding day on which there are such sales shall be used. On each date on which a dividend in cash or property is distributed on shares of issued and outstanding SPS stock, the Stock Account of a Director shall be credited with a number of shares of SPS stock based upon the amount of cash or the fair market value of any property (the "base amount") dist ributed with respect to a number of shares of issued and outstanding SPS stock equal to the number of shares (including fractions) of SPS stock standing to the Director's credit in his or her Stock Account on the record date for such distribution (assuming that fractional shares could be held of re cord and that distributions were made with respect thereto). The number of shares of SPS stock to be so credited shall be equal to the number of shares of SPS stock, to three decimal places, that could be purchased on such dividend distribution date with the base amount at a per share price equal to 65 the mean between the highest and lowest selling prices on the New York Stock Exchange Composite Tape for that day. If there are no sales on that day, then such mean on the next preceding day on which there are such sales shall be used. On each date on which a stock dividend or stock split is distributed on shares of SPS stock, a Director's Stock Account shall be credited with a number of shares of SPS stock equal to the number of shares which would have been distributed with respect to a number of shares of issued and outstandi ng SPS stock equal to the number of shares (including fractions) of SPS stock standing to the Director's credit in his or her Stock Account on the record date for such distribution (assuming that fractional shares could be held of record and that fractional shares would be distributed). In the event that the Company shall at any time be consolidated with or merged with any other corporation and the Company is not the surviving entity, the amounts credited to each Director's Stock Account shall be a continuing liability of the continuing entity and the amount of SPS stock credite d thereto just prior to the merger or consolidation (including fractional shares) shall be converted into shares of such continuing entity (including fractional shares) or other consideration on the same basis as issued and outstanding SPS stock is exchanged for shares of such continuing entity (as suming fractional shares could have been so exchanged and that fractional shares of the continuing entity would have been issued) or other consideration. Alternatively, each Director may demand and receive as of the day preceding the effective date of such consolidation or merger a cash amount equa l to the number of shares of SPS stock held in his or her Stock Account on such day multiplied by the mean between the highest and lowest selling prices for SPS stock on the New York Stock Exchange Composite Tape on such day or, if there are no sales on such day, such mean on the next preceding dat e on which there are such sales. Such demand shall be in writing and shall not be effective unless filed with the Secretary of the Company not later than the day preceding the effective date of such consolidation or merger. Deferred amounts distributed from a Director's Dollar Account shall be paid in the form of cash, and distributions from a Director's Stock Account shall (except as hereinafter stated as respects a fractional share) be made in whole shares of SPS stock, in each case in one of the following ways, a s set forth in the Director's applicable deferral election: (a) in a lump sum as soon as practicable following termination of the service of the Director as such (with a cash equivalent for any fractional share otherwise distributable from a Stock Account); or (b) in five annual installments, the first installment to be paid as soon as practicable following termination of the service of the Director as such. Each installment shall be in an amount determined by dividing the balance of cash credited to the Dollar Account or shares of SPS stock credited t o the Stock Account by the number of payments remaining to be made. In the case of a Stock Account, the number so produced shall be rounded down to the next highest number of whole shares and a cash equivalent will be paid for any fractional share of SPS stock otherwise includable in the last insta llment. If a Director who has filed a deferral election is not alive at the time any part of the deferral is to be paid under (a) or (b) above, such payment shall be made to the beneficiary or beneficiaries, if any, designated in the Director's deferral election, or in any later written designation of be neficiary or beneficiaries received by the Secretary of the Company prior to the death of the Director. If the Director has designated no beneficiary or none of his or her designated beneficiaries is alive at such payment date, then the payment shall be made to the estate of the Director. 66 If a Director who has filed a deferral election dies while a Director, payment of his or her Dollar Account or Stock Account shall be made to the Director's beneficiary or beneficiaries, or, if no designated beneficiary survives the Director, to the Director's estate in one lump sum as soon as pr acticable after the death of the Director. The Plan shall be administered by the Board of Directors of the Company and may be amended by the Board of Directors at any time in any respect without the approval of the stockholders. No Director shall, however, vote on any matter relating to the administration of the Plan or on its amendment w hich relates solely to himself or herself. 67 EX-10.D 5 SUPPLEMENTAL RETIREMENT INCOME PLAN SOUTHWESTERN PUBLIC SERVICE COMPANY SUPPLEMENTAL RETIREMENT INCOME PLAN (As Amended July 23, 1991) I. PLAN OBJECTIVE: The Southwestern Public Service Company Supplemental Retirement Income Plan (the "Supplemental Plan") is designed to provide compensation at retirement and to provide certain disability and death benefit protection before and after retirement for selected officers and certain key salaried executi ves of Southwestern Public Service Company (the "Company") and its subsidiaries. II. QUALIFICATION FOR PARTICIPATION: Selected officers and certain key salaried executives who, because of their positions and responsibilities, materially affect the cost of customer service, corporate profitability, and the daily operating efficiencies of the Company and its subsidiaries, having at their normal retirement 25 or mo re years of service, shall be eligible for supplemental retirement income consideration as provided by the Supplemental Plan. Notwithstanding the foregoing, if the Company desires to establish a trust for the payment of benefits under the Supplemental Plan as provided in Section IV, before the esta blishment of the trust and as a condition to its establishment, each eligible employee must execute a written waiver of any priority the employee may have under state or federal law as to any claims the employee may have against the Company under the Supplemental Plan or under the trust beyond the rights the employee would have as a general creditor of the Company. After the establishment of any such trust, any employee who qualifies for the Supplemental Plan coverage shall not become eligible for supplemental retirement income consideration unless and until the employee executes the written waiver described in this Section II. The officers and key salaried executives qualifying for participation shall be identified by the Retirement Committee annually, or more frequently as required. No employee who is not among the 25 highest-paid employees of the Company and its subsidiaries, in the aggregate, may receive benefits from the Supplemental Plan. III. SUPPLEMENTAL RETIREMENT INCOME LIMITS: If a participant retires under the normal retirement plan provisions of the Retirement Plan for Employees of Southwestern Public Service Company (the "Qualified Retirement Plan"), the participant shall be entitled to receive the supplemental retirement income provided in this Section III. The sup plemental retirement income generated by the Supplemental Plan shall not protect more than 75% of the participant's final monthly salary at normal retirement or, if applicable, the participant's monthly salary at the date of total and permanent disability reduced by the amount earned under the ten- years certain and life thereafter option of the Qualified Retirement Plan and further reduced by the primary Social Security benefit for which the participant is eligible. 