UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark One)
  [X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
           THE SECURITIES EXCHANGE ACT OF 1934

           For the quarterly period ended March 31,June 30, 1999

                      OR

  [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
           OF THE SECURITIES EXCHANGE ACT OF 1934

           For the transition period from _____________   to   ____________

             Exact name of registrant as specified in its charter,
             State or other jurisdiction of incorporation or
             organization, Address of principal executive offices
Commission   and Registrant's Telephone Number,                     IRS Employer
File Number  including area code                              Identification No.
- -----------  -------------------                              ------------------
1-12927    NEW CENTURY ENERGIES, INC.                            84-1334327
           (a Delaware Corporation)
           1225 17th Street
           Denver, Colorado  80202
           Telephone (303) 571-7511

1-3280     PUBLIC SERVICE COMPANY OF COLORADO                    84-0296600
           (a Colorado Corporation)
           1225 17th Street
           Denver, Colorado  80202
           Telephone (303) 571-7511

1-3789     SOUTHWESTERN PUBLIC SERVICE COMPANY                   75-0575400
           (a New Mexico Corporation)
           Tyler at Sixth
           Amarillo, Texas  79101
           Telephone (303) 571-7511
                                    -------------------

      Indicate by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

      On May 11,August 13, 1999,  114,950,360115,254,671  shares of the Registrant's  Common Stock
were  outstanding.  The  aggregate  market  value of this  common  stock held by
nonaffiliates  based on the  closing  price on the New York Stock  Exchange  was
approximately $4,353,744,885.$3,788,997,309.

Public Service Company of Colorado and Southwestern  Public Service Company meet
the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and
are therefore filing this Form 10-Q with the reduced disclosure format specified
in General Instruction H (2) to such Form 10-Q.






                                Table of Contents

                        PART I - FINANCIAL INFORMATION

Item l.Financial Statements ............................................    1

Item 2.Management's Discussion and Analysis of Financial
        Condition and Results of Operations ............................   3339


                          PART II - OTHER INFORMATION


Item 1.  Legal Proceedings..............................................   4559

Item 6.  Exhibits and Reports on Form 8-K...............................   4559








This  combined  Form 10-Q is  separately  filed by New Century  Energies,  Inc.,
Public Service  Company of Colorado and  Southwestern  Public  Service  Company.
Information contained herein relating to any individual company is filed by such
company on its own behalf.  Each  registrant  makes  representations  only as to
itself and makes no other representations  whatsoever as to information relating
to the other registrants.

This report should be read in its  entirety.  No one section of the report deals
with all aspects of the subject matter.

                           FORWARD-LOOKING INFORMATION

The  following  discussions  include  "forward-looking  statements"  within  the
meaning of Section  27A of the  Securities  Act of 1933 and  Section  21E of the
Securities  Exchange  Act of  1934.  Investors  and  prospective  investors  are
cautioned that the forward-looking  statements  contained herein with respect to
the  revenues,   earnings,  capital  expenditures,   resolution  and  impact  of
litigation,  Year 2000 issues,  competitive performance,  or other prospects for
the business of New Century  Energies,  Inc., Public Service Company of Colorado
and/or  Southwestern  Public  Service  Company  or their  affiliated  companies,
including any and all underlying assumptions and other statements that are other
than  statements  of  historical  fact,  may be influenced by factors that could
cause actual  outcomes and results to be materially  different  than  projected.
Such  factors  include,  but are not limited to, the effects of weather,  future
economic  conditions,  the  performance  of  generating  units,  fuel prices and
availability,  regulatory  decisions  and the  effects  of  changes in state and
federal  laws,  the pace of  deregulation  of  domestic  retail  natural gas and
electricity markets, the timing and extent of change in commodity prices for all
forms of energy,  capital spending  requirements,  the evolution of competition,
earnings   retention  and  dividend  payout  policies,   changes  in  accounting
standards,  the  consummation  of the proposed merger with Northern States Power
Company and other factors. From time to time, New Century Energies, Inc., Public
Service Company of Colorado and Southwestern  Public Service Company may publish
or otherwise  make available  forward-looking  statements.  All such  subsequent
forward-looking  statements,  whether  written or oral and whether made by or on
behalf  of each  company,  are also  expressly  qualified  by  these  cautionary
statements.


                                       i



TERMS
The abbreviations or acronyms used in the text and notes are defined below:

Abbreviation or Acronym                                           Term
- --------------------------------------------------------------------------------
AEP....................................................  AmericanAEP......................................................American Electric Power
CERCLA ....................................ComprehensiveCERCLA......Comprehensive Environmental Response, Compensation and Liability Act
Cheyenne..................................Cheyenne Light, Fuel and Power Company
CPUC....................The Public Utilities Commission of the State of Colorado
Denver District Court .............DistrictCourt....District Court in and for the City and County of Denver
DOE.........................................................Department of Energy
DSM.......................................................Demand Side Management
Dth....................................................................Dekatherm
ECA.......................................................Energy Cost Adjustment
EPA.........................................U.S. Environmental Protection Agency
e prime...........................................e prime, inc. and subsidiaries
FERC........................................Federal Energy Regulatory Commission
Fort St. Vrain ...............................FortVrain.......................Fort St. Vrain Electric Generating Station,
                                           formerly a nuclear generating station
Fuelco ..........................................FuelFuelco..........Fuel Resources Development Co., a dissolved Colorado Corporation
GCA..........................................................Gas Cost Adjustment
ICA....................................................Incentive Cost Adjustment
IRS.....................................................Internal Revenue Service
Kwh................................................................kilowatt-hour
PSCo/SPS Merger....................the businessMerger........................business combination between PSCo and SPS
Natural Fuels..........................................Natural Fuels Corporation
NCE or Company........................................New Century Energies, Inc.
NC Enterprises..............................................NC Enterprises, Inc.
NCI..............................................New Century International, Inc.
NMPRC..........................NewNMPRC .................................. New Mexico Public Regulation Commission
formerly,
                                        the New Mexico Public Utility Commission
NOx...............................................................Nitrogen Oxide
NSP................................................Northern States Power Company
PCB.....................................................Polychlorinated Biphenyl
PSCo..........................................Public Service Company of Colorado
PSRI........................................................PSRPSRI.......................................................PSR Investments, IncInc.
PUHCA.....................Public Utility Holding Company Act of 1935, as amended
PRPs.............................................Potentially Responsible Parties
PSCCC.............................................PS Colorado Credit Corporation
PUCT..........................................Public Utility Commission of Texas
QF...........................................................Qualifying Facility
Quixx.........................................Quixx Corporation and subsidiaries
SEC...........................................Securities and Exchange Commission
SO2...............................................................Sulfur Dioxide
SPS..........................................Southwestern Public Service Company
SFAS 71.....................Statement71....................Statement of Financial Accounting Standards No. 71 -
                    "Accounting for the Effects of Certain Types of Regulation"
SFAS 112...................Statement112..................Statement of Financial Accounting Standards No. 112 -
                             "Employers' Accounting for Postemployment Benefits"
SFAS 121...................Statement121..................Statement of Financial Accounting Standards No. 121 -
                    "Accounting for the Impairment of Long-Lived Assets and
                     Long-Lived Assets to Be Disposed Of"
Thunder Basin.........................................Thunder Basin Coal Company
UE..............................Utility Engineering Corporation and subsidiaries
WGI.....................................................WestGas InterState, Inc.
Y2K....................................................................Year 2000
Yorkshire Electricity............................Yorkshire Electricity Group plc
Yorkshire Power.......................................Yorkshire Power Group Ltd.


                                       ii




                   NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                                   (Unaudited)
                             (Thousands of Dollars)


                                     ASSETS

                                                          March 31,June 30,  December 31,
                                                            1999        1998
                                                            ----        ----
Property, plant and equipment, at cost:
   Electric ...........................................   $7,116,116..........................................   $7,357,881  $7,097,070
   Gas ................................................    1,220,178Gas................................................    1,281,283   1,210,605
   Steam and other ....................................      115,606other....................................      117,647     111,620
   Common to all departments ..........................      418,695departments..........................      470,895     423,287
   Construction in progress ...........................      468,825progress...........................      278,083     391,100
                                                            ----------  ----------
                                                           9,339,420-------     -------
                                                          9,505,789   9,233,682
   Less: accumulated depreciation .....................    3,410,190....................    3,471,139   3,351,659
                                                          ----------  -------------------   ---------
     Total property, plant and equipment ..............    5,929,230equipment..............    6,034,650   5,882,023
                                                          ----------  -------------------   ---------



Investments, at cost:
   Investment in Yorkshire Power and other
     unconsolidated subsidiaries (Note 3) ..............................      347,911.............      340,142     340,874
   Other ..............................................       71,152Other..............................................       77,757      64,562
                                                            ----------  -----------------      ------
    Total investments .................................      419,063investments.................................      417,899     405,436
                                                            ----------  -----------------     -------


Current assets:
   Cash and temporary cash investments ................       84,817investments................       72,157      56,667
   Accounts receivable, less reserve for uncollectible
     accounts ($4,1054,353 at March 31,June 30, 1999; $4,842 at
     December 31, 1998)...............................      323,767312,056     319,145
   Accrued unbilled revenues ..........................      113,400revenues..........................      120,486     130,455
   Recoverable purchased gas and electric energy costs        - net ......................................       19,0346,092      66,154
   Materials and supplies, at average cost ............       70,552cost............       74,541      69,298
   Fuel inventory, at average cost ....................       27,934cost....................       32,022      24,653
   Gas in underground storage, at cost (LIFO).........       30,93521,592      52,624
   Prepaid expenses and other .........................       86,788other.........................       74,585      83,561
                                                            ----------  -----------------      ------
    Total current assets ..............................      757,227assets..............................      713,531     802,557
                                                            ----------  -----------------     -------

Deferred charges:
   Regulatory assets (Note 1).........................      375,476362,221     381,632
   Unamortized debt expense ...........................       28,353expense...........................       27,885      27,408
   Other ..............................................      185,043Other..............................................      198,544     172,908
                                                            ----------  -----------------     -------
    Total deferred charges ............................      588,872charges............................      588,650     581,948
                                                            ----------  ----------
                                                          $7,694,392-------     -------
                                                         $7,754,730  $7,671,964
                                                         ==========  ==========


      The accompanying notes to consolidated condensed financial statements
               are an integral part of these financial statements.

                                       1



                   NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                                   (Unaudited)
                             (Thousands of Dollars)


                             CAPITAL AND LIABILITIES

                                                          March 31,June 30,  December 31,
                                                            1999        1998
                                                            ----        ----

Common stock .......................................  $ 1,884,687    $ 1,866,386stock..........................................   $1,896,515  $1,866,386
Retained earnings ..................................      775,016earnings.....................................      757,396     740,677
Accumulated other comprehensive income .............       (2,856)(Note 1).......       (9,410)      7,764
                                                            -----------    ------------------      ------
    Total common equity ............................    2,656,847equity...............................    2,644,501   2,614,827

PSCo and SPS obligated mandatorily redeemable preferred
 securities of subsidiary trusts holding solely
 subordinated debentures of PSCo and SPS (Note 7) .........................................      294,000     294,000
Long-term debt of subsidiaries ....................     2,304,985.......................    2,126,729   2,205,545
                                                          -----------    -----------
                                                        5,255,832---------   ---------
                                                          5,065,230   5,114,372
                                                          ---------   ---------

Noncurrent liabilities:
 Employees' postretirement benefits other than pensions.................................        58,449pensions      63,840      61,732
 Employees' postemployment benefits ..............        31,109................         31,343      31,326
                                                             -----------    -----------------      ------
    Total noncurrent liabilities ..................        89,558liabilities......................       95,183      93,058
                                                             -----------    -----------------      ------

Current liabilities:
 Notes payable and commercial paper .............       408,900................        544,097     524,394
 Long-term debt due within one year .............       124,477year.................        308,972     138,165
 Accounts payable ...............................       255,555payable...................................        269,152     285,080
 Dividends payable ..............................        69,523payable..................................         69,707      69,271
 Recovered electric energy costs - net ..........        26,284costs....................         13,907      18,760
 Customers' deposits ............................        31,221deposits................................         30,919      30,793
 Accrued taxes ..................................       133,954taxes......................................         26,589      85,384
 Accrued interest ...............................        41,854interest...................................         56,734      50,229
 Other ..........................................       115,294Other..............................................        119,687     122,747
                                                            -----------    ------------------     -------
    Total current liabilities .....................     1,207,062liabilities.........................    1,439,764   1,324,823
                                                          -----------    --------------------   ---------

Deferred credits:
 Customers' advances for construction ...........        56,612construction...............         57,194      55,400
 Unamortized investment tax credits .............        99,650................         98,374     100,925
 Accumulated deferred income taxes ..............       954,295taxes..................        961,362     947,247
 Other ..........................................        31,383Other..............................................         37,623      36,139
                                                            -----------    ------------------      ------
    Total deferred credits ........................     1,141,940credits............................    1,154,553   1,139,711
                                                          -----------    --------------------   ---------

Commitments and contingencies (Notes 4 and 5)
                                                      $ 7,694,392    $ 7,671,964
                                                      ===========    ===========.........   ----------  ----------
                                                         $7,754,730  $7,671,964
                                                         ==========  ==========


      The accompanying notes to consolidated condensed financial statements
               are an integral part of these financial statements.statements


                                       2



                   NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                   CONSOLIDATED CONDENSED STATEMENTS OF INCOME
                                   (Unaudited)
                             (Thousands of Dollars)

                                                            Three Months Ended
                                                                 March 31,June 30,
                                                               1999      1998
                                                               ----      ----

Operating revenues:
   Electric...........................................     $628,706  $599,988$607,277   $ 642,812
   Gas................................................      347,688   319,707173,172     166,421
   Other..............................................       15,029    19,80920,385      21,726
                                                            -------     ------
                                                            991,423   939,504800,834     830,959

Operating expenses:
  Fuel used in generation............................       133,849   140,919152,857     171,280
  Purchased power....................................       161,420   148,864130,635     137,240
  Cost of gas sold...................................       261,631   224,912114,502     112,689
  Other operating and maintenance expenses-regulated.       129,426   129,605137,040     139,075
  Other operating and maintenance expenses-nonregulated      20,683    18,07628,308      23,892
  Depreciation and amortization......................        69,502    62,41869,895      67,074
  Taxes (other than income taxes) ...................        37,620    32,87337,477      33,043
                                                            -------      ------
                                                            814,131   757,667670,714     684,293
                                                            -------     -------
Operating income......................................      177,292   181,837130,120     146,666

Other income and deductions:
  Equity in earnings (losses) of Yorkshire Power and
   other unconsolidated subsidiaries (Note 3) .............          15,811     3,752.........       (2,787)     (7,569)
   Miscellaneous income and deductions - net..........       (3,542)   (2,968)
                                                              -------(2,609)      1,023
                                                             ------      12,269       784------
                                                             (5,396)     (6,546)

Interest charges and preferred dividends of subsidiaries:
  Interest on long-term debt.........................        41,410    40,47343,942      42,718
  Other interest.....................................         6,889     8,4947,362       8,958
  Allowance for borrowed funds used during construction      (2,916)   (4,506)(2,611)     (4,415)
  Dividends on PSCo and SPS obligated mandatorily
   redeemable preferred securities of subsidiary
   trusts holding solely subordinated debentures of
   PSCo and SPS ......................................        5,763     1,9635,762       4,073
  Dividend requirements on preferred stock of
   subsidiaries ......................................            -       2,9292,403
                                                               ----       -----
                                                             51,146    49,353
                                                               ------    ------54,455      53,737

Income before income taxes............................       138,415   133,26870,269      86,383
Income taxes..........................................       37,115    47,11921,034      29,790
                                                            -------      ------
Net income............................................      $101,300  $ 86,149
                                                             ========  ========$49,235     $56,593
                                                            =======     =======

Weighted average common shares outstanding:
  Basic..............................................       114,681   110,973115,080     111,372
  Diluted............................................       114,743   111,134115,103     111,528

Basic and diluted earnings per share of common stock
  outstanding ...............................................................................        $ 0.880.43      $ 0.780.50
                                                             ======      ======


      The accompanying notes to consolidated condensed financial statements
               are an integral part of these financial statements.

                                       3



                   NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                   CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITYINCOME
                                   (Unaudited)
                             (Thousands of Dollars, Except Share Information)
                   ThreeDollars)

                                                             Six Months Ended
                                                                 March 31,June 30,
                                                              1999      1998
                                                               ----      ----

Operating revenues:
   Electric...........................................   $1,201,808  $1,227,658
   Gas................................................      478,307     477,783
   Other..............................................       35,414      41,535
                                                            -------      ------
                                                          1,715,529   1,746,976

Operating expenses:
   Fuel used in generation............................      286,706     312,199
   Purchased power....................................      257,879     270,962
   Cost of gas sold...................................      333,581     329,256
   Other operating and 1998