68 SUPPLEMENTAL RETIREMENT INCOME (Example Calculation) Participant profile: Age at retirement 65 years Credited service 35 years Service years 37 years Average monthly salary (prior 36 months) $10,000.00 Final monthly salary $10,500.00 Percent protected x 75% Amount of final monthly salary protected by the Supplemental Plan 7,875.00 Less monthly retirement income from the Qualified Retirement Plan (5,197.50) Less monthly Social Security benefit (1,000.00) Total monthly supplemental retirement income $ 1,677.50 The percent of final monthly salary protected by the Supplemental Plan shall be determined by the participant's accrual of service years as stipulated by the following table: PERCENT OF FINAL MONTHLY SALARY PROTECTED Service Years* Percent Less than 25 -0- 25 60.00 26 62.00 27 64.00 28 66.00 29 68.00 30 70.00 31 71.00 32 72.00 33 73.00 34 74.00 35 and over 75.00 * Service years means credited service as determined by the Qualified Retirement Plan plus any years not otherwise treated as credited service measured from the participant's first employment date with the Company, any subsidiary, or any predecessor through actual retirement date under the Qualifie d Retirement Plan, excluding periods the participant was not employed by the Company or a subsidiary, rounded to the nearest full year. IV. SOURCE OF PAYMENTS OF BENEFITS: The Supplemental Plan is a nonqualified, unfunded, deferred compensation plan. Therefore, all benefits owing under the Supplemental Plan shall be paid out of the Company's general corporate funds, which are subject to the claims of creditors, or out of any trust the Company's Board of Directors s hall establish or authorize, provided that all assets paid into any such trust shall at all times before actual payment to a participant or beneficiary remain subject to the claims of general creditors of the Company. In the absence of action by the Board of Directors, nothing herein shall be construed 69 to create or require the creation of a trust for the purpose of paying benefits owing under the Supplemental Plan. Although the Supplemental Plan is to be deemed totally unfunded, in addition to the discretionary authority to establish a trust as provided herein, the Company may, but shall not be obligated to, purchase one or more life insurance or annuity policies or contracts to provide for its obligations hereunder. Any such policies or contracts, if so purchased, shall name the Company or the trust as beneficiary and sole owner, with all incidents of ownership therein, including (bu t not limited to) the right to cash and loan values, dividends (if any), death benefits, and the right of termination. Any policies or contracts purchased hereunder shall remain a general restricted asset of the Company or of the trust unless and until transferred to the participant, when the parti cipant becomes entitled to benefits under the Supplemental Plan, in satisfaction of some or all of the Company's obligations under the Supplemental Plan. Unless otherwise provided by the Company, no policy or contract as provided herein shall be deemed to be held in trust for the benefit of a parti cipant or any beneficiary. Neither the participant nor any beneficiary shall have any right, title, or interest whatever in or to, or any claim, preferred or otherwise, in or to, any particular assets of the Company as a result of participation in the Supplemental Plan, any policy or contract as pr ovided herein, or any trust that the Company may establish to aid in providing the payments described in the Supplemental Plan. Nothing contained in the Supplemental Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust or a fiduciary relationship of a ny kind between the Company and a participant or any other person. Neither a participant nor a beneficiary of a participant shall acquire any interest greater than that of an unsecured creditor in any assets of the Company or in any trust that the Company may establish to pay benefits hereunder. The rights of the participants or of anyone claiming under the participants shall not be subject to anticipation, alienation, sale, transfer, assignment, encumbrance, or pledge, whether voluntary or involuntary, except that a participant may, as otherwise permitted under the Supplemental Plan, de signate a beneficiary to receive benefits payable hereunder in the event of the participant's death. Nor shall the rights of the participants be subject to legal process or the claims of any creditor of the participants or of anyone claiming under the participants, whether the claim arises out of a ny debts, contracts, liabilities (including any claim for child support or alimony), engagements, torts, or any other source whatsoever. V. VESTING: Participants shall have no vested interest or rights to any benefits under the Supplemental Plan if the participant leaves the employment of the Company or its subsidiaries for any reason other than death (in certain cases), disability (in certain cases), or retirement under either the normal ret irement or the "62/30" early retirement provision of the Qualified Retirement Plan. VI. QUALIFYING EARLY RETIREMENT: Early retirement for the purpose of qualification under the Supplemental Plan shall be limited to the retirement of participants who are 62 years of age but less than age 65 and have completed 30 or more years of credited service. The calculation of a participant's age and credited service, for the purpose of eligibility for qualifying early retirement benefits under the Supplemental Plan, shall be made in the same manner as under Section 2.2 of the Qualified Retirement Plan or any successor provision, including the provisions of 70 Section 2.2(D) of the Qualified Retirement Plan or any successor provision, in the case of the age requirement, and Section 1.1(A)(8) of the Qualified Retirement Plan or any successor provision, in the case of the credited service requirement. A participant selecting qualifying early retire ment shall receive the applicable percentage protection of the participant's final monthly salary, less the retirement income amount earned under the ten-years certain and life thereafter option as provided by the Qualified Retirement Plan, less, except as provided below, the Social Security benefi t for which the participant is eligible based on the participant's age at actual retirement. Notwithstanding the foregoing, if a participant elects to meet the qualifying minimum early retirement age of 62 by applying unused sick leave in satisfaction thereof, the Social Security offset provided ab ove shall be calculated as of and shall commence with the first of the month immediately following the month in which the participant actually attains age 62. EARLY RETIREMENT (Example Calculation) Participant profile: Age at retirement 62 years and 4 months Credited service 32 years Service years 32 years Average monthly salary (prior 36 months) $10,000.00 Final monthly salary $10,500.00 Percent protected x 72% Amount of final monthly salary protected by the Supplemental Plan 7,560.00 Less monthly retirement income from the Qualified Retirement Plan (4,752.00) Less monthly Social Security benefit (800.00) Total monthly supplemental retirement income $ 2,008.00 VII. PAYMENT OF SUPPLEMENTAL RETIREMENT INCOME BENEFIT: The supplemental retirement income benefit provided under the Supplemental Plan shall be payable as follows: (i) for a participant who is unmarried on the date payments from the Supplemental Plan are to commence, a monthly amount for the participant's lifetime and, in the event of a participant's death within ten years after the date the payments to the participant commence, the same monthly amount that was payable to the participant will be payable for the remainder of the ten-year period to a beneficiary designated by the participant, and (ii) for a participant who is married on the date payments from the Supplemental Plan are to commence, a monthly amount, which is the actuarial equivalent of the benefit payable under clause (i) above, using the appropriate actuarial equivalence factors provided in the Qualified Retirement Plan, to the participant during the participant's lifetim e and, if the participant predeceases the participant's spouse, 66-2/3% of the monthly amount payable to the participant will be payable after the death of the participant to the participant's spouse for the lifetime of the spouse. The supplemental retirement income benefit shall commence on the fi rst day of the month next following the date on which the participant terminates employment. VIII. PRE-RETIREMENT DEATH BENEFIT FOR A SPOUSE: If a married participant dies while employed, then the deceased participant's surviving spouse shall be entitled to the death benefit provided in this Section VIII. 71 The monthly death benefit payable to the eligible surviving spouse shall be equal to the remainder, if any, provided in paragraph D hereof, determined as follows: A. First, calculate the monthly amount of the deceased participant's final monthly salary that would have been protected pursuant to Section III of the Supplemental Plan if the participant had retired without regard to age on the date of the participant's death. B. Next, convert the monthly amount determined under paragraph A from the ten-years certain and life thereafter option form of payment provided in Section VII of the Supplemental Plan to a joint and two-thirds survivor form of payment as provided in the Qualified Retirement Plan, using the approp riate actuarial equivalence factors provided in the Qualified Retirement Plan. C. Then, determine the monthly amount which would be payable to the survivor under the joint and two-thirds survivor form of payment provided