Accumulated Paid Other Common Stock, $1 par value in Retained Comprehensive Shares Amount Capital Earnings Income Total ------ ------ ------- -------- ------ ----- Balance at December 31, 1997 110,749,301 $ 110,749 $1,583,446 $ 659,050 $4,142 $2,357,387 Comprehensive income: Net income.......... - - - 86,149 - 86,149 Foreign currency translation adjustment......... - - - - 5,260 5,260 ------- Comprehensive income (Note 1) 91,409 Dividends declaredmaintenance expenses-regulated. 266,466 268,680 Other operating and maintenance expenses-nonregulated 48,991 41,968 Depreciation and amortization...................... 139,397 129,492 Taxes (other than income taxes) ................... 75,097 65,916 ------- ------ 1,408,117 1,418,473 --------- --------- Operating income...................................... 307,412 328,503 Other income and deductions: Equity in earnings (losses) of Yorkshire Power and other unconsolidated subsidiaries (Note 3)........ 13,024 (3,817) Miscellaneous income and deductions - net.......... (6,151) (1,945) ------- ------ 6,873 (5,762) Interest charges and preferred dividends of subsidiaries: Interest on long-term debt......................... 85,352 83,191 Other interest..................................... 14,251 17,452 Allowance for borrowed funds used during construction (5,527) (8,921) Dividends on PSCo and SPS obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debentures of PSCo and SPS ..................................... 11,525 6,036 Dividend requirements on preferred stock of subsidiaries - 5,332 ---- ----- 105,601 103,090 Income before income taxes............................ 208,684 219,651 Income taxes.......................................... 58,149 76,909 ------- ------ Net income............................................ $150,535 $142,742 ======== ======== Weighted average common stock - - - (64,533) - (64,533) Issuance of common stock: Employees' Savings Plan 217,690 218 10,150 - - 10,368 Dividend Reinvestment Plan 211,723 212 9,485 - - 9,697 Incentive Compensation Plans 60,816 61 1,831 - - 1,892 ------ ------ ------- ------- ------- ------- Balance at March 31, 1998 111,239,530 $ 111,240 $1,604,912 $ 680,666 $9,402 $2,406,220 =========== ========== ========== ========= ====== ========== Balance at December 31, 1998 114,490,772 $ 114,491 $1,751,895 $ 740,677 $7,764 $2,614,827 Comprehensive income: Net income.......... - - - 101,300 - 101,300 Foreign currency translation adjustment......... - - - - (10,620) (10,620) ------- Comprehensive income (Note 1) 90,680 Dividends declared on common stock - - - (66,662) - (66,662) Issuance of common stock: Employees' Savings Plan 200,880 201 8,266 - - 8,467 Dividend Reinvestment Plan 195,440 195 8,050 - - 8,245 Incentive Compensation Plans 37,890 38 1,551 - - 1,589 Other .............. - - - (299) - (299) ------- ------ ------- ------- ------ ------- Balance at March 31, 1999 114,924,982 $ 114,925 $1,769,762 $ 775,016 $(2,856) $2,656,847 =========== ========== ========== ========= ======= ==========
Authorized shares outstanding: Basic.............................................. 114,881 111,174 Diluted............................................ 114,916 111,332 Basic and diluted earnings per share of common stock were 260 million at March 31, 1999 and 1998.outstanding ........................................ $ 1.31 $ 1.28 ====== ====== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 4 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands of Dollars) ThreeSix Months Ended March 31,June 30, 1999 1998 ---- ---- Operating activities: Net income......................................... $101,300 $86,149$150,535 $142,742 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................... 73,027 64,887145,934 134,512 Amortization of investment tax credits........... (1,275) (1,279)(2,551) (2,558) Deferred income taxes............................ (3,428) (6,433)15,003 4,598 Equity in earnings of Yorkshire Power and other unconsolidated subsidiaries, net .............. (15,811) (3,756)............... (13,024) 3,817 Allowance for equity funds used during construction..... (173) 3construction (827) - Change in accounts receivable.................... (4,622) 15,3737,089 12,845 Change in inventories............................ 17,154 36,91318,420 19,184 Change in other current assets................... 70,338 34,04082,069 52,508 Change in accounts payable....................... (29,525) (70,216)(15,928) (58,842) Change in other current liabilities.............. 46,037 45,221(52,103) (4,727) Change in deferred amounts....................... (17,440) 5,192(22,186) 53,688 Change in noncurrent liabilities................. (3,500) 1,7382,124 4,959 Other............................................ 84 45 ------- ------- Net cash provided by operating activities...... 232,082 207,832314,639 362,771 Investing activities: Construction expenditures.......................... (116,753) (127,989)(287,650) (261,302) Allowance for equity funds used during construction 173 (3)827 - Proceeds from disposition of property, plant and equipment ....................................... 715 441................................... 512 2,848 Acquisition of subsidiary, net of cash acquired (Note 3) - (13,725) Purchase of other investments...................... (3,740) (214)(11,809) (2,014) Sale of other investments.......................... 5,181 5,4582,402 3,426 ------- ------- Net cash used in investing activities.......... (114,424) (122,307)(295,718) (270,767) Financing activities: Proceeds from sale of common stock................. 8,789 13,03820,532 23,976 Proceeds from sale of PSCo obligated mandatorily redeemable preferred securities ................. - 194,000 Proceeds from sale of long-term debt............... 149,118 -156,488 248,380 Redemption of long-term debt....................... (65,212) (51,854)(66,774) (80,392) Short-term borrowings - net........................ (115,494) 20,41819,702 (134,281) Redemption of preferred stock (Note 1)............. - (181,824) Dividends on common stock.......................... (66,709) (63,745) ------- -------(133,379) (126,905) -------- -------- Net cash used in financing activities.......... (89,508) (82,143)(3,431) (57,046) ------- ------- Net increase in cash and temporary cash investments ................................ 28,150 3,382............................ 15,490 34,958 Cash and temporary cash investments at beginning of period ..................................................................... 56,667 72,623 ------ ------ Cash and temporary cash investments at end of period .................................................................... $ 84,817 $76,005 ========= =======72,157 $107,581 ======== ======== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements 5 PUBLIC SERVICE COMPANY OF COLORADONEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETSSTATEMENTS OF SHAREHOLDERS' EQUITY Three Months Ended June 30, 1999 and 1998 (Unaudited) (Thousands of Dollars) ASSETSDollars, Except Share Information)
Accumulated Common Stock, $1 par value Paid Other -------------------------- in Retained Comprehensive Shares Amount Capital Earnings Income Total ------ ------ ------- -------- ------ ----- Balance at March 31, December 31, 1998 111,239,530 $ 111,240 $1,604,912 $ 680,666 $ 9,402 $2,406,220 Comprehensive income (Note 1): Net income.......... - - - 56,593 - 56,593 Foreign currency translation adjustment......... - - - - (3,778) (3,778) -------- Comprehensive income 52,815 Dividends declared on common stock - - - (64,541) - (64,541) Issuance of common stock 252,388 252 10,877 - - 11,129 ------- ------- ------- ------- ------- ------ Balance at June 30,1998 111,491,918 $ 111,492 $1,615,789 $ 672,718 $ 5,624 $2,405,623 ============= ========== ========== ========= ======= ========== Balance at March 31, 1999 114,924,982 $ 114,925 $1,769,762 $ 775,016 $(2,856) $2,656,847 Comprehensive income (Note 1): Net income.......... - - - 49,235 - 49,235 Foreign currency translation adjustment......... - - - - (6,554) (6,554) ------- Comprehensive income 42,681 Dividends declared on common stock - - - (66,855) - (66,855) Issuance of common stock 317,286 317 11,511 - - 11,828 ------- ------- ------- ------- ------ ------ Balance at June 30,1999 115,242,268 $ 115,242 $1,781,273 $ 757,396 $(9,410) $2,644,501 ============= ========== ========== ========= ======= ==========
Authorized shares of common stock were 260 million at June 30, 1999 1998 ---- ---- Property, plant and equipment, at cost: Electric .......................................... $4,382,476 $4,369,134 Gas................................................ 1,180,826 1,171,198 Steam and other.................................... 71,973 71,986 Common to all departments.......................... 413,892 418,484 Construction in progress........................... 322,273 264,752 ------- ------- 6,371,440 6,295,554 Less: accumulated depreciation .................... 2,285,493 2,241,165 --------- --------- Total property, plant and equipment.............. 4,085,947 4,054,389 --------- --------- Investments, at cost: Note receivable from affiliate (Note 3)............ 192,620 192,620 Other.............................................. 18,123 22,664 ------- ------ Total investments................................. 210,743 215,284 ------- ------- Current assets: Cash and temporary cash investments................ 30,039 19,926 Accounts receivable, less reserve for uncollectible accounts ($1,999 at March 31, 1999; $2,254 at December 31, 1998) .............................. 159,007 172,587 Accrued unbilled revenues ......................... 87,146 119,856 Recoverable purchased gas and electric energy costs - net ..................................... 17,692 62,761 Materials and supplies, at average cost............ 48,559 47,881 Fuel inventory, at average cost.................... 25,640 22,361 Gas in underground storage, at cost (LIFO)......... 30,526 51,779 Prepaid expenses and other......................... 40,204 46,523 ------- ------ Total current assets.............................. 438,813 543,674 ------- ------- Deferred charges: Regulatory assets (Note 1)......................... 261,547 269,112 Unamortized debt expense .......................... 18,289 17,874 Other.............................................. 85,274 77,303 ------- ------ Total deferred charges............................ 365,110 364,289 ------- ------- $5,100,613 $5,177,636 ========== ==========1998. The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 6 PUBLIC SERVICE COMPANY OF COLORADONEW CENTURY ENERGIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETSSTATEMENTS OF SHAREHOLDERS' EQUITY Six Months Ended June 30, 1999 and 1998 (Unaudited) (Thousands of Dollars) CAPITAL AND LIABILITIES March 31,Dollars, Except Share Information)
Accumulated Common Stock, $1 par value Paid Other -------------------------- in Retained Comprehensive Shares Amount Capital Earnings Income Total ------ ------ ------- -------- ------ ----- Balance at December 31, 1997 110,749,301 $ 110,749 $1,583,446 $ 659,050 $ 4,142 $2,357,387 Comprehensive income (Note 1): Net income.......... - - - 142,742 - 142,742 Foreign currency translation adjustment......... - - - - 1,482 1,482 ----- Comprehensive income 144,224 Dividends declared on common stock - - - (129,074) - (129,074) Issuance of common stock 742,617 743 32,343 - - 33,086 ------- ------- ------ ------- ------- ------ Balance at June 30,1998 111,491,918 $ 111,492 $1,615,789 $ 672,718 $ 5,624 $2,405,623 =========== ========== ========== ========= ======== ========== Balance at December 31, 1998 114,490,772 $ 114,491 $1,751,895 $ 740,677 $ 7,764 $2,614,827 Comprehensive income (Note 1): Net income.......... - - - 150,535 - 150,535 Foreign currency translation adjustment......... - - - - (17,174) (17,174) ------- Comprehensive income 133,361 Dividends declared on common stock - - - (133,517) - (133,517) Issuance of common stock 751,496 751 29,079 - - 29,830 ------- --- ------ ------- ------- ------ Balance at June 30,1999 115,242,268 $ 115,242 $1,780,974 $ 757,695 $ (9,410) $2,644,501 ============= ========== ========== ========= ======== ==========
Authorized shares of common stock were 260 million at June 30, 1999 1998 ---- ---- Common stock.......................................... $1,302,119 $1,302,119 Retained earnings..................................... 344,650 325,213 ------- ------- Total common equity............................... 1,646,769 1,627,332 PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo (Note 7) ........... 194,000 194,000 Long-term debt........................................ 1,637,925 1,643,130 --------- --------- 3,478,694 3,464,462 --------- --------- Noncurrent liabilities: Employees' postretirement benefits other than pensions ....................................... 51,677 55,537 Employees' postemployment benefits................. 27,195 27,195 ------- ------- Total noncurrent liabilities...................... 78,872 82,732 ------- ------- Current liabilities: Notes payable and commercial paper................. 339,400 402,795 Long-term debt due within one year................. 33,520 44,481 Accounts payable................................... 181,575 226,712 Dividends payable.................................. 46,502 46,461 Customers' deposits................................ 24,209 23,902 Accrued taxes...................................... 105,277 57,848 Accrued interest................................... 31,140 36,729 Current portion of accumulated deferred income taxes 2,022 8,142 Other.............................................. 63,693 68,729 ------- ------- Total current liabilities......................... 827,338 915,799 ------- ------- Deferred credits: Customers' advances for construction............... 55,493 54,260 Unamortized investment tax credits ................ 93,265 94,459 Accumulated deferred income taxes.................. 543,094 538,581 Other.............................................. 23,857 27,343 ------- ------- Total deferred credits............................ 715,709 714,643 ------- ------- Commitments and contingencies (Notes 4 and 5)......... ------- -------- $5,100,613 $5,177,636 ========== ==========1998. The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 7 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOMEBALANCE SHEETS (Unaudited) (Thousands of Dollars) Three Months Ended MarchASSETS June 30, December 31, 1999 1998 ---- ---- Operating revenues: Electric........................................... $401,871 $375,446Property, plant and equipment, at cost: Electric .......................................... $4,543,488 $4,369,134 Gas................................................ 254,171 265,483 Other.............................................. 3,377 3,7131,239,871 1,171,198 Steam and other.................................... 68,954 71,986 Common to all departments.......................... 465,942 418,484 Construction in progress........................... 181,441 264,752 ------- ------- 659,419 644,642 Operating expenses: Fuel used in generation............................ 51,865 50,629 Purchased power.................................... 134,775 124,057 Gas purchased for resale........................... 172,842 176,482 Other operating6,499,696 6,295,554 Less: accumulated depreciation .................... 2,330,909 2,241,165 --------- --------- Total property, plant and maintenance expenses........... 94,511 93,945 Depreciation and amortization...................... 48,540 42,896 Taxes (other than income taxes) ................... 23,487 19,969 Income taxes ..................................... 29,214 36,818equipment.............. 4,168,787 4,054,389 --------- --------- Investments, at cost: Note receivable from affiliate (Note 3)............ 192,620 192,620 Other.............................................. 22,783 22,664 ------- ------ Total investments................................. 215,403 215,284 ------- ------- 555,234 544,796Current assets: Cash and temporary cash investments................ 38,570 19,926 Accounts receivable, less reserve for uncollectible accounts ($2,343 at June 30,1999; $2,254 at December 31, 1998) ...... ....................... 155,377 172,587 Accrued unbilled revenues ......................... 85,603 119,856 Recoverable purchased gas and electric energy costs 5,359 62,761 Materials and supplies, at average cost............ 52,415 47,881 Fuel inventory, at average cost.................... 29,730 22,361 Gas in underground storage, at cost (LIFO)......... 21,147 51,779 Prepaid expenses and other......................... 35,659 46,523 ------ ------ Total current assets.............................. 423,860 543,674 ------- ------- Operating income...................................... 104,185 99,846 Other income and deductions: Equity earnings in Yorkshire PowerDeferred charges: Regulatory assets (Note 3)........ - 3,446 Miscellaneous income and deductions - net.......... (1,566) (2,885)1)......................... 253,199 269,112 Unamortized debt expense .......................... 18,030 17,874 Other.............................................. 82,692 77,303 ------- ------ Total deferred charges............................ 353,921 364,289 ------- ------- (1,566) 561 Interest charges: Interest on long-term debt......................... 29,883 28,578 Other interest..................................... 5,220 5,653 Allowance for borrowed funds used during construction (2,223 (2,721) Dividends on PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo (Note 7) 3,800 - ----- ---- 36,680 31,510 ------ ------ Net income............................................ 65,939 68,897 Dividend requirements on preferred stock.............. - 2,929 ------- ------- Earnings available for common stock................... $65,939 $65,968 ======= =======$5,161,971 $5,177,636 ========== ========== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 8 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWSBALANCE SHEETS (Unaudited) (Thousands of Dollars) Three Months Ended MarchCAPITAL AND LIABILITIES June 30, December 31, 1999 1998 ---- ---- Operating activities: Net income......................................... $65,939 $68,897 Adjustments to reconcile netCommon stock.......................................... $1,302,119 $1,302,119 Retained earnings..................................... 334,883 325,213 ------- ------- Total common equity............................... 1,637,002 1,627,332 PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo (Note 7) ............ 194,000 194,000 Long-term debt........................................ 1,452,564 1,643,130 --------- --------- 3,283,566 3,464,462 Noncurrent liabilities: Employees' postretirement benefits other than pensions 56,511 55,537 Employees' postemployment benefits................. 27,195 27,195 ------- ------- Total noncurrent liabilities...................... 83,706 82,732 ------- ------- Current liabilities: Notes payable and commercial paper................. 460,025 402,795 Long-term debt due within one year................. 217,532 44,481 Accounts payable................................... 195,933 226,712 Dividends payable.................................. 44,575 46,461 Recovered electric energy costs.................... 6,850 - Customers' deposits................................ 23,914 23,902 Accrued taxes...................................... 21,465 57,848 Accrued interest................................... 39,344 36,729 Current portion of accumulated deferred income to net cash provided by operating activities: Depreciation and amortization.................... 50,507 44,124 Amortization oftaxes - 8,142 Other.............................................. 67,283 68,729 ------- ------ Total current liabilities......................... 1,076,921 915,799 --------- ------- Deferred credits: Customers' advances for construction............... 55,998 54,260 Unamortized investment tax credits........... (1,194) (1,197) Deferredcredits ................ 92,071 94,459 Accumulated deferred income taxes............................ 251 (801) Equity in earnings of Yorkshire Power............ - (3,446) Change in accounts receivable.................... 13,580 10,165 Change in inventories............................ 17,296 36,546 Change in other current assets................... 84,098 32,739 Change in accounts payable....................... (45,137) (46,326) Change in other current liabilities.............. 37,111 39,889 Change in deferred amounts....................... (9,683) (2,194) Change in noncurrent liabilities................. (3,860) (732)taxes.................. 546,373 538,581 Other.............................................. 23,336 27,343 ------- ------- Net cash provided by operating activities...... 208,908 177,664 Investing activities: Construction expenditures.......................... (86,857) (107,298) Proceeds from disposition of property, plant and equipment 10,532 1,393 Purchase of other investments...................... (321) (152) Sale of other investments.......................... 4,861 5,026Total deferred credits............................ 717,778 714,643 ------- ------- Net cash used in investing activities.......... (71,785) (101,031) Financing activities: Proceeds from the sale of long-term debt........... 47,909 - Redemption of long-term debt....................... (65,063) (51,800) Short-term borrowings - net........................ (63,395) 16,899 Dividends on common stock.......................... (46,461) (38,047) Dividends on preferred stock....................... - (2,929) ------- ------- Net cash used in financing activities.......... (127,010) (75,877) -------- ------- Net increase in cashCommitments and temporary cash investments ................................. 10,113 756 Cashcontingencies (Notes 4 and temporary cash investments at beginning of period ................................... 19,926 18,909 ------ ------ Cash and temporary cash investments at end of period ................................... $ 30,039 $ 19,665 ========= ========5)......... ---------- ---------- $5,161,971 $5,177,636 ========== ========== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 9 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Three Months Ended June 30, 1999 1998 ---- ---- Operating revenues: Electric........................................... $373,690 $369,940 Gas................................................ 140,895 133,170 Other.............................................. 1,580 1,488 ------- ------- 516,165 504,598 Operating expenses: Fuel used in generation............................ 54,882 49,554 Purchased power.................................... 111,963 123,874 Gas purchased for resale........................... 87,721 84,058 Other operating and maintenance expenses........... 102,037 102,564 Depreciation and amortization...................... 48,822 46,795 Taxes (other than income taxes) ................... 23,595 20,937 Income taxes ..................................... 14,768 13,550 ------- ------- 443,788 441,332 ------- ------- Operating income...................................... 72,377 63,266 Other income and deductions - net..................... 831 1,968 Interest charges: Interest on long-term debt......................... 29,908 30,688 Other interest..................................... 6,741 4,498 Allowance for borrowed funds used during construction (2,061) (2,971) Dividends on PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo (Note 7) 3,800 2,111 ----- ----- 38,388 34,326 ------ ------ Net income............................................ 34,820 30,908 Dividend requirements and redemption premium on preferred stock ..................................... - 2,403 ------- ----- Earnings available for common stock................... $34,820 $28,505 ======= ======= The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 10 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Six Months Ended June 30, 1999 1998 ---- ---- Operating revenues: Electric........................................... $ 755,012 $ 745,386 Gas................................................ 395,066 398,653 Other.............................................. 4,957 5,201 ------- ------- 1,155,035 1,149,240 Operating expenses: Fuel used in generation............................ 106,747 100,183 Purchased power.................................... 226,190 247,931 Gas purchased for resale........................... 260,562 260,540 Other operating and maintenance expenses........... 196,548 196,509 Depreciation and amortization...................... 97,362 89,691 Taxes (other than income taxes) ................... 47,082 40,906 Income taxes ..................................... 43,982 50,368 ------- ------- 978,473 986,128 ------- ------- Operating income...................................... 176,562 163,112 Other income and deductions: Equity earnings in Yorkshire Power (Note 2)........ - 3,446 Miscellaneous income and deductions - net.......... (735) (917) ---- ---- (735) 2,529 Interest charges: Interest on long-term debt......................... 59,791 59,266 Other interest..................................... 11,961 10,151 Allowance for borrowed funds used during construction (4,284) (5,692) Dividends on PSCo obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of PSCo (Note 7) 7,600 2,111 ----- ----- 75,068 65,836 ------ ------ Net income............................................ 100,759 99,805 Dividend requirements and redemption premium on preferred stock ..................................... - 5,332 ------ ----- Earnings available for common stock................... $100,759 $94,473 ======== ======= The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 11 PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands of Dollars) Six Months Ended June 30, 1999 1998 ---- ---- Operating activities: Net income......................................... $100,759 $99,805 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................... 100,369 92,182 Amortization of investment tax credits........... (2,388) (2,394) Deferred income taxes............................ 4,735 (63) Equity in earnings of Yorkshire Power............ - (3,446) Change in accounts receivable.................... 17,210 46,847 Change in inventories............................ 18,729 20,140 Change in other current assets................... 102,519 58,282 Change in accounts payable....................... (30,778) (53,082) Change in other current liabilities.............. (28,353) (18,643) Change in deferred amounts....................... (6,977) (20,083) Change in noncurrent liabilities................. 974 2,268 ------- ------- Net cash provided by operating activities...... 276,799 221,813 Investing activities: Construction expenditures.......................... (215,940) (213,677) Proceeds from disposition of property, plant and equipment ................................... 12,467 4,808 Purchase of other investments...................... (2,481) (2,172) Sale of other investments.......................... 2,361 3,145 ------- ----- Net cash used in investing activities.......... (203,593) (207,896) Financing activities: Proceeds from the sale of PSCo obligated mandatorily redeemable preferred securities .................. - 194,000 Proceeds from the sale of long-term debt........... 47,666 248,130 Redemption of long-term debt....................... (66,482) (80,111) Short-term borrowings - net........................ 57,230 (102,069) Dividends on common stock.......................... (92,976) (80,959) Redemption of preferred stock (Note 7)............. - (181,824) Dividends and redemption premium on preferred stock (Note 7) .................................. - (8,261) --- ------ Net cash used in financing activities.......... (54,562) (11,094) ------- ------- Net increase in cash and temporary cash investments ................................. 18,644 2,823 Cash and temporary cash investments at beginning of period ......................... 19,926 18,909 ------ ------ Cash and temporary cash investments at end of period ............................... $ 38,570 $ 21,732 ======== ======== The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements. 12 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEETS (Unaudited) (Thousands of Dollars) ASSETS March 31,June 30, December 31, 1999 1998 ---- ---- Property, plant and equipment, at cost: Electric........................................... $2,670,586$2,750,574 $2,665,115 Construction in progress........................... 140,38191,488 121,407 ------ ------- ------- 2,810,9672,842,062 2,786,522 Less: accumulated depreciation..................... 1,072,3671,086,562 1,057,183 --------- ------------------- Total property, plant and equipment............... 1,738,600 1,057,1831,755,500 1,729,339 --------- --------- Investments, at cost: Notes receivable from affiliate.................... 119,036 119,036 Other.............................................. 5,6455,700 5,591 ------- ------- Total investments................................. 124,681124,736 124,627 ------- ------- Current assets: Cash and temporary cash investments................ 17,0646,895 1,350 Accounts receivable, less reserve for uncollectible accounts ($1,3821,314 at March 31, 1999;June 30,1999; $1,695 at December 31, 1998)................................ 67,176............................... 74,313 76,190 Accrued unbilled revenues.......................... 25,52834,107 9,373 Materials and supplies, at average cost............ 17,24717,544 16,970 Fuel inventory, at average cost.................... 2,2942,292 2,293 Current portion of accumulated deferred income taxes 9,3903,062 6,113 Prepaid expenses and other......................... 3,1652,540 5,248 ------- ------- Total current assets.............................. 141,864140,753 117,537 ------- ------- Deferred charges: Regulatory assets (Note 1)......................... 113,420108,555 111,971 Unamortized debt expense........................... 9,2828,970 8,767 Other.............................................. 41,36453,262 37,623 ------- ------- Total deferred charges............................ 164,066170,787 158,361 ------- ------- $2,169,211$2,191,776 $2,129,864 ========== ========== The accompanying notes to condensed financial statements are an integral part of these financial statements. 1013 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEETS (Unaudited) (Thousands of Dollars) CAPITAL AND LIABILITIES March 31,June 30, December 31, 1999 1998 ---- ---- Common stock.......................................... $348,402 $348,402$ 348,402 Retained earnings..................................... 393,184393,676 389,818 ------- ------- Total common equity............................... 741,586742,078 738,220 SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS (Note 7) ......................... 100,000 100,000 Long-term debt........................................ 630,498630,531 530,618 ------- ------- 1,472,0841,472,609 1,368,838 --------- --------- Noncurrent liabilities: Employees' postretirement benefits other than pensions ........................................ 6,5346,926 5,941 Employees' postemployment benefits................. 3,3543,587 3,571 ------- ------- Total noncurrent liabilities...................... 9,88810,513 9,512 ------- ------- Current liabilities: Notes payable and commercial paper................. -49,697 85,162 Note payable to affiliate.......................... 9,000 9,000 Long-term debt due within one year................. 90,113 90,113 Accounts payable................................... 73,35477,243 64,275 Dividends payable.................................. 20,02522,343 20,007 Recovered electric energy costs - net.............. 26,284costs.................... 7,057 18,760 Customers' deposits................................ 6,0556,213 5,904 Accrued taxes...................................... 43,00118,081 37,646 Accrued interest................................... 8,96914,995 12,273 Other.............................................. 19,48021,682 18,011 ------- ------- Total current liabilities......................... 296,281316,424 361,151 ------- ------- Deferred credits: Unamortized investment tax credits................. 5,1565,094 5,219 Accumulated deferred income taxes.................. 381,393382,831 380,655 Other.............................................. 4,4094,305 4,489 ------- ------- Total deferred credits............................ 390,958392,230 390,363 ------- ------- Commitments and contingencies (Notes 4 and 5)......... ---------- ---------- $2,169,211$2,191,776 $2,129,864 ========== =================== The accompanying notes to condensed financial statements are an integral part of these financial statements. 1114 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Three Months Ended March 31,June 30, 1999 1998 ---- ---- Operating revenues.................................... $202,552 $199,732$224,114 $264,006 Operating expenses: Fuel used in generation............................ 82,053 90,29097,975 121,725 Purchased power.................................... 5,105 2,64111,404 7,079 Other operating & maintenance expenses............. 33,804 34,39633,858 35,065 Depreciation and amortization...................... 18,472 17,77618,435 17,761 Taxes (other than income taxes).................... 13,384 12,06512,487 11,328 Income taxes....................................... 14,365 11,22513,483 21,729 ------- ------- 167,183 168,393187,642 214,687 ------- ------- Operating income...................................... 35,369 31,33936,472 49,319 Other income and deductions - net..................... 2,080 1,0752,380 2,263 Interest charges: Interest on long-term debt......................... 11,195 11,50413,639 11,597 Other interest..................................... 1,589 2,579960 2,533 Allowance for borrowed funds used during construction (689) (1,771)(544) (1,427) Dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS ............ 1,962 1,962 ----- ----- 16,017 14,665 ------ ------ Net income............................................ $22,835 $36,917 ======= ======= The accompanying notes to condensed financial statements are an integral part of these financial statements. 15 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED STATEMENTS OF INCOME (Unaudited) (Thousands of Dollars) Six Months Ended June 30, 1999 1998 ---- ---- Operating revenues.................................... $426,666 $463,738 Operating expenses: Fuel used in generation............................ 180,028 212,015 Purchased power.................................... 16,509 9,720 Other operating & maintenance expenses............. 67,662 69,461 Depreciation and amortization...................... 36,907 35,537 Taxes (other than income taxes) ................... 25,871 23,393 Income taxes ...................................... 27,848 32,954 ------- ------- 354,825 383,080 ------- ------- Operating income...................................... 71,841 80,658 Other income and deductions - net..................... 4,460 3,338 Interest charges: Interest on long-term debt......................... 24,834 23,101 Other interest..................................... 2,549 5,112 Allowance for borrowed funds used during construction (1,233) (3,198) Dividends on SPS obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of SPS ........... 1,963 1,9633,925 3,925 ----- ----- 14,058 14,275 ------ ------30,075 28,940 Net income............................................ $23,391 $18,139$46,226 $55,056 ======= ======= The accompanying notes to condensed financial statements are an integral part of these financial statements. 1216 SOUTHWESTERN PUBLIC SERVICE COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands of Dollars) ThreeSix Months Ended March 31,June 30, 1999 1998 ---- ---- Operating activities: Net income......................................... $23,391 $18,139$46,226 $55,056 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................... 19,611 18,85938,713 37,703 Amortization of investment tax credits........... (63) (63)(125) (125) Deferred income taxes............................ (3,460) (4,969)6,102 1,384 Allowance for funds used during construction..... (173) 3(829) - Change in accounts receivable.................... 9,014 16,0081,877 (8,030) Change in inventories............................ (278) (305)(573) (695) Change in other current assets................... (14,072) 6,008(22,026) (734) Change in accounts payable....................... 9,079 (9,140)12,968 (34,457) Change in other current liabilities.............. 11,195 (1,359)(24,566) (11,189) Change in deferred amounts....................... (4,853) 10,438(14,291) 70,005 Change in noncurrent liabilities................. 376 (279)1,001 (855) ------- ------- Net cash provided by operating activities...... 49,767 53,34044,477 108,063 Investing activities: Construction expenditures.......................... (27,170) (18,601)(61,840) (43,184) Allowance for equity funds used during construction 173 (3)829 - Cost of disposition of property, plant and equipment (1,029) (1,013)(2,162) (1,830) Purchase of other investments...................... (54) (62)(109) (126) ------- ------- Net cash used in investing activities.......... (28,080) (19,679)(63,282) (45,140) Financing activities: Proceeds from sale of long-term debt............... 99,19699,846 - Redemption of long-term debt....................... - (57) Short-term borrowings - net........................ (85,162) (2,982)(35,465) (9,872) Dividends on common stock.......................... (20,007) (22,546)(40,031) (47,548) ------- ------- Net cash used in financing activities.......... (5,973) (25,528)24,350 (57,477) ------- ------- Net increase in cash and temporary cash investments ................................. 15,714 8,1335,545 5,446 Cash and temporary cash investments at beginning of period ......................... 1,350 986 ------- ----------- Cash and temporary cash investments at end of period ............................... $ 17,0646,895 $ 9,119 =========6,432 ======== ======= The accompanying notes to condensed financial statements are an integral part of these financial statements 1317 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Summary of Significant Accounting Policies (NCE, PSCo and SPS) Business, Utility Operations and Regulation NCE is a registered holding company under PUHCA and its domestic utility subsidiaries (PSCo, SPS and Cheyenne) are engaged principally in the generation, purchase, transmission, distribution and sale of electricity and in the purchase, transportation, distribution and sale of natural gas. Both the Company and its subsidiaries are subject to the regulatory provisions of the PUHCA. The utility subsidiaries are subject to regulation by the FERC and state utility commissions in Colorado, Texas, New Mexico, Wyoming, Kansas and Oklahoma. ApproximatelyOver 90% of the Company's revenues are derived from its regulated utility operations. Regulatory Assets and Liabilities The Company's regulated subsidiaries prepare their financial statements in accordance with the provisions of SFAS 71, as amended. SFAS 71 recognizes that accounting for rate regulated enterprises should reflect the relationship of costs and revenues introduced by rate regulation. A regulated utility may defer recognition of a cost (a regulatory asset) or recognize an obligation (a regulatory liability) if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in revenues. TheAccounting under SFAS 71 is appropriate as long as: rates are established by or subject to approval by independent, third party regulators; rates are designed to recover an enterprise's cost-of-service; and in view of the demand for service, it is reasonable to assume that rates are set at levels that will recover costs and can be collected from customers. While deregulation legislation has been enacted in certain states where SPS operates (see Note 4. Regulatory Matters), the Company currently believes its utility subsidiaries will continue to be subject to rate regulation. In the event that a portion of a subsidiaries' operations is no longer subject to the provisions of SFAS 71, as a result of a change in regulation or the effects of competition, the Company's subsidiaries could be required to write-off their regulatory assets, determine any impairment to other assets resulting from deregulation and write-down any impaired assets to their estimated fair value, which could separately have a material adverse effect on NCE's, PSCo's andand/or SPS's financial position, results of operations or cash flows. The following regulatory assets are reflected in the Company's consolidated balance sheets (in thousands): March 31,June 30, 1999 NCE PSCo SPS ------ ------ ------ Income taxes........................ $147,554 $68,011 $80,037$142,520 $ 64,784 $ 78,241 Nuclear decommissioning costs....... 67,215 67,21565,125 65,125 - Employees' postretirement benefits other than pensions............... 56,343 53,488 2,85555,336 52,516 2,820 Employees' postemployment benefits (Note 4) ......................... 24,768 24,320benefits.. 24,647 24,224 - Demand-side management costs........ 35,622 30,742 4,88034,171 29,379 4,792 Unamortized debt reacquisition costs 32,718 15,739 16,42431,819 15,230 16,040 Other............................... 11,256 2,032 9,2248,603 1,941 6,662 ------ ------ ------ Total............................. $375,476 $261,547 $113,420$362,221 $253,199 $108,555 ======== ======== ======== 1418 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) December 31, 1998 NCE PSCo SPS ------ ------ ------ Income taxes........................ $148,499 $69,868 $79,116$ 69,868 $ 79,116 Nuclear decommissioning costs....... 69,490 69,490 - Employees' postretirement benefits other than pensions............... 57,350 54,461 2,889 Employees' postemployment benefits (Note 4) .........................benefits.. 24,888 24,416 - Demand-side management costs........ 37,160 31,984 5,176 Unamortized debt reacquisition costs 33,138 15,769 16,808 Other............................... 11,107 3,124 7,982 ------ ------ ------ Total............................. $381,632 $269,112 $111,971 ======== ======== ======== The regulatory assets of the Company's regulated subsidiaries that are currently being recovered as of March 31,June 30, 1999 and December 31, 1998 are reflected in rates charged to customers over periods ranging from two to thirty years.customers. The recovery of regulatory assets over the next fivethree years is estimated to exceed $200$130 million. Refer to the discussion below or the Notes to Consolidated Financial Statements included herein and in the NCE, PSCo and SPS 1998 Annual Report on Form 10-K for a more detailed discussion regarding recovery periods. On January 27, 1997, the CPUC issued its order on PSCo's 1996 gas rate case. The CPUC allowed recovery of postemployment benefit costs on an accrual basis under SFAS 112 and denied amortization of the approximately $8.9 million regulatory asset recognized upon the adoption of SFAS 112. PSCo has appealed in the Denver District Court the decision related to this issue. PSCo believes that it will be successful on appeal and that the associated regulatory asset is realizable. On April 1, 1998, in connection with PSCo's annual electric department earnings test filing, PSCo requested approval to recover its electric jurisdictional portion of the postemployment benefits cost regulatory asset totaling approximately $15 million over three years. In December 1998, the CPUC approved a settlement agreement on this matter, which deferred the final determination of the regulatory treatment of these costs pending the outcome of the current appeal of the decision on PSCo's gas rate case. PSCo believes that it will be allowed recovery of SFAS 112 costs on an accrual basis. If PSCo is ultimately unsuccessful in its appeal of the gas rate case decision and/or in its request to recover its electric jurisdictional regulatory asset, all unrecoverable amounts will be written off (see Note 4. Regulatory Matters). PSCo is recovering the FERC jurisdictional portion of postemployment benefits costs. Other Property Property, plant and equipment includes approximately $18.4 million and $25.4 million, respectively, for costs associated with the engineering design of the future Pawnee 2 generating station and certain water rights located in southeastern Colorado, also obtained for a future generating station. PSCo is earning a return on these investments based on its weighted average cost of debt in accordance with a CPUC rate order. Non-utility Subsidiaries and International Investments The Company's non-utility subsidiaries are principally involved in energy-related businesses including the following: engineering, design and construction management, energy marketing and trading, non-regulated energy services, including gas and power marketing, the management of real estate and certain life insurance policies, the financing of certain current assets of PSCo and investments in cogeneration facilities, electric wholesale generators and a foreign utility company. The Company's international investments are subject to applicable regulation in the countries in which such investments are made (see Note 3. Investment in Yorkshire Power). Financial statements of foreign subsidiaries are translated into U.S. dollars at current rates, except for revenues, costs and expenses, which are translated at average current rates during each reporting period. 1519 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) Consolidation and Financial Statement Presentation The Company follows the practice of consolidating the accounts of its majority owned and controlled subsidiaries. The Company recognizes equity in income from its unconsolidated investments accounted for under the equity method of accounting. All intercompany items and transactions have been eliminated. Energy Trading Activities The Company and its subsidiaries adopted Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities" ("EITF 98-10"), effective January 1, 1999. EITF 98-10 requires gains or losses resulting from market value changes on energy trading contracts to be recorded in earnings. The initial adoption of EITF 98-10 on January 1, 1999, had no impact on the net income of NCE, PSCo or SPS. For the three and six month periods ended June 30, 1999, NCE recognized net gains/(losses) of $688,000 and $(551,000), respectively, and PSCo recognized net gains of $261,000 and $78,000, respectively, for market value changes on energy trading contracts. SPS does not currently have any trading activities. Revenues and purchased energy costs associated with trading activities are presented net on the income statement in electric and gas revenues. Certain prior year amounts have been reclassified for comparative purposes. Comprehensive Income The Company and its subsidiaries adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," effective January 1, 1998. This statement establishes standards for the reporting and display of comprehensive income (net income plus all other changes in net assets from non-owner sources) and its components in financial statements. Other comprehensiveComprehensive income for NCE wasand its components were reported in the consolidatedNCE's Consolidated Condensed Statements of Shareholders' Equity for the three months ending March 31, 1999 and March 31, 1998 andsix month periods ended June 30, 1999. Other comprehensive income consists solely of foreign currency translation adjustments related to the investment in Yorkshire Power. For the three months ending March 31,and six month periods ended June 30, 1999, PSCo and SPS had no othercomprehensive income items, therefore, comprehensive income equals net income. For the same period in 1998, SPS had no comprehensive income items, therefore, comprehensive income equals net income. For the three months ended March 31,June 30, 1998, SPSPSCo had no other comprehensive income items, therefore, comprehensive income equals net income. During that samethe three month period ended March 31, 1998, PSCo had other comprehensive lossincome of $4.1$5.3 million, which consisted of foreign currency translation adjustments related to the investment in Yorkshire Power. On March 31, 1998, PSCo sold NCI (which includes Yorkshire Power and related foreign currency translation adjustments) to NC Enterprises. The amount of the sale included other comprehensive income of $5.3$9.4 million at March 31, 1998. As a result of this sale, PSCo had no Accumulated Other Comprehensive Income at March 31, 1998.1998, and for all subsequent periods. Basic and Diluted Earnings Per Share Basic earnings per share is based upon the weighted average common shares outstanding during the year. Diluted earnings per share reflects the potential dilution that could occur if securities or other agreements to issue common stock were exercised or converted into common stock. Diluted earnings per share is based upon the weighted average common and common equivalent shares outstanding during each year. Employee stock options are the Company's only common stock equivalents. There are no other potentially dilutive securities. During the first quarter of 1999 and 1998, the Company had 62,000 shares and 161,000 shares, respectively, of20 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) The potentially dilutive securities.securities included in the computation of diluted earnings per share were 23,000 and 35,000 for the three and six month periods ended June 30, 1999, respectively, and 156,000 and 158,000 for the three and six month periods ended June 30, 1998, respectively. These shares had no impact on the Company's reported earnings per share information. Approximately 1,098,0002,124,000 common shares are issuable under stock option grants as of March 31,June 30, 1999, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common stock. Statements of Cash Flows - Non-cash Transactions: Shares of common stock (200,880 in 1999 and 222,362 in 1998), valued at the market price on date of issuance (approximately $10 million in 1999 and 1998), were issued to a savings plan of the Company. The estimated issuance values were recognized in other operating expenses during the respective preceding years. The stock issuances were non-cash financing activities and are not reflected in the consolidated condensed statements of cash flows. Effective March 31, 1998, PSCo sold its common stock investment in NCI to NC Enterprises, an NCE subsidiary. PSCo received as consideration a 20-year promissory note from NC Enterprises in the amount of 16 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) approximately $292.6 million (see Note 3. Investment in Yorkshire Power) of which $192.6 million remains outstanding at March 31, 1999. General See Note 1. of the Notes to Consolidated Financial Statements in the NCE, PSCo and SPS 1998 Annual Report on Form 10-K for a summary of the companies and their subsidiaries significant accounting policies. 2. Proposed Merger with Northern States Power Company (NCE, PSCo and SPS) On March 24, 1999, NCE and Northern States Power Company, a Minnesota corporation ("NSP"), entered into an Agreement and Plan of Merger (the "NCE/NSP Merger Agreement") providing for a strategic business combination of NCE and NSP. Pursuant to the NCE/NSP Merger Agreement, NCE will be merged with and into NSP with NSP as the surviving corporation in the merger (the "NCE/NSP Merger") and athe holding company for the combined assets and operations. Just before or atNSP will be renamed Xcel Energy Inc. ("Xcel Energy"). Concurrently with the timeclosing of the NCE/NSP Merger, is complete, NSP will contribute all of its utility assets, other than shares that it owns in subsidiaries, to a newly formed wholly ownedwholly-owned subsidiary. At the same time, the new subsidiary will assume all of NSP's liabilities associated with the assets that it receives in the contribution. If difficulties arise in obtaining the approvals and consents required to transfer NSP's utility assets to a new utility subsidiary, NCE and NSP may negotiate a mutually acceptable alternative. Subject to the terms of the NCE/NSP Merger Agreement, at the time of the NCE/NSP Merger, each share of NCE common stock, par value $1.00 per share ("NCE Common Stock") (other than certain shares to be canceled), together with any associated purchase rights, will be converted into the right to receive 1.55 shares of NSPXcel Energy common stock, par value $2.50 per share ("NSPXcel Energy Common Stock"). Cash will be paid in lieu of any fractional shares of NSPXcel Energy Common Stock which holders of NCE Common Stock would otherwise receive. Based on outstanding common stock of NCE and NSP at March 31,June 30, 1999, the NCE/NSP Merger would result in the common shareholders of NCE owning 54% of the common equity of the combined companyXcel Energy and the common shareholders of NSP owning 46% of the common equity of the combined company.Xcel Energy. The NCE/NSP Merger is expected to be a tax-free stock-for-stock exchange for shareholders of both companies and to be accounted for as a pooling-of-interests. It is anticipated that the combined companyXcel Energy will initially adopt the NCE dividend payment level, adjusted for the exchange ratio, resulting in a pro forma dividend of $1.50 per share on an annual basis, following completion of the NCE/NSP Merger. The actual dividend level will be dependent upon the combined company's results of operations, financial position, cash flows and other factors, and will be evaluated by the Board of Directors of the combined company. Based on reported 1998 results, the combined company would have revenues approximately of $6.7 billion (including earnings from equity investments of $116 million), earnings of approximately $619 million and assets totaling approximately $15.1 billion.Xcel Energy. 