in paragraph B. D. Finally, subtract from the monthly amount determined under paragraph C the monthly amount of death benefit which would be paid from the Qualified Retirement Plan to the deceased participant's surviving spouse, in the form of a ten-years certain and life thereafter benefit, assuming the decease d participant's spouse is the designated beneficiary under the Qualified Retirement Plan (regardless of whether the surviving spouse is actually the designated beneficiary). The monthly death benefit provided in this Section VIII shall be paid to the surviving spouse for the life of the spouse and shall commence on the first day of the month next following the participant's death. Except as provided in the foregoing provisions of this Section VIII, no other pre-retirement death benefit shall be payable under this Section VIII or under any provisions of the Supplemental Plan. 72 DEATH BENEFIT (Example Calculation) Participant profile: Age at date of death 55 years 0 months Age of spouse at date of participant's death 55 years Credited service 30 years Service years 30 years Average monthly salary (prior 36 months) $10,000.00 Final monthly salary $10,500.00 Percent protected x 70% Amount of final monthly salary protected by the Supplemental Plan 7,350.00 Qualified Retirement Plan factor to convert to two-thirds option x .9591 Monthly retirement income if retired and elected two-thirds option $ 7,049.39 Survivor benefit on death of participant (.667 of above amount) $ 4,701.94 Less death benefit paid from the Qualified Retirement Plan (2,001.16) Total monthly income payable from the Supplemental Plan $ 2,700.78 IX. GENERAL PLAN PROVISIONS: A. Administration: The Supplemental Plan shall be administered by the Retirement Committee. The Retirement Committee shall be the same individuals named by the Board of Directors to administer the Qualified Retirement Plan. The Retirement Committee shall interpret the Supplemental Plan, amend and rescind rules, and take other action deemed necessary for the effective control and administration of the Supplemental Plan. B. Contractual limitation: The Supplemental Plan shall not constitute a contract of employment, and participation in the Supplemental Plan shall not affect the Company's or any subsidiary's right to discharge a participating employee. C. Amendment, suspension, or termination: The Board of Directors may, from time to time, amend, suspend, or terminate the Supplemental Plan in whole or in part, and if the Supplemental Plan is suspended or terminated, the Board of Directors may reinstate any or all of its provisions; however, any such amendment, suspension, or terminatio n shall not reduce or otherwise adversely affect the benefits being paid under the Supplemental Plan to retired participants at the time of the amendment, suspension, or termination. D. Appeals procedure: The appeals and claim procedure as required by the Employee Retirement Income Security Act for nonqualified retirement income plans shall be for the purpose of the Supplemental Plan the exact procedure enumerated in the Qualified Retirement Plan and is further identified as Section 5.11 of the 73 Qualified Retirement Plan, or any successor provision. X. DISABILITY BENEFIT: If a participant becomes totally and permanently disabled, as defined below, while still employed by the Company or any of its subsidiaries, the participant shall be entitled to the disability benefit provided in this Section X. Determination of total and permanent disability shall be based on the determination that the participant meets the requirements for the disability benefit under the Qualified Retirement Plan. Disability benefit payments shall continue until the participant is no longer disabled as determined by the Qualified Retirement Plan or until the participant retires in accordance with the retirement provisions of the Qualified Retirement Plan, whichever is earlier. The disability income generated by the Supplemental Plan shall be an amount equal to 62% of the participant's salary at the date of disability, reduced by the amount of the disability benefit paid by the Qualified Retirement Plan, or by any other plan of the Company that provides disability benef its, and further reduced by the participant's primary Social Security disability benefit. DISABILITY RETIREMENT INCOME (Example Calculation) Average monthly salary (prior 36 months) $10,000.00 Final monthly salary $10,500.00 Percent protected x 62% Amount of final monthly salary protected by the Supplemental Plan 6,510.00 Less monthly disability income from the Qualified Retirement Plan (4,500.00) Less monthly Social Security benefit (1,000.00) Total monthly disability income payable from the Supplemental Plan $ 1,010.00 XI. POST-RETIREMENT BENEFIT PROTECTION: When a participant retires under either the normal retirement or the "62/30" early retirement provision of the Qualified Retirement Plan and becomes eligible to receive the supplemental retirement income provided under the Supplemental Plan, the participant shall be provided with death benefit pr otection of $70,000. On the first day of the month next following the date on which a participant actually retires as provided in this Section XI, there shall be distributed to the participant, in satisfaction of the death benefit protection obligation contained herein, at the sole discretion of the Retirement Commit tee, one of the two following forms of death benefit protection: (i) an individual life insurance policy issued by a life insurance company in the face amount of $70,000, or (ii) an individual contract between the Company and the participant under which the Company promises to pay to the participan t's designated beneficiary a death benefit of $70,000. 74 If the death benefit protection is provided through a life insurance policy, the policy will contain cash reserves. It is intended, but not guaranteed, that the cash reserves will be sufficient to maintain the face value of the policy indefinitely. If the death benefit protection is provided by an individual contract, the contract will be totally unfunded, but shall contain equivalent cash value provisions. The equivalent cash value provisions will permit the participant, subject to the terms and conditions of the participant's individual c ontract, to irrevocably elect to forgo death benefit protection in exchange for receiving an immediate payment of the equivalent cash value as determined under each participant's individual contract. Upon transfer of a life insurance policy to a participant, the participant shall be the sole owner of the policy with all rights of ownership, including the right to name, and change the name of, the beneficiary under the policy. On distribution of an individual contract providing death benefits, the participant shall be entitled to name, and change the name of, the beneficiary under the contract. XII. COST OF LIVING INCREASES: If a participant receiving benefits from the Supplemental Plan and the Qualified Retirement Plan is granted an increase in monthly retirement income from the Qualified Retirement Plan, but the increase is limited in whole or in part by federal laws or regulations prescribing maximum amounts that can be paid from the Qualified Retirement Plan, then the increase, in whole or in part as necessary, shall be paid from the Supplemental Plan. If subsequently the federal laws or regulations are amended, or if the laws or regulations include cost-of-living provisions which permit the increased paym ent to be made from the Qualified Retirement Plan, the increased amount shall be paid by the Qualified Retirement Plan, and any payment from the Supplemental Plan attributable to the increased payment shall be appropriately reduced or terminated. 75 EX-10.E 6 EPS PERFORMANCE UNIT PLAN SOUTHWESTERN PUBLIC SERVICE COMPANY EPS PERFORMANCE UNIT PLAN 1. PURPOSE The purpose of the Southwestern Public Service Company EPS Performance Unit Plan is to aid the Company and its Subsidiaries in employing and retaining qualified and competent personnel and to encourage significant contributions by such personnel to the success of the Company and its Subsidiaries by providing additional incentive to those employees who contribute significantly to the successful and profitable operations of the Company and its Subsidiaries. It is believed that this purpose will be furthered through the granting of Performance Units to key employees, as authorized under the P lan and as set forth in the written instrument evidencing the Performance Units so granted, so that such employees will be encouraged to improve shareholder returns by increasing earnings per share and will be enabled to increase their ownership of Shares by facilitating the exercise of Options gra nted to them under the Company's 1989 Plan for the continued success of the Company and its Subsidiaries 2. DEFINITIONS When used herein, the following terms shall have the meanings set forth below: 2.1 "Board" means the Board of Directors of the Company. 2.2 "Code" means the Internal Revenue Code of 1986, as amended. 2.3 "Committee" means the members of the Board's Compensation Committee. 