21 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) NCE and NSP estimate regulated cost savings of approximately $1.1 billion, net of merger costs and costs to achieve the savings, in the first 10 years after the transaction is completed. Nonrecurring costs directly attributable to the NCE/NSP Merger willare being deferred by NCE and are expected to be deferred and amortized to expense in periods subsequent to the consummation of the merger consistent with the anticipated recovery in rates. ConsummationThe shareholders of the Company and NSP approved the Agreement and Plan of Merger on June 28, 1999. Additionally, consummation of the NCE/NSP Merger is subject to certain closing conditions, including, among others, approval by the shareholdersor completion of NCE and NSP, approval or regulatory review by certain state utility regulators, the SEC under the PUHCA, the FERC, the Nuclear Regulatory Commission, the Federal Communications Commission and expiration or termination of the waiting period applicable to the NCE/NSP Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Applications or submissions to the state utility regulators, where required, and the FERC were completed in July 1999. In general, such filings propose the sharing of cost savings among customers and shareholders for up to five years. NCE and NSP have each 17 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) agreed to certain undertakings and limitations regarding the conduct of their respective businesses prior to the closing of the transaction. The NCE/NSP Merger is expected to take from 12another 9 to 1815 months to complete. A merger integration team, consisting of executives from each company, was formed and will oversee merger-related activities and the integration of operations of NCE expects to hold a special shareholders' meeting during late June 1999 to vote onand NSP. It is Management's intention that the combined company begin realizing certain savings upon the consummation of the NCE/NSP Merger. All shareholders will receive a detailed proxy statement priorThe following unaudited summarized pro forma financial information gives effect to the meeting, which will explain in detail the terms of the NCE/NSP Merger membershipas if it had occurred at June 30, 1999 for balance sheet information and at January 1, 1999 for income statement information. This financial information should be read in conjunction with the historical financial statements and related notes of NCE and NSP, which are included in the Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q of the respective companies. The unaudited summarized pro forma financial information has been prepared using information provided by NSP. This information does not necessarily indicate what the combined company's financial position or operating results would have been if the merger had been completed on the Boardassumed completion dates and does not necessarily indicate future operating results of Directors, employment arrangementsthe combined company. Unaudited Summarized Pro Forma Balance Sheet information as of June 30, 1999 (in millions): NSP NCE Adjustments Pro Forma --- --- ----------- --------- Utility plant - net..... $4,378 $6,035 $1,213 $11,626 Current assets.......... 886 714 - 1,600 Other assets............ 3,275 1,006 (1,213) 3,068 ------ ------ ------ ------ Total assets.......... $8,539 $7,755 $ - $16,294 ====== ====== ====== ======= Common equity........... $2,487 $2,644 $ - $ 5,131 Preferred securities.... 305 294 - 599 Long-term debt.......... 2,153 2,127 - 4,280 ------ ------ ------ ------ Total capitalization.. 4,945 5,065 - 10,010 Current liabilities..... 2,060 1,440 - 3,500 Other liabilities....... 1,534 1,250 - 2,784 ------ ------ ------ ------ Total equity and other matters related toliabilities $8,539 $7,755 $ - $16,294 ====== ====== ====== ======= 22 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) Unaudited Summarized Pro Forma Income Statement information for the NCE/six months ended June 30 (in millions): 1999 NSP Merger.NCE Adjustments Pro Forma --- --- ----------- --------- Revenues................ $1,402 $1,716 $ 167 $3,285 Operating income........ 154 307 56 517 Net income.............. 63 151 - 214 Earnings available for common ........... 60 151 - 211 Earnings per share...... $0.40 $1.31 - $0.64 1998 Revenues................ $1,340 $1,747 $ 110 $3,197 Operating income........ 144 329 58 531 Net income.............. 92 143 - 235 Earnings available for common ........... 89 143 - 232 Earnings per share...... $0.59 $1.28 - $0.72 3. Investment in Yorkshire Power (NCE and PSCo) Merger Rate Filings Yorkshire Power is a joint venture initially equally owned by PSCo and AEP, which acquired indirectly all of the outstanding ordinary shares of Yorkshire Electricity, ana U.K. regional electricity company. NCI accounts for its investment in Yorkshire Power using the equity method and NCI's equity in earnings of Yorkshire Power is 50%, the same as its ownership share. On August 12, 1999, the Office of Gas and Electricity Markets (the U.K. regulator of gas and electricity rates) published draft price proposals for the U.K.'s regional electric distribution businesses that would be effective for the five-year period beginning April 1, 2000. The draft price proposals reflect average reductions of 16% to 21%. The new distribution rates proposed for Yorkshire call for a 15% to 20% reduction in distribution revenues. Yorkshire is in the process of evaluating the impacts of the proposed price reductions. Effective March 31, 1998, PSCo sold its common stock investment in NCI to NC Enterprises, an NCE subsidiary. NCI's primary investment is Yorkshire Power. PSCo received as consideration a 20-year promissory note from NC Enterprises in the amount of approximately $292.6 million of which $192.6 remains outstanding at March 31,June 30, 1999. Annual interest payments are required for the first three years followed by principal and interest payments for the remaining seventeen years. The interest rate on the note is 7.02%. NCE intends to make additional capital contributions to NC Enterprises to provide the necessary cash flow requirements to make payments on the promissory note to PSCo. In October 1998, NCE contributed $100 million to NC Enterprises, which was used to reduce the principleprincipal balance of the promissory note to PSCo. Summarized income statement information for the threesix months ended March 31, 1999June 30,1999 and 1998, respectively is presented below (in millions): 1999 1998 (NCE and (NCE) PSCo) ----- --------- ---- Yorkshire Power: Operating revenues....................... $ 652.0 $ 663.2$1,156.7 $1,167.1 -------- -------- Operating income......................... 113.5 89.7152.0 182.2 -------- -------- Net income...............................income (loss)........................ $ 34.630.2 $ 6.9(7.9) ======== ======== NCI's equity in earnings (losses) of Yorkshire Power ......................... $ 17.315.1 $ 3.4(4.0) ======== ======== 23 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) NCI's equity in earnings of Yorkshire Power increased by approximately $13.9$19.1 million for the threesix months ended March 31, 1999,June 30,1999, when compared to the same period in 1998, primarily due to the impact of one-time items recognized in 1998. In the second quarter of 1998, Yorkshire Power recognized an increaseimpairment of its investment in gas supply business margins.Ionica, a wireless telecommunications company, upon the May 22, 1998, announcement by Ionica that negotiations for release of lines of credit from existing providers of bank finance had been unsuccessful. In November 1998, Ionica was placed into receivership and an administrator was appointed to oversee its operations and distribute its remaining assets. The impairment, reflecting a write down to fair market value, was offset, in part, by an unrelated tax adjustment. These two items reduced NCI's equity earnings in Yorkshire Power by approximately $16 million. The investment in Ionica was subsequently sold with no further adverse financial impact expected. In addition, during 1998 Yorkshire Power recognized a penalty, which was applicable to all United Kingdom regional electricity utilities, designed to recognize the effects of the delay in implementation of full competition (Yorkshire Power's portion was $8.3 million).competition. This charge reduced NCI's equity earnings in Yorkshire Power by approximately $4 million. The unaudited pro forma financial information, for the threesix months ended March 31,June 30, 1998, presented below for PSCo assumes that NCI was sold to NC Enterprises, effective January 1, 1998. The pro forma adjustments represent the removal of NCI's net income from PSCo and the inclusion of interest income, net of tax, from the promissory note to PSCo from NC Enterprises. Based upon the above assumptions, shown below is unaudited pro forma financial information for the threesix months ended March 31,June 30, 1998 (in millions): 18 PSCo Earnings 1998 ---- Net income............................................... $ 68.999.8 Pro forma adjustments: NCI's net income....................................... (2.8) Interest income from promissory note, net of tax....... 3.3 ----------- Pro forma result......................................... $ 69.4$100.3 ====== 4. Regulatory Matters (NCE, PSCo and SPS) Electric Utility Matters PSCo Performance Based Regulatory Plan PSCo's base electric rates are based on traditional cost of service ratemaking principles. The CPUC established a performance based regulatory plan in connection with the CPUC's decision to approve the PSCo/SPS Merger. The major components of this regulatory plan include the following: - - an annual electric department earnings test with the sharing of earnings in excess of an 11% return on equity for the calendar years 1997-2001; - - a Quality of Service Plan ("QSP") designed with performance measures to effectively penalize or reward PSCo based on the quality of service provided to retail customers. TheSubsequent to the approval of the performance based regulatory plan the reward structure was eliminated for the years 1999-2001; and - - an Incentive Cost Adjustment ("ICA") which provides for the sharing of energy costs and savings relative to an annual target cost/delivered Kwh. PSCo has filed with the CPUC its proposed Performance Based Regulatory Plan adjustment for calendar year 1998. This adjustment provides the means for implementing the sharing mechanism for the customers' portion of earnings over PSCo's authorized return on equity threshold. PSCo recorded a customer refund obligation of $15.1$15.9 million for the 1997 earnings test and an estimated refund obligation of $8 million for the 1998 earnings 24 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) test. The final determination, by the CPUC, for 1998 is pending. In July 1998, PSCo began refunding the 1997 earnings test refund obligation to customers through bill credits. PSCo has recorded an estimated refund obligation of approximately $5.8 million as of June 30, 1999 for anticipated sharing of earnings for 1999. Additionally, PSCo agreed to freeze base electric rates after the PSCo/SPS Merger rate reductions for the period through December 31, 2001 with the flexibility to make certain other rate changes, including those necessary for the recovery of DSM, QF capacity costs and decommissioning costs. The freeze in base electric rates does not prohibit PSCo from filing a general rate case or deny any party the opportunity to initiate a complaint or show cause proceeding. PSCo Wholesale - FERC On March 30, 1999, PSCo received authorization from the FERC to engage in market-based wholesale power sales. The authorization allows PSCo to sell energy to e prime, subject to certain conditions, as well as third parties. SPS Merger Related Rate Reductions Under the various regulatory commission approvals, SPS is required to provide credits to customers over five years from the date of the Merger, August 1, 1997, for one-half of the measured non-fuel operation and maintenance expense savings associated with the PSCo/SPS 19 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) Merger. SPS will provide guaranteed minimum annual credits to retail customers of $3 million in Texas, $100,000 in Oklahoma and $10,000 in Kansas and $1.5 million to wholesale customers. Under a settlement reached with the NMPRC, effective December 30, 1998, SPS discontinued the merger savings credit of $1.2 million per year with the implementation of new retail rates in New Mexico as discussed below. SPS Electric Cost Adjustment Mechanisms Substantially all fuel and purchased power costs are recoverable from utility customers, as determined on a jurisdictional basis, using approved cost adjustment mechanisms. As a result of amendments during 1998 to contracts between the coal supplier to SPS and the railroad company it employs, coal transportation costs are projected to decline significantly for the period from November 1998 through December 2002. These savings will be passed on to customers. Texas The PUCT's regulations require periodic examination of SPS's fuel and purchased power costs, the efficiency of the use of such fuel and purchased power, fuel acquisition and management policies and purchase power commitments. SPS is required to file an application for the Commission to retrospectively review, at least every three years, the operations of a utility's electricity generation and fuel management activities. In June 1998, SPS filed its reconciliation for the generation and fuel management activities totaling approximately $690 million, for the period from January 1995 through December 1997. For this same period, SPS had approximately $21.4 million in underrecovered fuel costs associated with the Texas retail jurisdiction. SPS has also requested the prospective sharing of margins from wholesale non-firm sales. Intervening parties are contesting a portion of the recovery of fuel costs, to which SPS is providing rebuttal testimony.costs. SPS has entered into a settlement agreement with the General Counsel atof the PUCT, which, if approved, would provide for the recovery of thesesubstantially all fuel costs. The final outcome of this fuel reconciliation proceeding is pending. SPS was named as a defendant in a case entitled Thunder Basin Coal Co. vs. Southwestern Public Service Co. In November 1994, the jury returned a verdict in favor of Thunder Basin and awarded damages of approximately $18.8 million. SPS appealed the judgment and, in January 1997, that Court found in favor of Thunder Basin and upheld the 25 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) judgment. In February 1997, SPS recorded the liability for the judgment including interest and court costs. The amount of approximately $22.3 million was paid in April 1997. During 1996 and 1997, SPS obtained conditional approval to collect portions of the Thunder Basin judgment from wholesale customers from the FERC and the NMPRC issued an order granting recovery of the New Mexico retail jurisdictional portion of the judgment. In May 1997, SPS filed a request with the PUCT to surcharge undercollected fuel and purchased power expenses, which included $9.1 million of the Thunder Basin judgment. The PUCT issued a decision which denied recovery of the judgment through a surcharge on the grounds that the costs were not classified as fuel costs. In 1997, SPS expensed approximately $12.1 million of the Texas retail jurisdictional portion of the Thunder Basin judgment and recognized an equal amount as deferred revenue in anticipation of future recovery through the pending fuel reconciliation proceeding. SPS believes that recovery of the Thunder Basin costs for the Texas retail jurisdiction will be approved in the pending fuel reconciliation proceeding. Under the PUCT regulations, a utility may recover eligible fuel expenses or fuel-related expenses, which result in benefits to customers that exceed the costs that customers would otherwise have to pay. The Thunder Basin costs resulted in total net savings to customers of approximately $8.5 million, with approximately $4.6 million net savings attributable to Texas retail jurisdictional customers. In the previously discussed proposed settlement agreement with the General Coounsel'sCounsel's office at the PUCT, the General Counsel has agreed with SPS's proposed recovery of the Thunder Basin costs. 20 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) TheEffective in April 1999, the PUCT authorized SPS to reduce its fixed fuel factor for SPS's Texas retail jurisdiction, effective in April 1999, by approximately $44 million on an annual basis. The PUCT also authorized SPS to refund its over collected fuel costs for the period January 1998 through January 1999. This one-time $16.5$16 million fuel refund, including interest, will bewas applied to the monthly billings during April 1999. This rate reduction and fuel cost refund are primarily due to lower coal transportation costs between SPS's coal supplier and the railroad company which began in late 1998. New Mexico In October 1997, the NMPRC approved a fixed fuel factor for SPS's New Mexico retail jurisdiction, effective January 1998. This employs an over/under fuel collection calculation made on a monthly basis. SPS is required to petition for a change in the fixed fuel factor if the over/under recovery balance exceeds $5 million. In addition, on an annual basis, SPS files with the NMPRC a report of SPS's fuel and purchase power costs, which includes the current over/under recovery balance and proposed rate changes to refund or surcharge the balance. The methodology of the over/under calculation, plus interest, is similar to the Texas fixed fuel factor calculation. Previously, New Mexico's retail jurisdictional electric rates applied a monthly fuel factor. In January 1999, SPS implemented new annual fixed fuel cost recovery factors to reflect lower fuel costs primarily as a result of the aforementionedpreviously discussed coal transportation cost settlement between SPS's coal supplier and the railroad company. SPS Rate Cases New Mexico In November 1997, the NMPRC issued an order investigating SPS's rates. In the order, the NMPRC determined that because of the rapid changes occurring in the electric industry the NMPRC would require rate case filings by the major electricity suppliers who have not adopted a plan to provide retail open access and customer choice of suppliers. SPS made a compliance filing in May 1998, which proposed a $1.7 million annual rate reduction for certain retail customers in New Mexico and incorporated the $1.2 million guaranteed minimum annual credits, discussed above. In October 1998, SPS entered into an uncontested stipulation agreement settling the rate investigation case. As part of this settlement, SPS instituted a $6 million annual reduction in base rates (discontinuing the $1.2 million in guaranteed minimum annual credits) for certain retail customers. Additionally, SPS implemented full normalization in its accounting for income taxes with recovery of the New Mexico jurisdictional portion of the tax regulatory asset over 26 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 16.8 years. On November 30, 1998, the NMPRC approved the stipulation and the rate reductionnew rates became effective December 30, 1998. Wholesale - FERC In 1989, the FERC issued its final order regarding a 1985 wholesale rate case. SPS appealed certain portions of that order that related to recognition of rates of the reduction of the federal income tax rates from 46% to 34%. The United States Court of Appeals remanded the case, directing the FERC to reconsider SPS's claim. Negotiated settlements with certain customers were reached, and approved by the FERC, in 1993 and 1995, with SPS receiving approximately $10 million, including interest. Settlement agreements were reached with the two remaining customers during 1998 and approved by the FERC. In June 1998, SPS recorded $7.7 million of additional revenues in connection with these settlements during 1998, subsequent to the first quarter ofsettlement. For the year ended December 31, 1998, SPS recorded $16.9 million of additional revenues and $7.6 million of additional depreciation expense. Cheyenne Rate Case On August 13, 1999, Cheyenne filed a combined gas and electric rate case with the Public Service Commission of Wyoming ("WPSC") requesting a $2.3 million increase electric and a $1.3 million increase in gas base rates, including a 12% return on equity. This follows the expiration of the two year moratorium on filing rate cases in connection with the WPSC approval of the PSCo/SPS Merger. Deregulation Legislation (NCE and SPS) New Mexico On April 8, 1999, New Mexico enacted the Electric Utility Restructuring Act of 1999, which allows customer choice for residential, small commercial and educational customers beginning January 1, 2001. All remaining customers will be allowed customer choice on January 1, 2002. Customers of a municipal utility and customers of a distribution cooperative utility will be afforded choice only if the respective utility elects to participate. The legislation provides for recovery of no less than 50% of stranded costs quantified by the NMPRC. Transition costs must be approved by the NMPRC prior to being recovered 21 through a non-by-passable wires charge, which must be included in a transition plan filing. All public electric utilities operating in New Mexico must file a transition plan with the NMPRC by March 1, 2000. SeveralBefore January 1, 2001, SPS must separate its operations into two segments; energy generation, transmission and distribution, and a retail business either by the creation of separate affiliates that may be owned by a common holding company or by the sale of assets to one or more third parties. A regulated company will be prohibited from providing unregulated service. Texas On June 18, 1999, an electric utility restructuring measures have been introducedact was passed in Texas, which allows for retail competition, for most areas of the state, beginning January 1, 2002. The legislation requires, among other things, a rate freeze for all customers, effective September 1, 1999 until January 1, 2002; a rate reduction for those residential and small commercial customers who choose not to switch suppliers at the start of retail competition; the unbundling of business activities, costs and rates relating to generation, transmission and distribution and retail services; reductions in NOx and SO2 emissions and the recovery of stranded costs. The PUCT can delay the date for retail competition if a power region is unable to offer fair competition and reliable service during pilot projects which begin for all utilities on June 1, 2001 for 5% of the currentutility's combined load of all customer classes. The legislation specifically addresses competition in the Texas legislative session. Substantial negotiation has been requiredPanhandle, where SPS operates, recognizing that certain transmission constraints exist within the region that require full retail customer choice to develop on a bill which meetsmore structured schedule than the diverse needsrest of the state. An electric restructuring bill has not yet been passedSPS must file a transition to competition plan with the PUCT by bothDecember 1, 2000. SPS, with no estimated stranded costs, must direct any excess earnings during the Senateperiod January 1, 1999 27 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) through December 31, 2001 to improvements in transmission and distribution facilities, to capital expenditures to improve air quality or to accelerate the House during this legislative session, which is scheduledamortization of regulatory assets (subject to PUCT approval). Additionally, the Texas legislation requires that no generation company can own and control more than 20% of the installed capacity located in or capable of delivering electricity to a power region. Utilities owning more than 400 Mw must sell, at auction, entitlements to at least 15% of the utility's installed generation capacity. The power sales auctions are to continue through early June 1999.for 5 years or until 40% of the utilities residential and small commercial customers served prior to the start date of competition are served by non-affiliated companies. The changes resulting from this legislative session, if any, canlegislation includes several possible remedies to market power abuses. These provisions are not be determinedimmediately applicable to SPS due to the existing transmission constraints and market power issues in the Panhandle region. Financial Reporting Considerations The Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus in Issue No. 97-4, "Deregulation of the Pricing of Electricity" ("97-4") indicating that when deregulatory legislation is passed or when a rate order (whichever is necessary to effect change in the jurisdiction) that contains sufficient detail for an enterprise to reasonably determine how the transition plan will affect the separable portion of its business whose pricing is being deregulated is issued, the enterprise should stop applying SFAS 71 to that separable portion of its business. The Company is evaluating the provisions of 97-4 related to the recently enacted legislation and, at this time.the time that such provisions have been met, SPS will no longer apply SFAS 71. Gas Utility Matters PSCo Rate Cases In November 1998, PSCo filed a retail gas rate case with the CPUC requesting an annual increase in rates of approximately $23.4 million. The request for a rate increase reflects revenues for additional plant investment, a 12.0% return on equity and the recovery of incremental year 2000 costs (see Note 5. Commitments and Contingencies - Year 2000 Costs). On June 8, 1999, the CPUC approved an increase in base rates of approximately $15 million with an 11.25% return on equity, effective July 1, 1999. PSCo was also allowed recovery of certain environmental costs. Prudently incurred year 2000 costs will be recovered under a separate mechanism beginning in 2000. On June 5, 1996, PSCo filed a retail rate case with the CPUC requesting an annual increase in its jurisdictional gas department revenues equal to approximately $34 million. In early 1997, the CPUC approved an overall increase of approximately $18 million with an 11.25% return on equity, effective February 1, 1997 and as modified on May 15, 1997. The CPUC disallowed the recovery of certain postemployment benefit costs under SFAS 112 and imputed anticipated merger related savings net of costs (associated with the PSCo/SPS merger) related to the gas business (see Note 1. Summary of Significant Accounting Policies). PSCo filed a petition with the Denver District Court appealing the CPUC's decision. PSCo anticipates a decision during 1999. In November 1998, PSCo filed a retail gas rate case with the CPUC requesting an annual increase in rates of approximately $23.4 million. The request for a rate increase reflects revenues for additional plant investment, a 12.0% return on equity and the recovery of incremental year 2000 costs (see Note 5. Commitments and Contingencies - Year 2000 Costs). Hearings were held during April 1999. Intervening parties proposed an annual reduction in rates, which PSCo is contesting. New rates, if approved, would become effective July 1, 1999. PSCo Unbundling and Deregulation of the Retail Natural Gas Supply Business On April 26, 1999, the Colorado legislature approved a bill, which will allowallows natural gas public utilities to voluntarily submit plans to the CPUC to open their markets and enable customers to choose their natural gas supplier. This bill was signed by the governor on June 6, 1999. Currently, PSCo provides a traditional bundled gas service with rates designed for the recovery of actual gas costs through the GCA and for providing transportation and delivery services. Delivery of natural gas wouldwill continue to be regulated, with delivery companies required to offer nondiscriminatory pipeline access to competitors. The bill must be approved by the governor by June 4, 1999, in order for itPSCo will continue to be enacted. PSCo is currently evaluating this legislation.subject to the reporting requirements of SFAS 71 as a regulated distribution company. 