2.4 "Company" means Southwestern Public Service Company, a New Mexico corporation. 2.5 "Corporate Transaction" means a transaction in which the Company is wholly or partially liquidated, or participates in a merger, consolidation, or reorganization. 2.6 "Grantee" means a person to whom Performance Units are granted. 2.7 "ISO" means an Option award under the 1989 Plan which meets the terms and conditions established by Section 422 of the Code and applicable regulations. 2.8 "1989 Plan" means the Company's 1989 Stock Incentive Plan. 2.9 "NQSO" means an Option awarded under the 1989 Plan other than an ISO. 2.10 "Operating Committee" means a committee consisting of the Chief Executive Officer of the Company and such other officers of the Company as the Chief Executive Officer may designate to serve thereon at the pleasure of the Chief Executive Officer. 2.11 "Option" means the right granted pursuant to the terms of the 1989 Plan to purchase a number of Shares, at a price, for a term, under conditions, and for cash or other consideration fixed by the Committee and expressed in the written instrument evidencing the Option. An Option may be either an ISO or NQSO. 2.12 "Performance Unit" means a promise by the Company to grant a credit or, 76 if applicable, to make a payment to the Grantee, which shall be contingent upon the achievement of one or more performance targets based on objective measures of financial performance of the Company specified by the Comm ittee and as determined by reference to dollar amounts. All Performance Units shall be payable in accordance with the terms and conditions of the written instrument evidencing the grant of such Performance Units. 2.13 "Plan" means the Company's EPS Performance Unit Plan. 2.14 "Shares" means the shares of the Company's $1 par value common stock except that, if any rights under an Option pertain to any other security due to the operation of the adjustment provisions of the 1989 Plan, the term "Shares" shall include such other security. 2.15 "Subsidiary" means any business, whether or not incorporated, in which the Company, when a Performance Unit is granted to an employee thereof, or in other cases, at the time of reference, owns directly or indirectly not less than 50 percent of the voting equity interest. 2.16 "Successor" means the legal representative of the estate of a deceased Grantee or the person or persons who shall acquire the right to exercise Performance Units, by bequest or inheritance or by reason of the Grantee's death, as provided in accordance with Section 7 hereof. 3. ADMINISTRATION OF THE PLAN 3.1 The Plan shall be administered by the Committee. 3.2 Subject to the provisions of the Plan, the Committee, as to Performance Units granted to an officer of the Company or a Subsidiary, and the Operating Committee, as to Performance Units granted to an employee who is not such an officer, shall have the authority to determine: (a) to whom Performance Units shall be granted; (b) the restrictions on transfer and forfeiture with respect to Performance Units; and (c) any other terms and conditions of Performance Units consistent with the Plan. Performance Units granted to officers of the Company or a Subsidiary shall be made only in accordance with the recommendation of the Committee and with the approval of the Board. Performance Units granted to employees who are not officers shall be made in accordance with the recommendation of the Operating Committee and with the approval of the Committee. 3.3 The Committee may construe and interpret the Plan, reconcile inconsistencies thereunder, and supply omissions therefrom. Any decision or action taken by the Committee in the exercise of such powers or otherwise, arising out of or in connection with the construction, administration, interpret ation, and effect of the Plan and of its rules and regulations, shall be conclusive and binding upon each Grantee and his or her Successor. 3.4 The Committee may appoint a secretary, who need not be a member of the Committee but must be an officer or other employee of the Company, and may establish and amend such rules and regulations for the conduct of its business and the administration of the Plan as it shall deem advisable. 3.5 No member of the Committee or the Operating Committee shall be liable, 77 in the absence of bad faith, for any act or omission with respect to his or her service or the Committee or the Operating Committee as respects the Plan. Service on the Committee is declared to constitute service as a Director of the Company, so that the members of the Committee shall, for their acts and omissions as such, be entitled to the benefits of the Company's Restated Articles of Incorporation and to indemnification and reimbursement as Di rectors of the Company pursuant to its Bylaws or any contract and to the benefits of any letter of credit, insurance policy, or other arrangement maintained by the Company providing coverage for acts or omissions of Directors of the Company or benefits with respect to the payment by or on behalf of the Company of such indemnification and reimbursement. Service on the Operating Committee as to the Plan is declared to be service as an officer of the Company, so that the members of the Operating Committee shall, for their acts and omissions with respect to the Plan, be entitled to indemnification and reimbursement as officers of the Company pursua nt to its Bylaws, or any contract and to the benefits of any letter of credit, insurance policy, or other arrangement maintained by the Company providing coverage for acts or omissions of officers of the Company or benefits with respect to the payment by or on behalf of the Company of such indemnif ication and reimbursement. 3.6 The Operating Committee shall inform the Committee as to its actions with respect to the Plan in such manner, at such times, and in such form as the Committee may request. The Committee shall regularly inform the Board as to its actions under the Plan in such manner, at such times, and in su ch form as the Board may request. 4. ELIGIBILITY Performance Units may be granted under the Plan only to key employees of the Company or a Subsidiary, including officers, who also have been granted Options. A Director who is not an employee shall not be eligible to receive Performance Units. Performance Units may be granted to eligible employee s whether or not they have received prior Performance Units under the Plan and whether or not they are participants in other benefit plans of the Company. 5. PERFORMANCE UNITS 5.1 Subject to the terms of the Plan, the Committee may from time to time grant Performance Units to officers of the Company or a Subsidiary, and the Operating Committee may from time to time grant Performance Units to other eligible employees. The number of Performance Units to be granted to ea ch Grantee shall be determined by the Committee in the case of the grant of Performance Units to an officer of the Company or a Subsidiary or by the Operating Committee in the case of the grant of Performance Units to an eligible employee who is not such an officer and as set forth in the written i nstrument evidencing the Performance Units so granted. 5.2 Performance Units shall be subject to such terms and conditions with respect to vesting, timing, and amount of payments (including income tax reimbursement provisions) as may be determined by the Committee in the case of the grant of Performance Units to an officer of the Company or a Subsid iary or by the Operating Committee in the case of the grant of Performance Units to an eligible employee who is not such an officer and as set forth in the written instrument evidencing the Performance Units so granted. 6. NONTRANSFERABILITY OF RIGHTS No rights under any Performance Units shall be transferable by the Grantee 78 otherwise than by will or the laws of descent and distribution, and the written instrument evidencing the grant of Performance Units shall so state. 7. DEATH OR TERMINATION OF EMPLOYMENT 7.1 Subject to the provisions of the Plan, there may be included in the written instrument evidencing Performance Units such provisions concerning exercise or lapse of the Performance Units on death or termination of employment as may be determined by the Committee in the case of the grant of Pe rformance Units to an officer of the Company or a Subsidiary or by the Operating Committee in the case of the grant of Performance Units to an eligible employee who is not such an officer. 7.2 A transfer of employment between the Company and a Subsidiary, or between Subsidiaries, shall not constitute a termination of employment for purposes of Performance Units. The written instrument evidencing the Performance Units may specify whether, and to what extent, any authorized leave of absence or absence for military or governmental service or for any other reason shall constitute a termination of employment for purposes of the Performance Units and the Plan. 8. PROVISIONS RELATING TO TERMINATION OF THE COMPANY'S SEPARATE EXISTENCE The written instrument evidencing Performance Units may provide that if a Corporate Transaction occurs in which the Company is not the surviving entity, the Performance Units evidenced shall be immediately exercisable in full. The written instrument may also provide that if a Corporate Transactio n occurs in which the Company is not the surviving entity, (i) such Performance Units shall be continued with appropriate adjustments or (ii) a revised award of equal value shall be substituted for the previously outstanding Performance Units. 