28 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 5. Commitments and Contingencies (NCE, PSCo and SPS) Environmental Issues The Company and its subsidiaries are subject to various environmental laws, including regulations governing air and water quality and the storage and disposal of hazardous or toxic wastes. The Company and its subsidiaries assess, on an ongoing basis, measures to ensure compliance with laws and regulations related to air and water quality, hazardous materials and hazardous waste compliance and remediation activities. Environmental Site Cleanup As described below, PSCo has been or is currently involved with the cleanup of contamination from certain hazardous substances. In many situations, PSCo is pursuing or intends to pursue insurance claims and believes it will recover some portion of these costs through such claims. Additionally, where applicable, PSCo is pursuing, or intends 22 to pursue, recovery from other PRPs and through the rate regulatory process. To the extent any costs are not recovered through the options listed above, PSCo would be required to recognize an expense for such unrecoverable amounts. Under the CERCLA, the U.S. EPA identified, and a Phase II environmental assessment revealed, low level, widespread contamination from hazardous substances at the Barter Metals Company ("Barter") properties located in central Denver. For an estimated 30 years, PSCo sold scrap metal and electrical equipment to Barter for reprocessing. PSCo has completed the cleanup of this site at a cost of approximately $9 million and has received responses from the Colorado Department of Public Health and Environment ("CDPHE") indicating that no further action is required related to these properties. In January 1996, a lawsuit by PSCo against its insurance providers, the Denver District Court entered final judgment in favor of PSCo in the amount of $5.6 million for certain cleanup costs at Barter. Several appeals and cross appeals have been filed by one of the insurance providers and PSCo in the Colorado Court of Appeals. The insurance provider has posted supersedeas bonds in the amount of $9.7$9.8 million ($7.7 million attributable toincluding the Barter judgment).judgement and interest. In July 1997, the Colorado Court of Appeals overturnedsent back to trial court the previously awarded $7.7 million judgment on the basis that the jury had not been properly instructed by the Judge regarding a narrow issue associated with certain policies. Previously, PSCo had received certain insurance settlement proceeds from other insurance providers for Barter and other contaminated sites and a portion of those funds remains to be allocated to this site by the trial court. Both sides of the litigation filed petitions for certiorari to the Colorado Supreme Court, which granted a hearing on several issues, although the matter is still pending. In addition, in August 1996, PSCo filed a lawsuit against four PRPs seeking recovery of certain Barter related costs. Settlement has been achieved with two smaller PRPs. In December 1997,small PRPs, although the U. S. District Court awarded summary judgment in favor ofCompany has been ultimately unsuccessful recovering from the remaining PRPs, on the basis that PSCo failed to follow CERCLA guidelines in the cleanup. In January 1998, PSCo appealed the summary judgment to the U.S. Court of Appeals, which is still pending.PRP's. In March 1998, PSCo sold the remaining Barter properties, and the total proceeds were $1.1 million. PCB presence was identified in the basement of an historic office building located in downtown Denver. The Company was negotiating the future cleanup with the current owners; however, in October 1993, the owners filed a civil action against PSCo in the Denver District Court. The action alleged that PSCo was responsible for the PCB releases and additionally claimed other damages in unspecified amounts. In August 1994, the Denver District Court entered a judgment approving a $5.3 million offer of settlement between PSCo and the building owners resolving all claims. In December 1995, PSCo filed complaints against all applicable insurance carriers in the Denver District Court. In June 1997, the Court ruled in favor of the carriers on summary judgment motions addressing late notice and other issues. In August 1997, PSCo filed an appeal of the decision with the Colorado Court of Appeals. In March 1999, the Court affirmed the trial court's decision. A petition for rehearing was denied. PSCo may file a petition for certiorari to the Colorado Supreme Court. One carrier was excluded from the summary judgment; subsequently, that carrier received approval to be dismissed on the same basis as the other carriers. In March 1998, PSCo reached a settlement with another carrier who was not part of the Denver District Court action. In December 1998, the CPUC approved recovery of the electric jurisdictional net costs totaling approximately $3.1 million through PSCo's electric department earnings test over a five-year amortization period. In addition to these sites, PSCo has identified several other sites where clean up of hazardous substances may be required. While potential liability and settlement costs are still under investigation and negotiation, PSCo believes that the resolution of these matters will not have a material adverse effect on PSCo's financial position, results of operations or cash flows. PSCo will pursue the recovery of all significant costs incurred for such projects through insurance claims and/or the rate regulatory process. Other Environmental Matters Under the Clean Air Act Amendments of 1990 ("CAAA"), coal-fueled power plants are required to reduce SO2 and NOx emissions to specified levels through a phased approach. PSCo and SPS's facilities must comply with the Phase II requirements, which will be effective in the year 2000. Currently, these regulations permit compliance with SO2 emission limitations 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. The Company expects 23 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) to meet the Phase II emission standards placed on SO2 through the combination of: a)(1) the use of low sulfur coal, b)(2) the operation of air quality control equipment on certain generation facilities, and c)(3) allowances issued by the EPA and purchased from other companies. In addition, PSCo will be required to modify certain boilers by the year 2000 toreduceto reduce the NOx emissions in order to comply with Phase II requirements. The estimated Phase II costs for these future 29 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) plant modifications to meet NOx requirements total approximately $2.5$1.5 million and pertainpertains to PSCo's Cherokee Unit 1 and 2 and Arapahoe Unit 3. PSCo has announcedobtained all necessary conditions to proceed with its intentionplans to spend approximately $211 million on its Denver and Boulder Metro area coal-fueled power plants to further reduce such emissions below the required regulatory levels discussed above, but will only do so if the following three conditions are met: 1) the Colorado General Assembly and the CPUC approve recoveryabove. The cost of these costs, 2) PSCo obtains flexibility in operating the plants, and 3) PSCo is assured the emission reduction plan is sufficient to meet future state requirements for 15 years. Legislation was passed and signed into law during the second quarter of 1998. During the third quarter of 1998, PSCo and the CDPHE entered into a voluntary emissions reduction agreement under the legislation. In November 1998, PSCo filed for recovery of these costs with the CPUC. The voluntary emissions reduction agreementcontrols will be effective only if the CPUC approves a cost recovery mechanism acceptable to PSCo. The CPUC has set this matter for hearing on May 17, 1999.recovered through rates. Hayden Steam Electric Generating Station In May 1996, PSCo and the other joint owners of Hayden Station reached an agreement resolving violations alleged in complaints filed by a conservation organization, the CDPHE and the EPA against the joint owners. PSCo is the operator and owns an average undivided interest of approximately 53% of the station's two generating units. In connection with the settlement, the joint owners of the Hayden station were required to install emission control equipment of approximately $130 million (PSCo's portion is approximately $70 million). The settlement included stipulated future penalties for failure to comply with the terms of the agreement, including specific provisions related to meeting construction deadlines associated with the installation of additional emission control equipment and complying with particulate, SO2 and NOx emissions limitations. In August 1996, the U.S. District Court for the District of Colorado entered the settlement agreement, which effectively resolved this litigation. Installation of certain portions of this emission control equipment ishas been completed with the remaining requirements in process and on schedule in accordance with the settlement agreement. The joint owners completed installation and began operating the emission control equipment required for Unit 1 on time in accordance with the settlement agreement in late 1998. In May 1999, Unit 2 began operating with the required particulate and NOx emission control equipment. The operation of SO2 emission control equipment has been delayed due to equipment problems. The joint owners beganhave filed a notice of "force majeure" to excuse any equipment related delays. The joint owners will withdraw this notice if they resolve the tie-inequipment problems within the terms of the Unit 2 control equipment in March 1999.settlement agreement. Craig Steam Electric Generating Station In October 1996, a conservation organization filed a complaint in the U. S. District Court pursuant to provisions of the Federal Clean Air Act (the "Act") against the joint owners of the Craig Steam Electric Generating Station located in western Colorado. Tri-State Generation and Transmission Association, Inc. is the operator of the Craig station and PSCo owns an undivided interest (acquired in April 1992) in each of two units at the station totaling approximately 9.7%. The plaintiff alleged that: 1)(1) the station exceeded the 20% opacity limitations in excess of 14,000 six minute intervals during the period extending from the first quarter of 1991 through the second quarter of 1996, and 2)(2) the owners failed to operate the station in a manner consistent with good air pollution control practices. The complaint seeks, among other things, civil monetary penalties and injunctive relief. The Act provides for penalties of up to $25,000 per day per violation, but the level of penalties imposed in any particular instance is discretionary. Settlement discussions were held in 1998, although no settlement was achieved. On March 8, 1999, the U. S. District Court ruled on all pending motions in the case. It held that: (1) the conservation organization has standing to bring the litigation; (2) the conservation organization may rely on continuous opacity monitor data to demonstrate the plant's violation of the opacity standard; (3) the Craig Station owners may challenge the accuracy of the monitor data at trial; and (4) the conservation organization must prove at trial that the station has not operated with good pollution control practices. The U. S. District Court setheld a pretrial conference forin June 1999 and ordered theall parties to participate in a settlement conference. Resolution of this matter may require the installation of additional emission control equipment. Management does not believe that any potential liability, the future impact of this litigation on plant operations, or any related cost will have a material adverse impact on PSCo's financial position, results of operations or cash flows. 24 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) Fort St. Vrain PSCo has completed all decommissioning activities at Fort St. Vrain and the site has been released for unrestricted use. PSCo is currently operating a gas-fired combined cycle steam generation plant at this facility. Spent nuclear fuel is currently being stored on-site in the Independent Spent Fuel Storage Installation ("ISFSI"). In 1996, 30 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) PSCo and the DOE entered into an agreement to resolving all the defueling issues, as discussed in the Notes to Consolidated Financial Statements in the NCENCE's and PSCoPSCo's 1998 Annual Reportannual report on Form 10-K. The NRC is reviewing a final request toOn June 4, 1999, the Nuclear Regulatory Commission ("NRC") approved the transfer the title of the ISFSI to the NRCDOE. The license was revised to reflect the DOE as the licensee for the ISFSI and PSCo anticipatesto reflect the conditions necessary to support the NRC's approval in mid-1999.of the license transfer. Leyden Gas Storage Facility During August 1998, a Jefferson County, Colorado District Court jury found PSCo liable for approximately $1.8 million for the reduction in land value and related damages resulting from the allegations that natural gas had migrated from the Leyden Gas Storage facility. PSCo appealed the judgment and recorded a liability for estimated costs related to this issue. The appeal is pending. The affected land is located north of, but not immediately adjacent to, the storage facility. Tax Matters PSRI, a subsidiary of PSCo, owns and manages permanent life insurance policies on certain past and present employees. These corporate owned life insurance ("COLI") policies were entered into prior to July 1, 1986. In 1996, Congress passed legislation to phase out the tax benefits with certain COLI policies, however, PSCo's policies were grandfathered under this legislation. In August 1998, the IRS issued a Notice of Proposed Adjustment proposing to disallow the 1993 and 1994 deductions of interest expense related to policy loans on the COLI policies totaling approximately $54.6 million. A Request for Technical Advice from the IRS National Office with respect to the proposed adjustment is pending. Management is vigorously contesting this issue. PSCo has not recorded any provision for income tax or interest expense related to this matter. Management believes that the PSCo's tax deduction of interest expense on life insurance policy loans was in full compliance with IRS regulations and believes that the resolution of this matter will not have a material adverse impact on PSCo's financial position, results of operations or cash flows. Year 2000 Issue The Y2K issue is a result of a universal programming standard that records dates as six digits, e.g., mm/dd/yy, using only the last two digits for the year. Any automated system software or firmware that uses two-digit fields could understand the year 2000 as the year 1900 if the issue is not corrected. This situation is not limited to computers; it has the potential to affect many systems, components and devices, which have embedded computer chips, which may be date sensitive. The Y2K issue could result in a major system failure or miscalculations and does impact many NCE systems considered critical or important to the Company's business operations. Systems posing the greatest business risks to the Company include power generation and distribution systems, telecommunications systems, energy trading systems and billing systems. The Company is correcting all potential Y2K failure points identified in its critical automated systems to maintain service to its customers and to mitigate legal and financial risks. In 1997, the Company established the Y2K Program Office to oversee all corporate-wide Y2K initiatives. These initiatives encompass all computer software, embedded systems, as well as contingency planning. Teams of internal and external specialists were established to inventory and assess and test critical computer programs and automated operational systems and modify those that may not be Y2K compliant. The inventory and assessment phases for information technology ("IT") systems were completed in 1998. As of March 31,June 30, 1999, approximately 98%all of the remediation and testing phases for all critical IT systems hashave been completed. The remaining work is planned to be completed by June 30, 1999. For non-IT systems, which exist primarily in the generation, transmission and distribution areas of the business, the inventory, assessment, remediation and assessmenttesting phases have also been 25completed. NCE has achieved "Y2K Ready" status for all mission-critical electrical generating and transmission facilities. Readiness was accomplished by June 30, 1999, in 31 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) completed. Remediation and testing for non-IT systems are approximately 76% completed as of March 31, 1999. The remainder is expected to be completedaccordance with the guidelines established by the endNorth American Electric Reliability Council ("NERC"). NCE is a participant in the NERC Y2K Program that has established reporting criteria and milestone dates for electric utilities. The final step of this program was the third quartersubmittal of 1999. Systems criticala letter to the generation and deliverypresident of energy are expected to be completed byNERC, certifying that the end ofcompany has met the second quarter of 1999.NERC Y2K goal. NCE submitted its Y2K certification letter, without exceptions, with its June 1999 NERC report. The Company has identified third parties, with which it has material business relationships including interconnected utilities, telecommunications service providers, fuel and water suppliers, equipment suppliers, leased facilities and financial institutions. Subject matter experts, along with functional managers, continue to evaluate the current list of third parties and have ongoing discussions with these and other critical suppliers about their Y2K readiness and contingency planning efforts. The Company currently expects to incur total costs of approximately $25$19 million of operating and capital expenditures to modify its computer software, hardware and other automated systems used in operations enabling proper data processing relating to the year 2000 and beyond. Furthermore, theThis revised estimate reflects a $6 million reduction from previously estimated costs due primarily to finding fewer Y2K related problems than originally estimated and lower contingency planning costs. The Company expects to spend approximately $15 million in operating and capital expenditures for the accelerated replacement of certain non-compliant IT systems. The majority of these costs will be incurred by PSCo and SPS. A significant portion of the costs incurred to address the Company's Y2K issues will represent the redeployment of existing information technology resources. The table below details the actual costs incurred during 1998 and prior periods; the actual costs incurred duringthrough the first quarter ofsix months ended June 30, 1999; and the total estimated costs to be incurred.incurred during the remainder of 1999 and early 2000. A significant portion of the remaining costs to be incurred consists of replacementfinalizing remaining work on non mission-critical systems, testing, project management and contingency planning costs, a portion of which may not ultimatelyplanning. Actual Remaining Estimated Costs Actual Estimated Total 1998 Costs Costs to Project and Prior 1999 be incurred.
Actual Actual Remaining Estimated Costs Costs Estimated Total 1998 First Costs to Project and Prior Quarter 1999 be Incurred Costs --------- ------------ ----------- ----- (in millions) Operating expenses ..... $8.0 $1.1 $8.7 $17.8 Capital for automated system components ... 0.7 0.3 6.1 7.1 IT replacement projects: Operating............ 0.2 0.5 0.3 1.0 Capital.............. 6.4 2.8 4.7 13.9 ----- --- --- ------ Total.............. $15.3 $ 4.7 $ 19.8 $ 39.8Incurred Costs --------- ------ ----------- ------- (in millions) Operating expenses.. $8.0 $2.4 $5.5 $15.9 Capital for automated system components 0.7 0.6 1.4 2.7 IT replacement projects: Operating...... 0.2 0.6 0.1 0.9 Capital........ 6.4 7.3 0.7 14.4 ---- ---- ---- ----- Total........ $15.3 $10.9 $7.7 $33.9 ===== ===== ==== ===== ===== ====== ======
Yorkshire Power has also undertaken activities to address Y2K issues. The estimated proportionate share of Yorkshire's incremental Y2K costs (costs which would not have been required in the normal course of business) that will flow through to the Company's earnings as a result of such activities is not expected to have a material impact on the financial condition or results of operations of the Company. The most reasonably likely worst case scenario resulting during Y2K critical dates is a loss of production capacity from certain of the Company's generating units, along with the loss of a portion of the communication system that is critical to generation and distribution control. If this were to occur, the Company's operating utilities may be required to "island" (separate from neighboring interconnected utilities) their generation and distribution systems in their service territories. As part of this scenario, difficulty could be encountered with the restart of generating units. The overall blackout recovery plan for NCE is designed so that this most reasonably likely worst case scenario would be addressed and electricity restored. NCE is able to isolate its systems and facilities from the national power grid in the case of a severe grid disruption. Isolation from the national grid is considered a last resort strategy in the Company's emergency response procedures that would be employed for severe system disruptions, regardless of Y2K issues. The Company intends to remain interconnected to the national grid at the millennium changeover. Being interconnected provides the additional security of having redundant sources of electric power supply. Critical components of this plan have been and continue to be tested to provide assurance that the Company will be prepared for risks which could result from the Y2K millennium change. 32 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) If correction or replacement of non-compliant systems is not completed on a timely basis, the Y2K issues may have a material impact on the operations of the Company and its subsidiaries. Management, however, does 26 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) not anticipate these activities will have a material adverse impact on the financial position, results of operations or cash flows of the Company or its subsidiaries. Employee Matters The Company and its subsidiaries are engaged in certain employment related litigation and intend to contest, or are actively contesting, all such claims, and believe that the ultimate outcome will not have a material adverse impact on the financial position, results of operations or cash flows of the Company or its subsidiaries. 6. Acquisitions and Divestitures (NCE) Acquisition of Planergy Effective April 1, 1998, the Company acquired all of the outstanding common stock of Falcon Seaboard Energy Services, Inc. ("Planergy") and assumed other outstanding debt. Planergy includes Planergy, Inc. and Planergy Services and is primarily engaged in energy consulting, energy efficiency management, conservation programs and mass-market services. Such acquisition was accounted for using the purchase method and the acquired assets and liabilities were valued at their estimated fair market values as of the date of acquisition. Planergy has been consolidated as a subsidiary of NC Enterprises in the Company's consolidated financial statements. Sale of Texas-Ohio Gas, Inc. Effective July 1, 1999, the Company sold all of the outstanding common stock of Texas-Ohio Gas, Inc., a gas marketing company, including all retail gas marketing contracts serving customers in the northeast region of the U.S. Certain operations were retained and transferred to e prime and its subsidiaries. This sale is not expected to have a significant impact on the Company's financial position, results of operations or cash flows. 7. Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debentures (NCE, PSCo and SPS) In May 1998, PSCo Capital Trust I, a wholly-owned trust of PSCo, issued 7,760,000 shares of its 7.60% Trust Originated Preferred Securities for $194 million. The sole asset of the trust is $200 million principal amount of PSCo's 7.60% Deferrable Interest Subordinated Debentures, due June 30, 2038. Holders of the securities are entitled to receive quarterly dividends at an annual rate of 7.60% of the liquidation preference value of $25. The securities are redeemable at the option of PSCo on and after May 11, 2003 at 100% of the principal amount outstanding plus accrued interest. In addition to PSCo's obligations under the Subordinated Debentures, PSCo has agreed, pursuant to a guarantee issued to the trust and the provisions of the trust agreement establishing the trust, on a subordinated basis, payment of distributions on the preferred securities (but not if the trust does not have sufficient funds to pay such distributions) and to pay all of the expenses of the trust (collectively, the "Back-up Undertakings"). Considered together, the Back-up Undertakings constitute a full and unconditional guarantee by PSCo of the trust obligations under the preferred securities. The proceeds from the sale of the 7.60% Trust Originated Preferred Securities were used to redeem all $181.8 million of PSCo's outstanding preferred stock on June 10, 1998, and for general corporate purposes. In October 1996, Southwestern Public Service Capital I, a wholly-owned trust of SPS, issued $100 million of its 7.85% Trust Preferred Securities, Series A. The sole asset of the trust is $103 million principal amount of SPS's 7.85% Deferrable Interest Subordinated Debentures, Series A due September 1, 2036. The securities are redeemable at the option of SPS on and after October 21, 2001 at 100% of the principal amount plus accrued interest. In addition to SPS's obligations under the Subordinated Debentures, SPS has agreed, pursuant to 33 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) a guarantee issued to the trust, the provisions of the trust agreement establishing the trust and a related expense agreement to guarantee, on a subordinated basis, payment of distributions on the preferred securities (but not if the trust does not have sufficient funds to pay such distributions) and to pay all of the expenses of the trust. Considered together, the Back-up Undertakings constitute a full and unconditional guarantee by SPS of the trust obligations under the preferred securities. The proceeds from the sale were used to reduce short-term debt. 27 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 8. Business Segment Information (NCE, PSCo and SPS) NCE: NCE has three reportable segments: electric utility, gas utility and international. The electric utility segment consists primarily of the activities of the three regulated operating companies that provide wholesale and retail electric service in the states of Colorado, Texas, New Mexico, Wyoming, Kansas and Oklahoma. The gas utility segment consists primarily of the activities of three regulated operating companies providing retail gas service in the state of Colorado and Wyoming. The international segment consists of equity investments in foreign operations held by NCI since 1997. Revenues from operating segments below the quantitative thresholds are included in the all other category. Those primarily include a company involved in non-regulated power and gas marketing activities throughout the United States; a company that invests in and develops cogeneration and energy related projects; a company that is engaged in engineering, design construction management and other miscellaneous services and a company engaged in energy consulting, energy efficiency management, conservation programs and mass market services. The accounting policies of the segments are the same as those described in Note 1. Summary of Significant Accounting Policies. NCE evaluates performance by each legal entity based on profit or loss generated from the product or service provided. NCE segment information is as follows (in thousands): Electric Gas Inter- All March 31, 1999 Utility Utility national Other Total -------- -------- -------- -------- -------- Revenues: External customers. $614,695 $259,384 $ - $117,344 $991,423 Intersegment....... 155 1,959 - 16,686 18,800 Segment profit...... 66,820 18,211 18,140 4,721 107,892 Electric Gas Inter- All March 31, 1998 Utility Utility national Other Total -------- -------- -------- -------- -------- Revenues: External customers. $584,624 $271,243 $ - $ 83,637 $939,504 Intersegment....... 159 1,200 - 17,169 18,528 Segment profit...... 61,231 25,164 2,799 6,634 95,828 Reconciliations: 1999 1998 -------- -------- Profit or Loss Total profit for reportable
Eliminations/ Three months ended: Electric Gas All Unallocated Consolidated June 30, 1999 Utility Utility International Other Amounts * Total ------------- ------- ------- ------------- ----- --------- ----- Revenues: External customers $607,438 $144,131 $ - $49,265 $ - $ 800,834 Intersegment 107 1,699 - 33,352 (35,158) - Segment profit 53,823 (362) (65) (1,221) (2,940) 49,235 June 30, 1998 Revenues: External customers $642,483 $136,466 $ - $52,010 $ - $ 830,959 Intersegment 455 1,150 - 13,334 (14,939) - Segment profit 69,042 (1,547) (5,959) 7,435 (12,378) 56,593 Six months ended: June 30, 1999 Revenues: External customers $1,201,584 $403,514 $ - $110,431 $ - $1,715,529 Intersegment 262 3,658 - 49,994 (53,914) - Segment profit 118,128 17,103 18,075 3,378 (6,149) 150,535 June 30, 1998 Revenues: External customers $1,227,107 $407,709 $ - $112,160 $ - $1,746,976 Intersegment 614 2,350 - 30,503 (33,467) - Segment profit 130,273 23,617 (3,160) 14,069 (22,057) 142,742
* Certain financing costs have been allocated to the operating segments $103,171 $ 89,194 Other profit.................... 4,721 6,634 Other unallocated amounts....... (6,592) (9,679) -------- -------- Net income................... $101,300 $ 86,149 ======== ========in 1999. PSCo: PSCo has two reportable segments: electric utility and gas utility. During 1998, PSCo had three reportable segments: electric, gas and international. The electric utility segment consists primarily of the activities of PSCo's regulated operations that provide wholesale and retail electric service in the state of Colorado. 34 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) The gas utility segment consists primarily of the activities of PSCo's regulated gas operations in Colorado. Revenues from operating segments below the quantitative thresholds are included in the all other category. Those segments primarily include a real estate company which owns certain real estate interests of PSCo, a company which owns and manages permanent life insurance policies on certain past and present employees and a finance company that finances certain of PSCo's current assets. The International segment does not apply to PSCo in 1999 as effective March 31, 1998,31,1998, PSCo sold NCI to NC Enterprises (see Note 3. Investment in Yorkshire Power). 28 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) The accounting policies of the segments are the same as those described in Note 1. Summary of Significant Accounting Policies. PSCo evaluates performance by each legal entity based on profit or loss generated from the product or service provided. PSCo segment information is as follows (in thousands): Electric Gas Inter- All March 31, 1999 Utility Utility national Other Total -------- -------- -------- -------- -------- Revenues from external customers. $401,871 $254,171 $ - $ 3,377 $659,419 Segment profit...... 44,466 17,989 - 6,865 69,320 Electric Gas Inter- All March 31, 1998 Utility Utility national Other Total -------- -------- -------- -------- -------- Revenues from external customers. $375,446 $265,483 $ - $ 3,713 $644,642 Segment profit...... 44,710 24,878 2,799 2,167 74,544 Reconciliations: 1999 1998 -------- -------- Profit or Loss Total profit or loss for reportable
Eliminations/ Three months ended: Electric Gas All Unallocated Consolidated June 30, 1999 Utility Utility International Other Amounts * Total ------------- ------- ------- ------------- ----- --------- ----- Revenues from external customers $373,690 $140,895 $ - $ 1,580 $ - $ 516,165 Segment profit 31,439 (441) - 3,822 - 34,820 June 30, 1998 Revenues from external customers $369,940 $133,170 $ - $ 1,488 - $ 504,598 Segment profit 33,194 (1,649) - 5,145 (8,185) 28,505 Six months ended: June 30, 1999 Revenues from external customers $755,012 $395,066 $ - $ 4,957 - $1,155,035 Segment profit 73,391 16,781 - 10,587 - 100,759 June 30, 1998 Revenues from external customers $745,386 $398,653 $ - $ 5,201 - $1,149,240 Segment profit 77,904 23,229 2,799 7,312 (16,771) 94,473
* Certain financing costs have been allocated to the operating segments $ 62,455 $ 72,387 Other profit.................... 6,865 2,167 Other unallocated amounts....... (3,381) (8,586) -------- -------- Net income................... $ 65,939 $ 65,968 ======== ========in 1999. SPS: SPS operates in the regulated electric utility industry providing wholesale and retail electric service in the states of Texas, New Mexico, Kansas and Oklahoma. Revenues from external customers for this reportable segment were $202.6$224.1 million and $199.7$264.0 million for the quartersthree months ended March 31,June 30, 1999 and 1998, respectively. Revenues from external customers for this reportable segment were $426.7 million and $463.7 million for the six months ended June 30, 1999 and 1998, respectively. 9. Management's Representations (NCE, PSCo and SPS) In the opinion of the registrants, the accompanying unaudited consolidated condensed financial statements for NCE, PSCo and SPS include all adjustments necessary for the fair presentation of the financial position of the Company and its subsidiaries at March 31, 1999June 30,1999 and December 31, 1998 and the results of operations for the three and six months ended March 31,June 30, 1999 and 1998 and cash flows for the threesix months ended March 31,June 30, 1999 and 1998. The unaudited consolidated condensed financial information and notes thereto should be read in conjunction with the consolidated financial statements and notes included in the combined 1998 Form 10-K for NCE, PSCo and SPS. Because of seasonal and other factors, the results of operations for the three and six months ended March 31,June 30, 1999 should not be taken as an indication of earnings for all or any part of the balance of the year. 2935 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO NEW CENTURY ENERGIES, INC.: We have reviewed the accompanying consolidated condensed balance sheet of New Century Energies, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1999,June 30,1999, and the related consolidated condensed statements of income and shareholders' equity for the three and six-month periods ended June 30, 1999 and 1998 and the consolidated condensed statements of cash flows for the three-monthsix-month periods ended March 31,June 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of New Century Energies, Inc. and subsidiaries as of December 31, 1998, and the related consolidated statement statements of income, shareholders' equity and cash flows for the year then ended (not presented separately herein), and in our report dated February 23, 1999, we expressed an unqualified opinion on these financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 1998, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Denver, Colorado, MayAugust 13, 1999 3036 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO PUBLIC SERVICE COMPANY OF COLORADO: We have reviewed the accompanying consolidated condensed balance sheet of Public Service Company of Colorado (a Colorado corporation) and subsidiaries as of March 31,June 30, 1999, and the related consolidated condensed statements of income for the three and six-month periods ended June 30, 1999 and 1998 and the consolidated condensed statements of cash flows for the three-monthsix-month periods ended March 31,June 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Public Service Company of Colorado and subsidiaries as of December 31, 1998, and the related consolidated statements of income, shareholder's equity and cash flows for the year then ended (not presented separately herein), and in our report dated February 23, 1999, we expressed an unqualified opinion on these financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 1998, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Denver, Colorado, MayAugust 13, 1999 3137 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO SOUTHWESTERN PUBLIC SERVICE COMPANY: We have reviewed the accompanying condensed balance sheet of Southwestern Public Service Company (a New Mexico corporation) as of March 31,June 30, 1999, and the related condensed statements of income for the three and six-month periods ended June 30, 1999 and 1998 and the condensed statements of cash flows for the three-monthsix-month periods ended March 31,June 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Southwestern Public Service Company as of December 31, 1998, and the related statements of income, shareholder's equity and cash flows for the year then ended (not presented separately herein), and in our report dated February 23, 1999, we expressed an unqualified opinion on these statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1998, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Denver, Colorado, MayAugust 13, 1999 3238 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (NCE, PSCo and SPS) NCE's Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended March 31,June 30, 1999 Compared to the Three Months Ended March 31,June 30, 1998 NCE/NSP Merger On March 24, 1999, the Company and NSP entered into an Agreement and Plan of Merger providing for a strategic business combination of the companies. Consummation of this "merger of equals" is subject to certain closing conditions and the obtaining of applicable regulatory and shareholder approval and isapprovals, which are expected to take from 12 to 18 months to complete.complete from the date of the merger announcement. At the special shareholder meetings on June 28, 1999, the shareholders of NCE and NSP approved the Agreement and Plan of Merger. The NCE/NSP Merger would create aname of the merged company will be Xcel Energy Inc. The combined company is anticipated to be one of the top 10 largest gas and electric energy companycompanies in the U.S. The combined company wouldXcel Energy Inc. and will serve approximately 3 million electricity customers and 1.5 million natural gas customers in portions of twelve states. See Note 2. Proposed Merger with Northern States Power Company in Item 1. FINANCIAL STATEMENTS. Earnings Earnings per share (basic and diluted) were $0.88$0.43 for the firstsecond quarter of 1999 as compared to $0.78$0.50 per share (basic and diluted) for the firstsecond quarter of 1998. HigherThe decrease in earnings werewas primarily attributed to increasedlower electric sales resulting from continued customer growthmild, wet weather throughout the Company's service territory and an increased contributionlower operating earnings from Yorkshire Electricity. In addition, the 1998 results included a $7.7 million benefit from the Company's investment in Yorkshire Power.settlement of a 1985 FERC rate case. Electric customer growth in the Colorado region was approximately 2.6%2.0% over the prior year, with growth in natural gas customers rising 3.4%of approximately 3.3%. Mild winterLower demand for electricity as a result of the mild, wet weather reduced earnings approximately $0.05 per share during the firstsecond quarter, 1999, more than offset the favorable impact of this growth. Temperatures were approximately 14% warmer during the first quarter of 1999 when compared to the same period in the prior year first quarter, lowering demand and reducing earnings by approximately $0.04 per share.year. Electric Operations The following table details the change in electric operating revenues and energy costs for the firstsecond quarter of 1999 as compared to the same period in 1998 (thousands of dollars). Increase (Decrease) ------------------- Electric operating revenues: Retail............................................... $ (827)$(20,604) Wholesale............................................ 24,290 Non-regulated power marketing........................ (1,353)(21,693) Other (including unbilled revenues and provision for rate refunds) ..................................... 6,608 -----revenues)................... 6,762 -------- Total revenues...................................... 28,718(35,535) Fuel used in generation............................... (7,070)(18,423) Purchased power....................................... 12,556 -------(6,605) -------- Net increasedecrease in electric margin..................... $23,232 ======= 33 $(10,507) ======== The following table compares electric Kwh sales by major customer classes for the firstsecond quarter of 1999 and 1998. 39 Millions of Kwh Sales --------------------- 1999 1998 % Change * ---- ---- ---------- Residential................................ 2,711 2,680 1.1%2,244 2,215 1.3% Commercial and Industrial.................. 6,660 6,592 1.06,676 6,686 - Public Authority........................... 182 181 0.5203 197 2.9 ----- ----- Total Retail............................. 9,553 9,453 1.19,123 9,098 0.3 Wholesale.................................. 3,589 2,736 31.2 Non-regulated power marketing.............. 647 823 (21.3) --- ---3,030 3,698 (18.0) ----- ----- Total...................................... 13,789 13,012 6.012,153 12,796 (5.0) ====== ====== Power marketing and trading................ 2,953 781 ** ===== ===== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful. Electric margin increaseddecreased in the firstsecond quarter of 1999, when compared to the firstsecond quarter of 1998, due primarily to a 6% increase5.0% decrease in total sales resulting from totalmild, wet weather during 1999, and a lower level of oil well pumping in the SPS service territory, the benefit of a SPS FERC rate case settlement during 1998 of approximately $7.7 million, and higher provisions for estimated customer refunds in connection with PSCo's earnings sharing in excess of 11% return on equity. These decreases were offset, in part, by continued customer growth, of 2.2%. PSCo's higher wholesale electric sales, reflecting increased marketing activities for economy, short-term firm and off-system sales, contributed to increased operating revenues, butprimarily in the margin on such sales was minimal. SPS's higher retail and wholesale sales resulted primarily due to higher delivered but not billed wholesale and retail revenues.Colorado service territory. The Company's regulated subsidiaries have cost adjustment mechanisms which recognize the majority of the effects of changes in fuel used in generation and purchased power costs and allow recovery of such costs on a timely basis. In connectionSPS's revenues were reduced approximately $24.7 during the second quarter in conjunction with the recovery of lower fuel costs (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). PSCo has an ICA, which allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders,shareholders. PSCo recognized cost savings of approximately $3.5$2.2 million during the firstsecond quarter 1999. The ICA did not significantly impact electric margin for1999, compared to the first quarter of 1998.prior year. Fuel used in generation expense decreased $7.1$18.4 million during the firstsecond quarter of 1999, as compared to the same quarter in 1998, due primarily to reduced generation and lower coal and gas costs at SPS. This decrease in coal costs is primarily due to negotiations with a new supplier in mid-1998 and lower transportation costs, while the decrease in gas costs is attributable to lower per-unit gas prices. This decrease was offset in part by an increase in expense by PSCo due to increased generation levels at its power plants.costs. Purchased power expense increased $12.6decreased $6.6 million during the firstsecond quarter of 1999, as compared to the same quarter in 1998, primarily due to purchases related to increased wholesale marketing activities at PSCo ($10.7 million). Purchased power expense at SPS increased $2.5 million primarily due to a 41% increase in wholesale purchases and higher spot market prices. SPS generates substantially alllower volume of its power for sale to its firm retail and wholesale customers and sells non-firm energy as the market demands. Similarly, SPS purchases low-cost non-firm energy when available. 34 purchases. Gas Operations The following table details the change in gas revenues and gas purchased for resale for the firstsecond quarter of 1999 as compared to the same period in 1998 (thousands of dollars). Increase (Decrease) ------------------- Revenues from gas sales (including unbilled revenues). $26,688$ 6,038 Gas purchased for resale.............................. 36,7191,813 ------- Net decreaseincrease in gas sales margin..................... (10,031)4,225 Transportation revenues............................... 1,293713 ------- DecreaseIncrease in net gas margin........................... $(8,738)$ 4,938 ======= 40 The following table compares gas Dth deliveries by major customer classes for the firstsecond quarter of 1999 and 1998. Millions of Dth Deliveries -------------------------- 1999 1998 % Change * ---- ---- ---------- Residential................................ 39.0 39.9 (2.4)%19.1 18.6 2.9% Commercial................................. 18.0 19.3 (6.6) Non-regulated gas marketing................ 39.5 16.4 **9.3 9.4 (0.7) ----- ----- Total Sales.............................. 96.5 75.6 27.7sales.............................. 28.4 28.0 1.7 Transportation............................. 31.3 27.5 14.028.1 27.3 2.6 ----- ----- Total.................................... 127.8 103.1 24.056.5 55.3 2.1 ==== ===== Non-regulated gas marketing and trading.... 40.5 15.5 ** ===== ===== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful Gas sales margin decreasedincreased during the firstsecond quarter of 1999, when compared to the firstsecond quarter of 1998, primarily due to lowerhigher retail sales at PSCo resulting from growth in the effectsnumber of mild winter weather in 1999, despite a 3.4% increase in customers. As previously noted, weather during the first quarter of 1999 was approximately 14% warmer than the first quarter of 1998.customers served. Although non-regulated gas marketing sales and trading increased at the Company's non-regulated subsidiariessignificantly, the margin on such sales decreased primarily duewas comparable to lower average market sales prices.the prior year. Gas transportation revenues increased approximately $1.3$0.7 million during the firstsecond quarter of 1999, when compared to the firstsecond quarter of 1998, primarily due to higher deliveries. The increase in transport deliveries continues to be impacted by the shifting of various commercial customers to transport customers, some of which become retail customers of the Company's non-regulated subsidiaries.at PSCo. PSCo and Cheyenne have in place GCA mechanisms for natural gas sales, which recognizes the majority of the effects of changes in the cost of gas purchased for resale and adjusts revenues to reflect such changes in cost on a timely basis. As a result, the changes in revenues associated with these mechanisms during the firstsecond quarter of 1999, as compared to the firstsecond quarter of 1998, had little impact on net income. However, the fluctuations in gas sales impact the amount of gas the Company's gas utilities must purchase and, therefore, along with the increases and decreases in the per-unit cost of gas, affect total gas purchased for resale. Other Operating Revenues and Equity in Earnings of Unconsolidated Subsidiaries Other operating revenues decreased approximately $4.8$1.3 million due to lower development fee revenues from non-regulated independent power projects offset, in part, by an increase in revenue from energy management and consulting services. Equity earnings from Yorkshire Power increased over 1998 primarily due to the recognition in 1998 of an impairment of an investment in a U.K. telecommunications company. This impairment, in conjunction with the recognition of a non-recurring positive tax adjustment at Yorkshire Power, reduced 1998 earnings approximately $16.6 million or 15 cents per share. Yorkshire Power's operating earnings were lower in 1999 primarily due to lower gas and electric sales resulting from mild weather, higher marketing costs to obtain new, and retain existing customers, and increased maintenance expenses (see Note 3. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). Miscellaneous income and deductions-net decreased primarily due to delay damage penalties incurred in development of certain independent power projects by non-regulated subsidiaries. These projects are now operational or expected to become operational during the third quarter of 1999. Non-Fuel Operating Expenses and Other Income and Deductions Other operating and maintenance expense-regulated decreased $2.0 million from the continued deployment of cost saving-programs instituted as part of the PSCo/SPS Merger. Other operating and maintenance 41 expense-non-regulated increased $4.4 million primarily due to increased costs in providing energy management and consulting services. Depreciation and amortization expense increased $2.8 million primarily due to higher depreciation expense from property additions. Taxes other than income taxes increased approximately $4.4 million due to higher utility property tax accruals resulting from an increase in plant investment and higher valuation rates. Income taxes declined $8.8 million during the second quarter of 1999, when compared to the same quarter in 1998, primarily due to lower pre-tax income and the recognition of additional Colorado state tax credits. Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998 Earnings Earnings per share (basic and diluted) were $1.31 for the first six months of 1999 as compared to $1.28 per share (basic and diluted) for the first six months of 1998. The increase in earnings were primarily attributed to a higher electric margin resulting from customer growth and an increased contribution from the Company's investment in Yorkshire Power. This increase was partially offset by a lower gas margins, resulting from mild weather during the first quarter of 1999. Electric Operations The following table details the change in electric operating revenues and energy costs for the first six months of 1999 as compared to the same period in 1998 (thousands of dollars). Increase (Decrease) ------------------- Electric operating revenues: Retail............................................... $(21,522) Wholesale............................................ (17,789) Other (including unbilled revenues)................... 13,461 ------- Total revenues...................................... (25,850) Fuel used in generation............................... (25,493) Purchased power....................................... (13,083) ------- Net increase in electric margin..................... $ 12,726 ======== The following table compares electric Kwh sales by major customer classes for the first six months of 1999 and 1998. Millions of Kwh Sales --------------------- 1999 1998 % Change * ---- ---- ---------- Residential................................ 4,956 4,896 1.2% Commercial and Industrial.................. 13,336 13,277 0.4 Public Authority........................... 384 378 1.8 ----- ----- Total Retail............................. 18,676 18,551 0.7 Wholesale.................................. 5,787 6,434 (10.1) ----- ----- Total...................................... 24,463 24,985 (2.1) ====== ====== Power marketing and trading................ 4,434 1,603 ** ===== ===== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful. 42 Electric margin increased in the first six months of 1999, when compared to the first six months of 1998, due to the positive impact of shared savings under the ICA resulting from lower fuel and purchased energy costs (approximately $5.2 million) and higher sales at PSCo resulting primarily from growth in the number of customers served. This was offset, in part, by decreases in both retail and wholesale sales at SPS, primarily due to mild weather, reduced oil well pumping and the benefit of an SPS 1985 FERC rate case settlement in 1998 which increased margin approximately $7.7 million. The recovery of fuel costs at SPS, of approximately $37 million, reduced revenues but had no effect on margin. Fuel used in generation expense decreased $25.5 million during the first six months of 1999, as compared to 1998, primarily due to reduced generation levels at SPS and lower coal and gas costs at SPS. The lower coal costs are due to a reduction in transportation costs, while the decrease in gas costs is attributable to lower per-unit gas prices. Decreased gas costs were partially offset by higher gas generation levels at PSCo and SPS, due to placing in service a new gas generation unit. Purchased power expense decreased $13.1 million during the first six months of 1999, as compared to 1998, primarily due to a lower volume of purchases. This decrease at PSCo was partially offset by an increase in purchased power expense at SPS resulting from an increase in quantity of power purchased and higher capacity charges. Gas Operations The following table details the change in gas revenues and gas purchased for resale for the first six months of 1999 as compared to the same period in 1998 (thousands of dollars). Increase (Decrease) ------------------- Revenues from gas sales (including unbilled revenues). $(1,482) Gas purchased for resale.............................. 4,325 ------- Net decrease in gas sales margin..................... (5,807) Transportation revenues............................... 2,006 ------- Decrease in net gas margin........................... $(3,801) ======= The following table compares gas Dth deliveries by major customer classes for the first six months of 1999 and 1998. Millions of Dth Deliveries -------------------------- 1999 1998 % Change * ---- ---- ---------- Residential................................ 58.1 58.5 (0.8)% Commercial................................. 27.4 28.7 (4.6) ----- ----- Total Sales.............................. 85.5 87.2 (2.0) Transportation............................. 59.6 54.9 8.7 ----- ----- Total.................................... 145.1 142.1 2.1 ===== ===== Non-regulated gas marketing and trading ... 80.0 31.9 ** ===== ===== * Percentages are calculated using unrounded amounts ** Percentage change is significant, but presentation of the amount is not meaningful Gas sales margin decreased during the first six months of 1999, when compared to the first six months of 1998, primarily due to lower retail sales at PSCo resulting from the effects of mild winter weather in 1999, despite a 3.3% increase in customers. 43 Gas transportation revenues increased approximately $2.0 million during the first six months of 1999, when compared with the same period in 1998, primarily due to higher deliveries at PSCo. The increase in transport deliveries continues to be impacted by the shifting of various commercial customers to transport customers. Other Operating Revenues and Equity in Earnings of Unconsolidated Subsidiaries Other operating revenues decreased approximately $6.1 million due to lower revenues from diversified energy businesses, primarily engineering, design and construction management and lower development fee income from non-regulated independent power projects, offset in part by an increase in revenue from energy management and consulting services. 35 Non-Fuel Operating Expenses and Other Income and Deductions Other operating and maintenance expense-regulated decreased $0.2 million from the continued deployment of cost saving-programs instituted as part of the PSCo/SPS merger. Other operating and maintenance expense-non-regulated increased $2.6 million primarily due to increased operating cost due to the acquisition of Planergy, effective April 1, 1998. Depreciation and amortization expense increased $7.1 million primarily due to higher depreciation expense from property additions. Equity in earnings of Yorkshire Power and other unconsolidated subsidiaries increased $12.1$16.8 million primarily due to increasedhigher earnings offrom Yorkshire Power. NCI's equity in earnings of Yorkshire Power increased by approximately $13.9$19 million for the first quartersix months of 1999, when compared to the same period in 1998, primarily due to Yorkshire Power's 1998 recognition of an increaseimpairment of its investment in gas supply business margins.a U.K. telecommunications company offset, in part, by an unrelated tax adjustment. The net effect of these items reduced 1998 earnings approximately $16.6 million. In addition, during 1998 Yorkshire Power recognized a penalty, applicable to all United KingdomU.K. regional electricity utilities, designed to recognize the effects of the delay in implementation of full competition (NCI's portion was $4.2approximately $4 million). Equity losses from independent power projects reduced earnings during 1999. Miscellaneous income and deductions-net decreased primarily due to delay damage penalties incurred in development of certain independent power projects by non-regulated subsidiaries. Non-Fuel Operating Expenses and Other Income and Deductions Other operating and maintenance expense-regulated decreased $2.2 million from the continued deployment of cost saving-programs instituted as part of the PSCo/SPS Merger. Other operating and maintenance expense-nonregulated increased $7.0 million primarily due to increased operating cost due to the acquisition of Planergy, effective April 1, 1998 and higher costs incurred in providing energy management and consulting services. Depreciation and amortization expense increased $9.9 million primarily due to higher depreciation expense from property additions. Taxes other than income taxes increased approximately $9.2 million due to higher utility property tax accruals as a result of an increase in plant investment and higher valuation rates. Interest charges and preferred dividends of subsidiaries increased $1.8$2.5 million during the first quarter of 1999 whenas compared towith the same quarterperiod in 1998. The increase is primarily attributable to costshigher average amounts of debt outstanding used to finance capital expenditures, including higher interest costs on long-term debt resulting from the April 1998 issuance of $250 million of long-term debt.expenditures. Additionally, in May 1998, PSCo issued $194 million of Trust Preferred Originated Preferred Securities. The proceeds were used to redeem all of PSCo's outstanding preferred stock (totaling $181.8 million) in June 1998 (see Note 7. PSCo Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debentures in Item 1. FINANCIAL STATEMENTS). Income taxes declined $10.0$18.8 million during the first quartersix months of 1999, when compared to the same quarter in 1998, primarily due to lower pre-tax income, from non-regulated operations, the recognition of additional Colorado Statestate tax credits and the recognition of the favorable tax impact of certain prior year PSCo severance costs that were previously recognized as non-deductible. 44 Other Market Risks NCE and its subsidiaries are exposed to market risks, including changes in commodity prices, interest rates and currency exchange rates as fully disclosed in the NCE, PSCo and SPS 1998 Annual Report on Form 10-K. NCE's regulated subsidiaries have limited exposure to commodity price and interest rate risk due to cost-based rate regulation. Exposure to currency exchange risk is related to NCE's investment in Yorkshire Power (see Note 3. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). There have been no material changes in the market risk exposures that affect the quantitative and qualitative disclosures presented as of December 31, 1998 in the 1998 Annual Report on Form 10-K. Commitments and Contingencies Year 2000 Issue The Y2K issue is a result of a universal programming standard that records dates as six digits, e.g., mm/dd/yy, using only the last two digits for the year. Any automated system software or firmware that uses two-digit fields could understand the year 2000 as the year 1900 if the issue is not corrected. This situation is not limited to computers; it has the potential to affect many systems, components and devices, which have embedded computer chips, which may be date sensitive. The Y2K issue could result in a major system failure or miscalculations and does impact many NCE systems considered critical or important to the Company's business operations. Systems posing the greatest business risks to the Company include power generation and distribution systems, telecommunications systems, energy trading systems and billing systems. The Company is correcting all 36 potential Y2K failure points identified in its critical automated systems to maintain service to its customers and to mitigate legal and financial risks. In 1997, the Company established the Y2K Program Office to oversee all corporate-wide Y2K initiatives. These initiatives encompass all computer software, embedded systems, as well as contingency planning. Teams of internal and external specialists were established to inventory and assess and test critical computer programs and automated operational systems and modify those that may not be Y2K compliant. The inventory and assessment phases for information technology ("IT") systems were completed in 1998. As of March 31,June 30, 1999, approximately 98%all of the remediation and testing phases for all critical IT systems hashave been completed. The remaining work is planned to be completed by June 30, 1999. For non-IT systems, which exist primarily in the generation, transmission and distribution areas of the business, the inventory, assessment, remediation and assessmenttesting phases have also been completed. RemediationNCE has achieved "Y2K Ready" status for all mission-critical electrical generating and testing for non-IT systems are approximately 76% completed as of March 31, 1999. The remainder is expected to be completedtransmission facilities. Readiness was accomplished by June 30, 1999, in accordance with the guidelines established by the endNorth American Electric Reliability Council ("NERC"). NCE is a participant in the NERC Y2K Program that has established reporting criteria and milestone dates for electric utilities. The final step of this program was the third quartersubmittal of 1999. Systems criticala letter to the generation and deliverypresident of energy are expected to be completed byNERC, certifying that the end ofcompany has met the second quarter of 1999.NERC Y2K goal. NCE submitted its Y2K certification letter, without exceptions, with its June 1999 NERC report. The Company has identified third parties, with which it has material business relationships including interconnected utilities, telecommunications service providers, fuel and water suppliers, equipment suppliers, leased facilities and financial institutions. Subject matter experts, along with functional managers, continue to evaluate the current list of third parties and have ongoing discussions with these and other critical suppliers about their Y2K readiness and contingency planning efforts. The Company currently expects to incur total costs of approximately $25$19 million of operating and capital expenditures to modify its computer software, hardware and other automated systems used in operations enabling proper data processing relating to the year 2000 and beyond. Furthermore, theThis revised estimate reflects a $6 million reduction from previously estimated costs due primarily to finding fewer Y2K related problems than originally estimated and lower contingency planning costs. The Company expects to spend approximately $15 million in operating and capital expenditures for the accelerated replacement of certain non-compliant IT systems. The majority of these costs will be incurred by PSCo and SPS. A significant portion of the costs incurred to address the 45 Company's Y2K issues will represent the redeployment of existing information technology resources. The table below details the actual costs incurred during 1998 and prior periods; the actual costs incurred duringthrough the first quarter ofsix months ended June 30, 1999; and the total estimated costs to be incurred.incurred during the remainder of 1999 and early 2000. A significant portion of the remaining costs to be incurred consists of replacementfinalizing remaining work on non mission-critical systems, testing, project management and contingency planning costs, a portion of which may not ultimatelyplanning. Actual Costs Actual Remaining Estimated 1998 Costs Estimated Costs Total Project and Prior 1999 to be incurred.
Actual Actual Remaining Estimated Costs Costs Estimated Total 1998 First Costs to Project and Prior Quarter 1999 be Incurred Costs --------- ------------ ----------- ----- (in millions) Operating expenses .... $8.0 $1.1 $8.7 $17.8 Capital for automated system components .. 0.7 0.3 6.1 7.1 IT replacement projects: Operating........... 0.2 0.5 0.3 1.0 Capital............. 6.4 2.8 4.7 13.9 --- ---- --- ---- Total............. $15.3 $ 4.7 $19.8 $39.8 ===== =====Incurred Costs --------- ----- -------------- ----- Operating expenses $8.0 $2.4 $5.5 $15.9 Capital for automated system components 0.7 0.6 1.4 2.7 IT replacement projects: Operating...... 0.2 0.6 0.1 0.9 Capital........ 6.4 7.3 0.7 14.4 ---- --- ---- ----- Total........ $15.3 $10.9 $7.7 $33.9 ===== =====
==== ===== Yorkshire Power has also undertaken activities to address Y2K issues. The estimated proportionate share of Yorkshire's incremental Y2K costs (costs which would not have been required in the normal course of business) that will flow through to the Company's earnings as a result of such activities is not expected to have a material impact on the financial condition or results of operations of the Company. The most reasonably likely worst case scenario resulting during Y2K critical dates is a loss of production capacity from certain of the Company's generating units, along with loss of a portion of the communication system that is critical to generation and distribution control. If this were to occur, the Company's operating utilities may be required to "island" (separate from neighboring interconnected utilities) their generation and distribution systems in their service territories. As part of this scenario, difficulty could be encountered with the restart of generating units. The overall blackout recovery plan for NCE is designed so that this most reasonably likely worst case scenario would be addressed and electricity restored. NCE 37 is able to isolate its systems and facilities from the national power grid in the case of a severe grid disruption. Isolation from the national grid is considered a last resort strategy in the Company's emergency response procedures that would be employed for severe system disruptions, regardless of Y2K issues. The Company intends to remain interconnected to the national grid at the millennium changeover. Being interconnected provides the additional security of having redundant sources of electric power supply. Critical components of this plan have been and continue to be tested to provide assurance that the Company will be prepared for risks which could result from the Y2K millennium change. If correction or replacement of non-compliant systems is not completed on a timely basis, the Y2K issues may have a material impact on the operations of the Company and its subsidiaries. Management, however, does not anticipate these activities will have a material adverse impact on the financial position, results of operations or cash flows of the Company or its subsidiaries. Common Stock Dividend The Board of Directors approved a $0.58 per share dividend payable to shareholders of the Company for the firstsecond quarter of 1999.1999 and $1.16 for the year-to-date. The Company's common stock dividend level is dependent upon the Company's financial position, results of operations, cash flows and other factors, including the proposed merger with NSP. The Board of Directors of the Company will continue to evaluate the common stock dividend on a quarterly basis. Liquidity and Capital Resources Cash Flows - ThreeSix Months Ended MarchJune 30 1999 1998 IncreaseDecrease ---- ---- -------- Net cash provided by operating activities (in millions) $232.1 $207.8 $24.2............ $314.6 $362.8 $(48.2) Cash provided by operating activities increaseddecreased during the first threesix months of 1999, when compared to the first three months ofsame period in 1998, primarily due to higher earningsthe cash proceeds, received in 1998 by SPS and a non-regulated 46 subsidiary, of approximately $67 million for the recovery of deferred costs and income from regulated utility operations and collection of purchasethe investment in a non-regulated energy development project. This was offset, in part, by lower purchased gas and electric energy costs. 1999 1998 DecreaseIncrease ---- ---- -------- Net cash used in investing activities (in millions) $(114.4) $(122.3) $(7.9)........... $(295.7) $(270.8) $(24.9) Cash used in investing activities increased during 1999, when compared to 1998, primarily due to an increase in construction expenditures. 1999 1998 Decrease ---- ---- -------- Net cash used in financing activities (in millions) ............ $ (3.4) $(57.0) $ 53.6 Cash used in financing activities decreased during 1999, when compared to 1998, primarily due to the decreasean increase in construction expenditures.short-term borrowings in 1999 1998 Increase ---- ---- -------- Net cash used inand more financing activities (in millions) $(89.5) $(82.1) $(7.4) Cashin 1998. PSCo issued $250 million of long-term debt in April 1998 which was used to repay short-term and other debt. In May 1998, PSCo issued $194 million of Trust Originated Preferred Securities the proceeds of which were used to redeem all of PSCo's outstanding preferred stock (totaling $181.8 million) on June 10, 1998 (see Note 7. Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Soley Subordinated Debentures in financing activities increased during 1999, when compared to 1998, primarily due to the reduction of short-term debt offset, in part, by the issuance of medium term notes at SPS.Item 1. FINANCIAL STATEMENTS). Financing Activities Long-Term Debt During the first quarter of 1999, PSCo refinanced a portion of its pollution control bonds in the amount of $48.75 million to take advantage of lower interest rates. The interest rate on the new bonds is 5.1% compared to 5 7/8% on $21.5 million and 7 3/8% on $27.25 million. In addition, SPS issued $100 million of 6.2% unsecured senior notes due March 1, 2009. The proceeds will bewere used initially for the repayment of certain short-term debt, pending the retirement of $90 million of the SPS 6 7/8% First Mortgage Bonds due December 1, 1999 and for other general corporate purposes. 38 On June 29, 1999, PSCo Obligated Mandatorily Redeemable Preferred Securities In May 1998, PSCo Capital Trust I,filed a wholly-owned trustregistration statement to issue up to $500 million of unsecured debt. On July 16, 1999, PSCo issued in a public offering $194$200 million of its 7.60% Trust Originated Preferred Securities. The sole assetunsecured senior notes, at an interest rate of the trust is $200 million principal amount of PSCo's 7.60% Deferrable Interest Subordinated Debentures6 7/8%, due June 30, 2038. The proceeds from the sale of the 7.60% Trust Originated Preferred SecuritiesJuly 15, 2009. Proceeds were used to redeem all of PSCo's outstanding preferred stock totaling $181.8 million on June 10, 1998, and for general corporate purposes.purposes including capital expenditures, repayment of short-term debt and refunding of long-term debt on maturity or otherwise. Bank Lines of Credit and Compensating Bank Balances During the second quarter of 1999, PSCo entered into a credit facility, which provides for $300 million in committed lines of credit, replacing an existing $150 million credit facility. The credit facility expires June 23, 2000. During the first quarter of 1999, SPS extended its $200 million committed line of credit until February 25, 2000. Electric Utility Industry Electric utilities have historically operated in a highly regulated environment in which they have an obligation to provide electric service to their customers in return for an exclusive franchise within their service territory with an opportunity to earn a regulated rate of return. This regulatory environment is changing. The generation sector has experienced competition from nonutility power producers and the FERC is requiring utilities, including the Company's subsidiaries, to provide wholesale transmission service to others and may order electric utilities to enlarge their transmission systems to facilitate transmission services without impairing 47 reliability. State regulatory authorities are in the process of changing utility regulations in response to federal and state statutory changes and evolving markets, including consideration of providing open access to retail customers. All of the Company's jurisdictions continue to study and evaluate utility regulations with respect to competition. A summaryDeregulation legislation was passed in Texas and New Mexico during the second quarter of recent developments1999. Texas In June 1999, an electric utility restructuring act was passed in Texas, which allows for retail competition, for most areas of the state, beginning January 1, 2002. The legislation requires, among other things, a rate freeze for all customers, effective September 1, 1999 is discussed below.until January 1, 2002; a rate reduction for those residential and small commercial customers who choose not to switch suppliers at the start of retail competition; the unbundling of business activities, costs and rates relating to generation, transmission and distribution and retail services; reductions in NOx and SO2 emissions and the recovery of stranded costs. The CompanyPUCT can delay the date for retail competition if a power region is unable to predict what financial impactoffer fair competition and reliable service during pilot projects which begin for all utilities on June 1, 2001 for 5% of the utility's combined load of all customer classes. Utilities, including SPS, with no estimated stranded costs must direct any excess earnings during the freeze period to improvements in transmission and distribution facilities, to capital expenditures to improve air quality or effectto accelerate the implementationamortization of these legislative changes orregulatory assets (subject to PUCT approval). The legislation specifically addresses competition in the adoptionTexas Panhandle, where SPS operates, recognizing that certain transmission constraints exist within the region that requires full retail customer choice to develop on a more structured schedule than the rest of other proposals might have on its operations.the state. SPS must file a transition to competition plan with the PUCT by December 1, 2000. New Mexico On April 8, 1999, New Mexico enacted the Electric Utility Restructuring Act of 1999 which allows customer choice for residential, and small commercial and educational customers beginning January 1, 2001. All remaining customers will be allowed customer choice on January 1, 2002. Customers of a municipal utility and customers of a distribution cooperative utility will be afforded choice only if the respective utility elects to participate. The legislation provides for recovery of no less than 50% of stranded costs quantified by the NMPRC. Transition costs must be approved by the NMPRC prior to being recovered through a non-bypassablenon-by-passable wires charge, which must be included in a transition plan filing. All public electric utilities operating in New Mexico must file a transition plan with the NMPRC by March 1, 2000. Colorado On April 26, 1999, the Colorado legislature approved a bill, which will allow natural gas public utilities to voluntarily submit plans to the CPUC to open their markets and enable customers to choose their natural gas supplier. Currently, PSCo provides a traditional bundled gas service with rates designed for the recovery of actual gas costs through the GCA and for providing transportation and delivery services. Delivery of natural gas would continue to be regulated, with delivery companies required to offer nondiscriminatory pipeline access to competitors.Financial Reporting Considerations The bill must be approved by the governor by June 4, 1999, in order for it to be enacted. PSCo is currently evaluating this legislation. New Accounting Standard Effective January 1, 1999, the Company and its subsidiaries adopted Emerging Issues Task Force 98-10reached a consensus in Issue No. 97-4, "Deregulation of the Pricing of Electricity" ("EITF"97-4"), indicating that when deregulatory legislation is passed or when a rate order (whichever is necessary to effect change in the jurisdiction) that contains sufficient detail for an enterprise to reasonably determine how the transition plan will affect the separable portion of its business whose pricing is being deregulated is issued, the enterprise should stop applying SFAS 71 to that separable portion of its business. The Company is evaluating the provisions of 97-4 related to the recently enacted legislation and, at the time such provisions have been met, SPS will no longer apply SFAS 71. 