9. WRITTEN INSTRUMENTS EVIDENCING PERFORMANCE UNITS Performance Units granted under the Plan shall be evidenced by a written instrument which may be in the form of an agreement to be signed by the Grantee. The written instrument shall set forth the terms and conditions of the Performance Units and such other matters as the Committee or Operating C ommittee, as the case may be, directs. Acceptance of any benefits of Performance Units by the Grantee shall be an assent to the terms and conditions set forth therein, whether or not the written instrument is in the form of an agreement signed by the Grantee. 10. EXERCISE OF RIGHTS UNDER PERFORMANCE UNITS 10.1 A Grantee entitled to exercise Performance Units may do so only by delivery of a written notice to that effect in accordance with the terms and conditions of the written instrument evidencing the grant of such Performance Units and any other information which the Committee or Operating Comm ittee has previously required be furnished with the exercise and of which such Grantee has been notified. 10.2 All notices or requests by a Grantee provided for herein shall be delivered to the Secretary of the Company. 11. EFFECTIVE DATE AND DURATION OF THE PLAN The Plan shall become effective on October 27, 1992, and no Performance Units may be granted under the Plan after July 25, 1998. The termination of the Plan shall have no effect on Performance Units then outstanding. 79 12. DATE OF PERFORMANCE UNITS The date of Performance Units shall be the date on which the Committee's or Operating Committee's determination to grant the same is final, or such later date as shall be specified by the Committee or Operating Committee in connection with such determination. 13. TERMINATION, SUSPENSION, OR MODIFICATION OF THE PLAN The Board may at any time terminate, suspend, or modify the Plan. No termination, suspension, or modification of the Plan shall adversely affect any right acquired by any Grantee or any Successor under Performance Units granted before the date of such termination, suspension, or modification unle ss such grantee or Successor consents thereto. Adjustments for changes in capitalization and Corporate Transactions as provided for herein shall not, however, be deemed to adversely affect any such right. To the extent required by applicable law, no member of the Board who is an officer or employee of the Company or a Subsidiary shall vote on any proposed amendment to the Plan or on any other matter or question arising under the Plan relating solely to his or her own individual interest thereunder. 14. NONUNIFORM DETERMINATION PERMISSIBLE The Committee's or Operating Committee's determinations under the Plan, including, without limitation, determination as to the persons to receive Performance Units, the terms, conditions, and provisions of Performance Units, and the written instruments evidencing Performance Units, need not be un iform as among persons similarly situated and may be made selectively among eligible employees. 15. TAXES The Company shall be entitled to withhold the amount of any withholding tax payable with respect to any Performance Units as determined by the Committee. 16. ADJUSTMENT FOR CHANGES IN CAPITALIZATION AND CORPORATE TRANSACTIONS Any change in the number of outstanding Shares occurring through stock splits, combination of Shares, recapitalization, or dividends consisting of Shares after the adoption of the Plan shall be appropriately reflected in the calculation of financial performance of the Company under Performance Un its granted prior thereto. Similar adjustments shall be made in the event of distribution of other securities or other consideration in respect of outstanding Shares or in the event of a Corporate Transaction or any other change in the corporate structure, if and to the extent that the Committee de ems such adjustments appropriate to maintain the interest of the Grantee (or the Successor) as it existed before the occurrence of the event. 17. TENURE A Grantee's right, if any, to continue in the employee of the Company or a Subsidiary shall not be affected by the fact that the Grantee is a participant under the Plan; and the Company or Subsidiary shall retain the right to terminate the Grantee's employment without regard to the effect such te rmination may have on any rights the Grantee may have under the Plan. 80 18. UNFUNDED PLAN The adoption of the Plan and any setting aside of amounts by the Company with which to discharge its obligations hereunder shall not be deemed to create a trust. The benefits provided under the Plan shall be a general, unsecured obligation of the Company payable solely from the general assets of the Company, and neither a Grantee nor the Successor shall have any interest in any assets of the Company by virtue of the Plan. Nothing in this section shall be construed to prevent the Company from implementing or setting aside funds in a grantor trust subject to the claims of the Company's credi tors. Legal and equitable title to any funds set aside, other than any grantor trust subject to the claims of the Company's creditors, shall remain in the Company and any funds so set aside shall remain subject to the general creditors of the Company, present and future. Any liability of the Compan y to any Grantee with respect to Performance Units shall be based solely upon contractual obligations created by the Plan and the written instruments evidencing Performance Units. 19. GOVERNING LAW The Plan shall be governed, construed, and enforced in accordance with the laws of Texas applicable to transactions that take place entirely within Texas, and where applicable, the laws of the United States. 81 EX-12 7 STATEMENTS RE COMPUTATION OF RATIO OF EARNINGS SOUTHWESTERN PUBLIC SERVICE COMPANY EXHIBIT 12. Statements re Computation of Ratio of Earnings
Fiscal year ended August 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Dollars In Thousands) Computation of Ratio of Earnings to Fixed Charges: Fixed charges, as defined: Interest on long-term debt ......................... $ 44,964 $ 40,645 $ 37,881 $38,992 $41,528 Amortization of debt premium, discount and expense .................... 577 534 518 498 314 Other interest ..................................... 6,561 3,219 3,068 2,047 1,527 Estimated interest factor of rental charges ................................... 1,245 1,292 1,184 1,094 1,067 ----- ----- ----- ----- ----- Total fixed charges ............................ $ 53,347 $ 45,690 $ 42,651 $42,631 $44,436 ========= ========= ========= ======= ======= Earnings as defined: Net earnings per consolidated statements of earnings ........................... $ 105,773 $ 119,477 $ 102,168 $ 105,254 $102,987 Fixed charges as shown ............................. 53,347 45,690 42,651 42,631 44,436 Income taxes: Federal .......................................... 46,435 56,297 45,232 42,272 39,101 State ............................................ 2,689 1,885 1,842 1,763 1,621 Deferred ......................................... 16,423 9,717 11,564 13,883 13,375 Investment tax credits ............................. (250) (250) (250) (250) (250) -------- -------- -------- -------- -------- Earnings available for fixed charges .................................... $ 224,417 $ 232,816 $ 203,207 $ 205,553 $201,270 ========= ========= ========= ========= ========= Ratio of earnings to fixed charges .................................... 4.21 5.10 4.76 4.82 4.53 ========= ========= ========= ========= ========= Computation of Ratio of Earnings to Fixed Charges and Preferred Dividend Requirements Combined: Total fixed charges, as shown above ................................... $53,347 $45,690 $42,651 $42,651 $44,436 Preferred dividend requirements* .................................... 4,016 7,593 7,620 8,663 10,987 ----- ----- ----- ----- ------ Total fixed charges and preferred dividend requirements combined................ $57,363 $53,283 $50,271 $51,294 $55,423 ======= ======= ======= ======= ======= Earnings available for fixed charges and preferred dividend requirements .............................. $ 224,417 $ 232,816 $ 203,207 $ 205,553 $201,270 ========= ========= ========= ========= ========= Ratio of earnings to fixed charges and preferred dividend requirements combined ..................... 3.91 4.37 4.04 4.01 3.63 ========= ========= ========= ========= ========= *Preferred dividend requirements: Annual preferred dividend requirement ...... $ 2,494 $ 4,878 $ 4,878 $ 5,626 $ 7,243 Less amount deductible for income tax purposes ................................. 28 82 84 84 84 --------- --------- --------- --------- -------- Net requirement [A] ................ $ 2,466 $ 4,796 $ 4,794 $ 5,542 $ 7,159 ========= ========= ========= ========= ========= 1 / (100% - effective tax rate) [B] ........ 1.617 1.566 1.572 1.548 1.523 ========= ========= ========= ========= ========= Effective tax rate ......................... 38.2% 36.2% 36.4% 35.4% 34.3% ========= ========= ========= ========= ========= [A] x [B] .................................. $ 3,988 $ 7,511 $ 7,536 $ 8,579 $ 10,903 Add amount deductible for income tax purposes .................................. 28 82 84 84 84 --------- --------- --------- --------- -------- Preferred dividend requirements ............ $4,016 $ 7,593 $ 7,620 $ 8,663 $ 10,987 ========= ========= ========= ========= ========
82 EX-21 8 SUBSIDIARIES OF THE REGISTRANT SOUTHWESTERN PUBLIC SERVICE COMPANY EXHIBIT 21. Subsidiaries of the Registrant Name Place of Incorporation Utility Engineering Corporation* Texas Quixx Corporation* Texas * Utility Engineering Corporation and Quixx Corporation are wholly owned subsidiaries of Southwestern Public Service Company. 83 EX-23 9 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23. Consent of DELOITTE & TOUCHE LLP INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-53171 and 333-05199 on Form S-3, Registration Statement No. 33-64951 on Form S-4 and Registration Statement Nos. 33-27452 and 33-57869 on Form S-8 of Southwestern Public Service Company, of our report dated October 10, 1996 appearing in this Annual Report on Form 10-K of Southwestern Public Service Company for the year ended August 31, 1996. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Dallas, Texas November 22, 1996 84 EX-24 10 POWERS OF ATTORNEY SOUTHWESTERN PUBLIC SERVICE COMPANY EXHIBIT 24. Power of Attorney The undersigned, David M. Wilks, Director of Southwestern Public Service Company ("Southwestern"), a New Mexico corporation, which is to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, Southwestern's annual report on Form 10-K for the year ended August 31, 1996, hereby constitutes and appoints Bill D. Helton and Doyle R. Bunch II, of SPS Tower, Tyler at Sixth, Amarillo, Texas, and each of them, his attorney-in-fact, with full power of substitution and resubstitution in the premises, for him and in his name, place and stead to sign with or without the other in any and all capacities and file such annual report and any and all amendments thereto, granting unto said attorneys-in-fact full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and approving the acts of said attorneys-in-fact. In Witness Whereof, the undersigned has hereunto set his hand this 22nd day of October, 1996. /s/ David M. Wilks David M. Wilks 85 SOUTHWESTERN PUBLIC SERVICE COMPANY EXHIBIT 24. Power of Attorney The undersigned, Danny H. Conklin, Director of Southwestern Public Service Company ("Southwestern"), a New Mexico corporation, which is to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, Southwestern's annual report on Form 10-K for the year ended August 31, 1996, hereby constitutes and appoints Bill D. Helton, David M. Wilks, and Doyle R. Bunch II, of SPS Tower, Tyler at Sixth, Amarillo, Texas, and each of them, his attorney-in-fact, with full power of substitution and resubstitution in the premises, for him and in his name, place and stead to sign with or without the other in any and all capacities and file such annual report and any and all amendments thereto, granting unto said attorneys-in-fact full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and approving the acts of said attorneys-in-fact. In Witness Whereof, the undersigned has hereunto set his hand this 22nd day of October, 1996. /s/ Danny H. Conklin Danny H. Conklin 86 SOUTHWESTERN PUBLIC SERVICE COMPANY EXHIBIT 24. Power of Attorney The undersigned, J. C. Chambers, Director of Southwestern Public Service Company ("Southwestern"), a New Mexico corporation, which is to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, Southwestern's annual report on Form 10-K for the year ended August 31, 1996, hereby constitutes and appoints Bill D. Helton, David M. Wilks, and Doyle R. Bunch II, of SPS Tower, Tyler at Sixth, Amarillo, Texas, and each of them, his attorney-in-fact, with full power of substitution and resubstitution in the premises, for him and in his name, place and stead to sign with or without the other in any and all capacities and file such annual report and any and all amendments thereto, granting unto said attorneys-in-fact full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and approving the acts of said attorneys-in-fact. In Witness Whereof, the undersigned has hereunto set his hand this 22nd day of October, 1996. /s/ J. C. Chambers J. C. Chambers 87 SOUTHWESTERN PUBLIC SERVICE COMPANY EXHIBIT 24. Power of Attorney The undersigned, Don Maddox, Director of Southwestern Public Service Company ("Southwestern"), a New Mexico corporation, which is to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, Southwestern's annual report on Form 10-K for the year ended August 31, 1996, hereby constitutes and appoints Bill D. Helton, David M. Wilks, and Doyle R. Bunch II, of SPS Tower, Tyler at Sixth, Amarillo, Texas, and each of them, his attorney-in-fact, with full power of substitution and resubstitution in the premises, for him and in his name, place and stead to sign with or without the other in any and all capacities and file such annual report and any and all amendments thereto, granting unto said attorneys-in-fact full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and approving the acts of said attorneys-in-fact. In Witness Whereof, the undersigned has hereunto set his hand this 22nd day of October, 1996. /s/ Don Maddox Don Maddox 88 SOUTHWESTERN PUBLIC SERVICE COMPANY EXHIBIT 24. Power of Attorney The undersigned, Shirley Bird Perry, Director of Southwestern Public Service Company ("Southwestern"), a New Mexico corporation, which is to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, Southwestern's annual report on Form 10-K for the year ended August 31, 1996, hereby constitutes and appoints Bill D. Helton, David M. Wilks, and Doyle R. Bunch II, of SPS Tower, Tyler at Sixth, Amarillo, Texas, and each of them, her attorney-in-fact, with full power of substitution and resubstitution in the premises, for her and in her name, place and stead to sign with or without the other in any and all capacities and file such annual report and any and all amendments thereto, granting unto said attorneys-in-fact full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises as fully to all intents and purposes as she might or could do in person, hereby ratifying and approving the acts of said attorneys-in-fact. In Witness Whereof, the undersigned has hereunto set her hand this 22nd day of October, 1996. /s/ Shirley Bird Perry Shirley Bird Perry 89 SOUTHWESTERN PUBLIC SERVICE COMPANY EXHIBIT 24. Power of Attorney The undersigned, C. Coney Burgess, Director of Southwestern Public Service Company ("Southwestern"), a New Mexico corporation, which is to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, Southwestern's annual report on Form 10-K for the year ended August 31, 1996, hereby constitutes and appoints Bill D. Helton, David M. Wilks, and Doyle R. Bunch II, of SPS Tower, Tyler at Sixth, Amarillo, Texas, and each of them, his attorney-in-fact, with full power of substitution and resubstitution in the premises, for him and in his name, place and stead to sign with or without the other in any and all capacities and file such annual report and any and all amendments thereto, granting unto said attorneys-in-fact full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and approving the acts of said attorneys-in-fact. In Witness Whereof, the undersigned has hereunto set his hand this 22nd day of October, 1996. /s/ C. Coney Burgess C. Coney Burgess 90 EX-27 11 FDS -- TWELVE MONTHS ENDED AUGUST 31, 1996
UT 12-mos Aug-31-1996 Aug-31-1996 Per-Book 1,621,746 71,855 168,492 135,724 0 1,997,817 40,918 307,484 386,717 735,119 0 0 622,931 0 0 69,624 15,176 0 0 0 554,967 1,997,817 899,397 59,880 688,851 748,731 150,666 4,693 155,359 49,586 105,773 2,494 103,279 90,020 44,863 180,086 2.52 0
EX-99 12 UNAUDITED PRO FORMA FINANCIAL INFORMATION SOUTHWESTERN PUBLIC SERVICE COMPANY EXHIBIT 99. Unaudited Pro Forma Information The following unaudited pro forma balance sheet information at September 30, 1996, gives effect to the Merger as if it had occurred at September 30, 1996. The unaudited pro forma operating information for the twelve-months ended September 30, 1996, and each of the two years ended December 31, 1995, give effect to the Merger as if it had occurred on January 1, 1994. These statements are prepared on the basis of accounting as required under a pooling of interests and do not reflect any cost savings or other synergies anticipated by management as a result of the Merger. Accordingly, the pro forma information is not necessarily indicative of the financial position or results of operations that would have occurred had the Merger been consummated for the periods for which it is given effect, nor is it necessarily indicative of future operating results or financial condition.
NEW CENTURY ENERGIES, INC. Unaudited Pro Forma Combined Balance Sheet At September 30, 1996 SPS PSCo Pro Forma --- ---- --------- (In Thousands) Assets Property, plant and equipment, at cost: Electric ................................................... $2,493,052 $3,887,589 $6,380,641 Gas ........................................................ -- 1,011,274 1,011,274 Steam ...................................................... -- 17,748 17,748 Other ...................................................... 37,684 60,449 98,133 Common to all departments .................................. -- 423,296 423,296 Construction work in progress .............................. 53,829 150,189 204,018 ------ ------- ------- 2,584,565 5,550,545 8,135,110 Less: accumulated depreciation .................................... 928,304 2,011,606 2,939,910 ------- --------- --------- Total property, plant and equipment ........................ 1,656,261 3,538,939 5,195,200 --------- --------- --------- Investments, at cost, and receivables .............................. 46,558 35,912 82,470 ------ ------ ------ Current assets: Cash and temporary cash investments ........................ 34,187 15,540 49,727 Accounts receivable - net .................................. 67,441 142,498 209,939 Accrued unbilled revenues .................................. 17,737 72,879 90,616 Recoverable purchased electric energy costs (3) ............ 6,759 -- -- Materials and supplies, at average cost .................... 19,286 51,450 70,736 Fuel inventory, at average cost ............................ 2,322 22,446 24,768 Gas in underground storage, at cost (LIFO) ................. -- 50,105 50,105 Current portion of accumulated deferred income taxes (3) ... -- 16,669 16,069 Regulatory assets recoverable within one year .............. -- 43,535 43,535 Prepaid expenses and other (3) ............................. 7,305 30,800 38,705 ----- ------ ------ Total current assets ....................................... 155,037 445,922 594,200 ------- ------- ------- Deferred charges Regulatory assets .......................................... 108,593 300,354 408,947 Unamortized debt expense ................................... 6,592 10,506 17,098 Other ...................................................... 29,818 73,996 103,814 ------ ------ ------- Total deferred charges ..................................... 145,003 384,856 529,859 ------- ------- ------- $2,002,859 $4,405,629 $6,401,729 ========== ========== ==========
The accompanying notes to pro forma consolidated balance sheet and statements of income are an integral part of this statement. 92 SOUTHWESTERN PUBLIC SERVICE COMPANY EXHIBIT 99. Unaudited Pro Forma Information, Continued
NEW CENTURY ENERGIES, INC. Unaudited Pro Forma Combined Balance Sheet, Continued At September 30, 1996 SPS PSCo Pro Forma --- ---- --------- (In Thousands) Capitalization and Liabilities Common stock (2) ................................................ $40,918 $323,032 $ 103,479 Paid-in capital (2) ............................................. 307,484 717,799 1,285,754 Retained earnings (5) ........................................... 394,912 374,690 760,066 -- ------- ------- ------- Total common equity ..................................... 743,314 1,415,521 2,149,299 Preferred stock: Not subject to mandatory redemption ..................... -- 140,008 140,008 Subject to mandatory redemption - ....................... -- 39,913 39,913 Long-term debt .................................................. 620,467 1,270,716 1,891,183 ------- --------- --------- 1,363,781 2,866,158 4,220,403 --------- --------- --------- Noncurrent liabilities: Employees' postretirement benefits other than pensions .. 3,232 55,052 58,284 Employees' postemployment benefits ...................... 2,369 23,500 25,869 ----- ------ ------ Total noncurrent liabilities ............................ 5,601 78,552 84,153 ----- ------ ------ Current liabilities: Notes payable and commercial paper ...................... 97,523 258,150 355,673 Long-term debt due within one year ...................... 15,229 69,988 85,217 Preferred stock subject to mandatory redemption within one year - . ................................... -- 2,576 2,576 Accounts payable ........................................ 13,984 159,806 173,790 Dividends payable ....................................... -- 36,860 36,860 Recovered purchased gas and electric energy costs - net - -- 45,357 38,598 Customers' deposits ..................................... 5,968 20,556 26,524 Accrued taxes ........................................... 39,028 38,963 77,991 Accrued interest ........................................ 11,174 24,160 35,334 Current portion of defueling and decommissioning liability ............................................. -- 15,182 15,182 Merger costs (5)......................................... -- -- 9,536 Other ................................................... 66,732 60,021 126,753 ------ ------ ------- Total current liabilities ............................... 249,638 731,619 984,034 ------- ------- ------- Deferred credits: Customers' advances for construction .................... 366 56,710 57,076 Unamortized investment tax credits ...................... 5,782 109,463 115,245 Accumulated deferred income taxes ....................... 366,497 533,589 900,086 Other ................................................... 11,194 29,538 40,732 ------ ------ ------ Total deferred credits 383,839 729,300 1,113,139 ------- ------- --------- $ 2,002,859 $ 4,405,629 $ 6,401,729 =========== =========== ===========
The accompanying notes to pro forma consolidated balance sheet and statements of income are an integral part of this statement. 93 EXHIBIT 99. Unaudited Pro Forma Information, Continued
NEW CENTURY ENERGIES, INC. Unaudited Pro Forma Combined Statement of Income For the twelve months ended September 30, 1996 SPS PSCo Pro Forma --- ---- --------- (In Thousands) Operating revenues: Electric ................................................ $ 899,938 $ 1,476,006 $ 2,375,944 Gas ..................................................... -- 590,757 590,757 Other ................................................... -- 40,654 40,654 ------- --------- --------- 899,938 2,107,417 3,007,355 ------- --------- --------- Operating expenses: Fuel used in generation ................................. 416,423 189,604 606,027 Purchased power ......................................... 19,256 482,911 502,167 Gas purchased for resale ................................ -- 353,924 353,924 Other operating expenses (3) ............................ 110,486 327,680 438,166 Maintenance ............................................. 31,141 61,908 93,049 Depreciation and amortization ........................... 65,684 149,640 215,324 Taxes (other than income taxes) ......................... 44,711 81,656 126,367 Income taxes ............................................ 65,204 105,086 170,290 ------ ------- ------- 752,905 1,752,409 2,505,314 ------- --------- --------- Operating income ................................................ 147,033 355,008 502,041 ------- ------- ------- Other income and deductions: Allowance for equity funds used during construction ..... 60 1,737 1,797 Miscellaneous income and deductions - net (3) ........... 9,630 (19,380) (9,750) ----- ------- ------ 9,690 (17,643) (7,953) ----- ------- ------ Interest charges and preferred dividends: Interest on long-term debt .............................. 45,674 89,725 135,399 Amortization of debt discount and expense less premium .. 2,093 3,560 5,653 Other interest .......................................... 5,459 58,015 63,474 Allowance for borrowed funds used during construction ... (2,396) (3,295) (5,691) Dividend requirements on preferred stock of PSCo and SPS -- -- 13,965 ------ ------- ------ 50,830 148,005 212,800 ------ ------- ------- Net income ...................................................... 105,893 189,360 281,288 Dividend requirements on preferred stock of PSCo and SPS ........ 2,088 11,877 -- Earnings available for common stock ............................. $ 103,805 $ 177,483 $ 281,288 =========== =========== =========== Weighted average common shares outstanding (2) .................. 40,918 63,823 102,695 ====== ====== ======= Earnings per weighted average share of common stock outstanding . $2.54 $ 2.78 $ 2.74 ===== =========== ===========
The accompanying notes to pro forma consolidated balance sheet and statements of income are an integral part of this statement. 94 EXHIBIT 99. Unaudited Pro Forma Information, Continued
NEW CENTURY ENERGIES, INC. Unaudited Pro Forma Combined Statement of Income For the year ended December 31, 1995 SPS PSCo Pro Forma --- ---- --------- (In Thousands) Operating revenues: Electric .............................................. $ 852,510 $1,449,096 $2,301,606 Gas ................................................... -- 624,585 624,585 Other ................................................. -- 36,920 36,920 ---------- --------- --------- 852,510 2,110,601 2,963,111 ---------- --------- --------- Operating expenses: Fuel used in generation ............................... 376,544 181,995 558,539 Purchased power ....................................... 6,485 481,958 488,443 Gas purchased for resale .............................. -- 392,680 392,680 Other operating expenses (3) .......................... 108,411 346,025 454,436 Maintenance ........................................... 27,594 64,069 91,663 Depreciation and amortization ......................... 62,552 141,380 203,932 Taxes (other than income taxes) ....................... 43,316 81,319 124,635 Income taxes .......................................... 69,840 95,357 165,197 694,742 1,784,783 2,479,525 ------- --------- --------- Operating income .............................................. 157,768 325,818 483,586 ------- ------- ------- Other income and deductions: Allowance for equity funds used during construction ... 245 3,782 4,027 Miscellaneous income and deductions - net (3) ......... 8,141 (6,838) 1,303 ----- ------ ----- 8,386 (3,056) 5,330 ----- ------ ----- Interest charges and preferred dividends: Interest on long-term debt ............................ 42,421 85,832 128,253 Amortization of debt discount and expense less premium 2,048 3,278 5,326 Other interest ........................................ 1,695 58,109 59,804 Allowance for borrowed funds used during construction . (2,744) (3,313) (6,057) Dividend requirements on preferred stock of PSCo and SPS .............................................. -- -- 17,588 ------ 43,420 143,906 204,914 ------ ------- ------- Net income .................................................... 122,734 178,856 284,002 Dividend requirements on preferred stock of PSCo and SPS ...... 5,625 11,963 -- ----- ------ ---------- Earnings available for common stock ........................... $ 117,109 $ 166,893 $ 284,002 ========== ========== ========== Weighted average common shares outstanding (2) ................ 40,918 62,932 101,804 ====== ====== ======= Earnings per weighted average share of common stock outstanding ........................................... $ 2.86 $ 2.65 $ 2.79 ========== ========== ==========
The accompanying notes to pro forma consolidated balance sheet and statements of income are an integral part of this statement. 95 EXHIBIT 99. Unaudited Pro Forma Information, Continued
NEW CENTURY ENERGIES, INC. Unaudited Pro Forma Combined Statement of Income For the year ended December 31, 1994 SPS PSCo Pro Forma --- ---- --------- (In Thousands) Operating revenues: Electric ................................................ $ 824,008 $ 1,399,836 $ 2,223,844 Gas ..................................................... -- 624,922 624,922 Other ................................................... -- 32,626 32,626 ------ ------ 824,008 2,057,384 2,881,392 ------- --------- --------- Operating expenses: Fuel used in generation ................................. 386,796 198,118 584,914 Purchased power ......................................... 4,401 437,087 441,488 Gas purchased for resale ................................ -- 397,877 397,877 Other operating expenses ................................ 107,130 369,094 476,224 Maintenance ............................................. 30,245 67,097 97,342 Defueling and decommissioning ........................... -- 43,376 43,376 Depreciation and amortization ........................... 59,759 139,035 198,794 Taxes (other than income taxes) ......................... 42,510 86,408 128,918 Income taxes ............................................ 57,126 48,500 105,626 ------ ------ ------- 687,967 1,786,592 2,474,559 ------- --------- --------- Operating income ................................................ 136,041 270,792 406,833 ------- ------- ------- Other income and deductions: Allowance for equity funds used during construction ..... 179 3,140 3,319 Gain on sale of WestGas Gathering, Inc. - ............... -- 34,485 34,485 Miscellaneous income and deductions - net ............... 1,867 (6,014) (4,147) ----- ------ ------ 2,046 31,611 33,657 ----- ------ ------ Interest charges and preferred dividends: Interest on long-term debt .............................. 37,710 89,005 126,715 Amortization of debt discount and expense less premium .. 2,020 3,126 5,146 Other interest .......................................... 2,028 44,021 46,049 Allowance for borrowed funds used during construction ... (1,303) (4,018) (5,321) Dividend requirements on preferred stock of PSCo and SPS -- -- 16,892 ------ 40,455 132,134 189,481 ------ ------- ------- Net income ...................................................... 97,632 170,269 251,009 Dividend requirements on preferred stock of PSCo and SPS ........ 4,878 12,014 -- ----- ------ ----------- Earnings available for common stock ............................. $92,754 $158,255 $ 251,009 ======= ======== =========== Weighted average common shares outstanding (2) .................. 40,918 61,547 100,419 ====== ====== ======= Earnings per weighted average share of common stock outstanding . $2.27 $ 2.57 $ 2.50 ===== ======== ===========
The accompanying notes to pro forma consolidated balance sheet and statements of income are an integral part of this statement. 96 EXHIBIT 99. Unaudited Pro Forma Information, Continued NEW CENTURY ENERGIES, INC. Notes To Unaudited Pro Forma Combined Balance Sheet and Statements of Income September 30, 1996 (1) The unaudited pro forma combined statements of income have been prepared from the historical consolidated financial statements of PSCo and SPS and are presented as if the companies were combined during all periods presented herein. (2) The unaudited pro forma combined balance sheet and statements of income reflect the conversion of each outstanding share of PSCo Common Stock into one share of NCE Common Stock, and each outstanding share of SPS Common Stock into 0.95 of one share of NCE Common Stock in accordance with the terms of the Merger Agreement. (3) There were no intercompany transactions and, accordingly, no pro forma elimination adjustments were made. Certain amounts have been reclassified in order to provide consistent presentation. (4) For discussion regarding material commitments and contingencies relating to SPS see Note (7) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Commitments and Contingencies in Item 8. Financial Statements and Supplementary Data. For PSCo reference is made to the 1995 Annual Report on Form 10-K and Form 10-Q for the quarter ended September 30, 1996. (5) The unaudited pro forma combined financial statements include $7.8 million of nonrecurring charges directly related to the Merger incurred during the twelve months ended September 30, 1996. These nonrecurring charges include merger transaction costs and benefits expense resulting from an accelerated vesting of certain benefits. The unaudited pro forma combined statements of income do not reflect future nonrecurring charges directly related to the Merger, estimated to total approximately $9.5 million. The pro forma combined balance sheet at September 30, 1996 has been adjusted to include these items with the recognition of additional current liabilities and the reduction of retained earnings. 97 -----END PRIVACY-ENHANCED MESSAGE-----