48 Accounting Pronouncements Issued But Not Yet Effective In June 1998, the FASB issued SFAS 133, "Accounting for Energy TradingDerivative Instruments and Risk ManagementHedging Activities." This EITF provides guidance for accounting for energy contracts as part of energy and risk management activities. The adoption of EITF did not have a material impactstatement requires companies to record derivatives on the Company's consolidated financial statements. 39balance sheet as assets and liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. In July 1999, the FASB delayed the effective date for one year, to fiscal years beginning after June 15, 2000. The Company is currently evaluating the potential impact of this accounting standard and will adopt the standard as required by January 1, 2001. 49 PSCo's Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30, 1998 Earnings Available for Common Stock Earnings were $65.9$34.8 million for the firstsecond quarter of 1999, as compared to $66.0$28.5 million for the firstsecond quarter of 1998. An1998, primarily due to an increase in electric margin resulting from strong customer growth of 2.6% was offset by a decrease in gas margin, resulting from unseasonably warm weather in the current quarter, despite customer growth of 3.4%. Electric Operations The following table details the change in electric operating revenues and energy costs for the three months ended March 31,June 30, 1999, as compared to the same period in 1998 (in thousands of dollars). Increase (Decrease) ------------------- Electric operating revenues: Retail....................................... $ 9,133997 Wholesale.................................... 26,675(7,652) Other (including unbilled revenues).......... (9,383)10,405 ------- Total revenues.............................. 26,4253,750 Fuel used in generation....................... 1,2365,328 Purchased power............................... 10,718(11,911) ------- Net increase in electric margin............. $14,471$10,333 ======= The following table compares electric Kwh sales by major customer classes for the three months ended March 31,June 30, 1999 and 1998. Millions of Kwh Sales --------------------- 1999 1998 % Change * ---- ---- ---------- Residential ..................... 1,932 1,856 4.1%1,567 1,501 4.4% Commercial and Industrial ....... 3,922 3,755 4.53,799 3,721 2.1 Public Authority ................ 48 47 1.360 39 53.0 ------ ------ Total Retail................... 5,902 5,658 4.3 Wholesale........................ 2,255 1,494 51.15,426 5,261 3.1 Wholesale **..................... 1,045 1,409 (25.9) ------ ------ Total............................ 8,157 7,152 14.16,471 6,670 (3.0) ====== ====== * Percentages are calculated using unrounded amounts ** Excludes power trading activities Electric margin increased in the firstsecond quarter of 1999, when compared to the firstsecond quarter of 1998, primarily due to higher retail sales of 4.3%3.1% resulting primarily from customer growth of approximately 2.6% and the positive impact of a lower 1999 provision for estimated customer refundsshared savings under the ICA (approximately $2.5$2.2 million) in connection with the earnings sharing in excess of 11% return on equity (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). Higher wholesale electric sales, reflecting increased marketing activities for economy, short-term firm and off-system sales, also contributed to increased operating revenues; however, the margin on such salesThe ICA is minimal. PSCo hasa cost adjustment mechanisms which recognize the majority of the effects of changes in fuel used in generation and purchased power costs and allow recovery of such costs on a timely basis. In connection with the ICA, whichmechanism that allows for a 50%/50% sharing of certain fuel and energy cost increases and decreases among customers and shareholders, PSCo recognized cost savingsshareholders. Provisions for estimated customer refunds in connection with the earnings sharing in excess of 11% return on equity increased approximately $3.5$2.8 million during the first quarter 1999. The ICA did not significantly impact electric margin for the first quarter of 1998.in 1999 (see Note 4. Regulatory Matters in Item 1.FINANCIAL STATEMENTS). Fuel used in generation expense increased approximately $1.2$5.3 million during the firstsecond quarter of 1999, as compared to the same quarter in 1998, primarily due to increased generation levels at PSCo's power plants. 40 plants to serve retail customers. Purchased power expense increased $10.7decreased $11.9 million during the firstsecond quarter of 1999, as compared to the same quarter in 1998, primarily due to higher purchases related to wholesale marketing activities.a lower volume of purchases. 50 Gas Operations The following table details the change in revenues from gas sales and gas purchased for resale for the firstsecond quarter of 1999, as compared to the same period in 1998 (in thousands of dollars). Increase (Decrease) ------------------- Revenues from gas sales (including unbilled revenues) $(12,603)$ 6,978 Gas purchased for resale........................ (3,640)3,663 ------- Net decreaseincrease in gas sales margin.............. (8,963)3,315 Transportation revenues......................... 1,291747 ------- DecreaseIncrease in net gas margin.................... $(7,672)$ 4,062 ======= The following table compares gas Dth deliveries by major customer classes for the firstsecond quarter of 1999 and 1998. Millions of Dth Deliveries -------------------------- 1999 1998 % Change * ---- ---- ---------- Residential................... 37.9 38.9 (2.5)%19.0 18.0 5.3% Commercial.................... 17.1 18.4 (6.9)8.8 8.9 (1.3) ------- -------- Total Sales ............... 55.0 57.3 (3.9)Sales................. 27.8 26.9 3.1 Transportation................ 26.5 23.3 14.123.6 22.8 3.7 ------- -------- Total....................... 81.5 80.6 1.351.4 49.7 3.4 ======= ======== * Percentages are calculated using unrounded amounts Gas sales margin decreasedincreased during the firstsecond quarter of 1999, when compared to the firstsecond quarter of 1998, despite a 3.4% increase in customers, primarily due to a 3.9% decrease3.1% increase in retail gas sales which resultedresulting from mild winter weather, with temperatures 14% warmer than the prior year.customer growth of approximately 3.4%. Gas transportation revenues increased $1.3$0.7 million during the firstsecond quarter of 1999, compared to the firstsecond quarter of 1998, primarily due to higher deliveries. The increase in transport deliveries continues to be impacted by the shifting of various commercial customers to transport customers. PSCo has in place a GCA mechanism for natural gas sales, which recognizes the majority of the effects of changes in the cost of gas purchased for resale and adjusts revenues to reflect such changes in costs on a timely basis. As a result, the changes in revenues associated with these mechanisms during the firstsecond quarter of 1999, as compared to the firstsecond quarter of 1998, had little impact on net income. However, the fluctuations in gas sales impacts the amount of gas PSCo must purchase and, therefore, along with the increases and decreases in the per-unit cost of gas, affect total gas purchased for resale. The decrease in the quantity of gas purchased in the first quarter of 1999 was the primary contributor to the overall decrease in the total cost of gas purchased for resale. Non-Fuel Operating Expenses and Other Income and Deductions Depreciation and amortization increased $5.6$2.0 million during the firstsecond quarter of 1999, as compared to the firstsecond quarter of 1998, primarily due to the depreciation of property additions. IncomeTaxes other than income taxes decreasedincreased approximately $7.6$2.7 million during the firstsecond quarter of 1999, as compared to the second quarter of 1998, primarily due higher property tax accruals resulting from an increase in plant investment and higher valuation rates. Income taxes increased approximately $1.2 million during the second quarter of 1999, as compared to the second quarter of 1998, primarily due to higher pre-tax income, despite the recognition of additional Colorado state tax credits. 51 Other income and deductions decreased $1.1 million during the second quarter of 1999, as compared to the second quarter of 1998, primarily due to higher non-utility operating expenses attributed to affiliate billings and customer rebates. Interest charges and dividend requirements and redemption premium on preferred stock increased approximately $1.7 million during the second quarter of 1999, as compared to the second quarter of 1998. The increase is primarily attributable to costs to finance capital expenditures, including higher interest costs on short-term debt. Additionally, in May 1998, PSCo issued $194 million of Trust Preferred Originated Preferred Securities. The proceeds were used to redeem all of PSCo's outstanding preferred stock (totaling $181.8 million) in June 1998 (see Note 7. Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debentures in Item 1. FINANCIAL STATEMENTS). Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998 Earnings Available for Common Stock Earnings were $100.8 million for the first six months of 1999, as compared to $94.5 million for the first six months of 1998. An increase in electric margin resulting from strong customer growth of 2.6% was offset, in part, by a lower gas margin, resulting from unseasonably warm weather in the first quarter of 1999 and higher non-fuel operating expenses. Electric Operations The following table details the change in electric operating revenues and energy costs for the six months ended June 30, 1999, as compared to the same period in 1998 (in thousands of dollars). Increase (Decrease) ------------------- Electric operating revenues: Retail....................................... $10,130 Wholesale.................................... (1,526) Other (including unbilled revenues).......... 1,022 ------- Total revenues.............................. 9,626 Fuel used in generation....................... 6,564 Purchased power............................... (21,741) ------- Net increase in electric margin............. $24,803 ======= The following table compares electric Kwh sales by major customer classes for the six months ended June 30, 1999 and 1998. Millions of Kwh Sales --------------------- 1999 1998 % Change * ---- ---- ---------- Residential ..................... 3,499 3,356 4.2% Commercial and Industrial ....... 7,720 7,476 3.3 Public Authority ................ 108 87 24.7 ------ ------ Total Retail................... 11,327 10,919 3.7 Wholesale **..................... 2,467 2,903 (15.0) ------ ------ Total............................ 13,794 13,822 (0.2) ====== ====== * Percentages are calculated using unrounded amounts ** Excludes power trading activities 52 Electric margin increased during the first six months of 1999, when compared to the same period in 1998, primarily due to higher retail sales of 3.7% resulting primarily from customer growth of approximately 2.6% and the positive impact of shared savings under the ICA (approximately $5.2 million). Provisions for estimated customer refunds in connection with the earnings sharing in excess of 11% return on equity was $6.6 million in 1999 compared to $5.6 million in 1998 (see Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS). Fuel used in generation expense increased approximately $6.6 million during the first six months of 1999, as compared to the same period in 1998, primarily due to increased generation levels at PSCo's power plants to serve retail customers. Purchased power expense decreased $21.7 million during the first six months of 1999, as compared to the same period in 1998, primarily due to a lower volume of purchases. Gas Operations The following table details the change in revenues from gas sales and gas purchased for resale for the first six months of 1999, as compared to the same period in 1998 (in thousands of dollars). Increase (Decrease) ------------------- Revenues from gas sales (including unbilled revenues) $(5,626) Gas purchased for resale........................ 22 ------- Net decrease in gas sales margin.............. (5,648) Transportation revenues......................... 2,039 ------- Decrease in net gas margin.................... $(3,609) ======= The following table compares gas Dth deliveries by major customer classes for the first six months of 1999 and 1998. Millions of Dth Deliveries -------------------------- 1999 1998 % Change * ---- ---- ---------- Residential................... 56.8 56.9 - % Commercial.................... 25.9 27.3 (5.1) ------- -------- Total Sales................. 82.7 84.2 (1.7) Transportation................ 50.1 46.0 8.9 ------- -------- Total....................... 132.8 130.2 2.1 ======= ======== * Percentages are calculated using unrounded amounts Gas sales margin decreased during the first six months of 1999, when compared to the same period in 1998, primarily due to a 1.7% decrease in retail gas sales, resulting from the milder winter weather, with temperatures approximately 6.5% warmer than the prior year. Gas transportation revenues increased $2.0 million during the first six months of 1999, compared to the same period in 1998, primarily due to higher deliveries. The increase in transport deliveries continues to be impacted by the shifting of various commercial customers to transport customers. PSCo has in place a GCA mechanism for natural gas sales, which recognizes the majority of the effects of changes in the cost of gas purchased for resale and adjusts revenues to reflect such changes in costs on a timely basis. As a result, the changes in revenues associated with these mechanisms during the six months ended June 30, 1999, as compared to the same period in 1998, had little impact on net income. However, the fluctuations in 53 gas sales impacts the amount of gas PSCo must purchase and, therefore, along with the increases and decreases in the per-unit cost of gas, affect total gas purchased for resale. The decrease in the quantity of gas purchased in 1999 lowered costs, but was offset by the recovery of costs previously deferred through the GCA. Non-Fuel Operating Expenses and Other Income and Deductions Depreciation and amortization increased $7.7 million during the first six months of 1999, as compared to the same period in 1998, primarily due to the depreciation of property additions. Taxes other than income taxes increased approximately $6.2 million during the first six months of 1999, as compared to the same period in 1998, primarily due higher property tax accruals resulting from an increase in plant investment and higher valuation rates. Income taxes decreased approximately $6.4 million during the first six months of 1999, as compared to the same period in 1998, primarily due to lower pre-tax income, the recognition of additional Colorado state tax 41 credits and the recognition of the favorable tax impact of deducting certain prior year severance costs that were previously recognized as non-deductible. Other income and deductions decreased $2.1$3.3 million during the first quartersix months of 1999, as compared to the first quartersix months of 1998. On March 31, 1998, NCI and its subsidiaries were transferred through the sale by PSCo of all the outstanding common stock of NCI at net book value (approximately $292.6 million), to NC Enterprises, an intermediate holding company of NCE, and received as consideration a promissory note from NC Enterprises (see Note 3. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). The first quartersix months of 1999 includesinclude approximately $3.2$6.7 million of interest income on the promissory note, excluding income taxes, compared to $5.1 million of interest income in 1998 and the recognition of equity earnings associated with PSCo's investment in Yorkshire Power of approximately $3.4 million in the first quarter of 1998.1998, prior to the sale. In addition, other non-utility income decreased $1.4$1.6 million. Interest charges and dividend requirements and redemption premiums on preferred stock increased approximately $2.2$3.9 million during the first quartersix months of 1999, as compared to the first quartersix months of 1998. The increase is primarily attributable to costs to finance capital expenditures, including higher interest costs on long-term debt resulting from the April 1998 issuance of $250 million of long-term debt. Additionally, in May 1998, PSCo issued $194 million of Trust Preferred Originated Preferred Securities. The proceeds were used to redeem all of PSCo's outstanding preferred stock (totaling $181.8 million) in June 1998 (see Note 7. Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debentures in Item 1. FINANCIAL STATEMENTS). Commitments and Contingencies See Note 5. Commitments and Contingencies in Item 1. FINANCIAL STATEMENTS. Financing Activities Discussion relating to PSCo's financing activities is covered under "Financing Activities" in NCE's Management's Discussion and Analysis of Financial Condition and Results of Operations. 4254 SPS's Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30, 1998 Earnings Available for Common Stock Earnings available for common stock increased $5.3were $22.8 million during the firstsecond quarter of 1999 as compared to $36.9 million for the same quarter in 1998. Earnings increaseddecreased primarily due to an increase in electric marginthe effects of lower sales resulting from mild weather during 1999 and the absenceimpact of SPS/PSCo merger and business integration expensesa FERC rate case settlement recognized in 1999.1998. Operating Revenues Electric Operations Substantially all of SPS's operating revenues result from the sale of electric energy. The principal factors impacting revenues are the amount and price of energy sold. The following table details the change in electric operating revenues and energy costs for the three months ended March 31,June 30, 1999, as compared to the same period in 1998 (thousands of dollars). Increase (Decrease) ------------------- Electric operating revenues: Retail.............................. $(10,875)$(22,337) Wholesale........................... (2,385)(13,551) Other (including unbilled revenues). 16,080 -------(4,004) -------- Total revenues.................... 2,820(39,892) Fuel used in generation.............. (8,237)(23,750) Purchased power...................... 2,4644,325 ------- Net increasedecrease in electric margin... $ 8,593 =======$(20,467) ======== The following table compares electric Kwh sales by major customer classes for the three months ended March 31,June 30, 1999 and 1998. Millions of Kwh Sales --------------------- 1999 1998 % Change* ----------- ---- --------- Residential ............ 717 764 (6.2)629 667 (5.7)% Commercial ............ 669 663 0.9690 712 (3.1) Industrial ............ 1,905 2,014 (5.4)2,033 2,098 (3.1) Public Authority ....... 133 132 0.3141 156 (9.6) ----- ----- Total Retail.......... 3,424 3,573 (4.2)3,493 3,633 (3.9) Wholesale............... 1,333 1,243 7.31,986 2,289 (13.2) ----- ----- Total................... 4,757 4,816 (1.2)5,479 5,922 (7.5) ===== ===== * Percentages are calculated using unrounded amounts. Electric operating revenues increased $2.8decreased $39.9 million or 1.4%15.1% during the firstsecond quarter in 1999, when compared to the same period in 1998, primarily due to higher unbilledlower retail and wholesale revenues offset, in part, by(total Kwh sales decreased 7.5%), lower revenues related to the recovery of fuel costs totaling $12.6 million. A portion of the(totaling approximately $24.7 million) and a $7.7 million settlement for a 1985 FERC rate case settlement recorded in 1998. The decrease in Kwh sales resulted from a changethe mild wet weather in the billing cyclesecond quarter of various customers,1999, which is offset by the higherreduced loads for air conditioning and irrigation and a lower level of unbilled revenues. In addition, the Company has made additional non-firm wholesale sales as a result of the Company's lower fuel costs.oil well pumping sales. Fuel used in generation expense decreased $8.2$23.8 million or 9.1%19.5% during the firstsecond quarter of 1999, when compared to the same period in 1998, primarily due to lower coal and gas costs for the quarter offset, in part, by a slight increasean 8.5% decrease in generation levels required to serve retail and wholesale customers.customers and lower coal costs for the quarter. The decrease in coal costs is primarily 55 due to negotiations with a new supplier in mid-1998 and lower transportation costs. CostThe cost of natural 43 gas used in generation decreased $3.8$3.9 million during the firstsecond quarter of 1999 primarily due to lower gas prices offset, in part, by increased gas generation at Cunningham Station during the current period.generation. Purchased power increased $2.5$4.3 million during the firstsecond quarter of 1999, when compared to the same period in 1998, due to higher spot market prices and an increase in wholesale purchases.purchases and capacity costs. SPS generates substantially all of its power for sale to its firm retail and wholesale customers and sells non-firm energy as the market demands. Similarly, SPS will purchase low-cost non-firm energy when available and as needed to meet customer requirements. SPS has fuel cost adjustment mechanisms which recognize the majority of the effects of changes in fuel used in generation and purchased power costs and allow recovery of such costs on a timely basis. As a result, the changes in revenues associated with these mechanisms during the firstsecond quarter of 1999, when compared to the firstsecond quarter of 1998, had little impact on net income. (See discussion on "SPS Electric Cost Adjustment Mechanisms" Note 4. Regulatory Matters - in Item 1. FINANCIAL STATEMENTS). Non-Fuel Operating Expenses Other operating and maintenance expenses decreased $0.6$1.2 million during the second quarter of 1999, as compared to the same period in 1998, primarily due to lower administrative and general expenses and other reductions resulting from the continued deployment of cost saving programs instituted as part of the PSCo/SPS Merger.Merger offset, in part, by higher maintenance costs. Taxes other than income taxes increased $1.3$1.2 million during the firstsecond quarter of 1999, as compared to the same period in 1998, primarily due to higher property and franchise taxes. Income taxes increased $3.1decreased $8.2 million during the firstsecond quarter of 1999, as compared to the same period in 1998, primarily due to the effect of lower pre-tax income. The effective income tax rates for both the second quarter of 1999 and 1998 were 37.1%. Interest Charges Interest charges increased $1.4 million during the second quarter of 1999, as compared to the same period in 1998, primarily due to higher long-term debt costs, resulting from the issuance of $100 million of new debt in March 1999 offset, in part, by a decrease in the allowance for funds used during construction of approximately $0.9 million resulting from lower construction activities. The proceeds from the long-term debt issuance were initially for the repayment of certain short-term debt, pending the retirement of $90 million in bonds due December 1, 1999, thus lowering other interest expense ($1.6 million). Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998 Earnings Available for Common Stock Earnings available for common stock were $46.2 million during the six months ended June 30, 1999 compared to $55.1 million for the same period in 1998. Earnings decreased primarily due to the lower earnings recognized during the second quarter of 1999 which resulted from the effects of mild weather in 1999 and a FERC rate case settlement in 1998. 56 Operating Revenues Electric Operations Substantially all of SPS's operating revenues result from the sale of electric energy. The principal factors impacting revenues are the amount and price of energy sold. The following table details the change in electric operating revenues and energy costs for the six months ended June 30,1999, as compared to the same period in 1998 (thousands of dollars). Increase (Decrease) ------------------- Electric operating revenues: Retail.............................. $(33,212) Wholesale........................... (15,936) Other (including unbilled revenues). 12,076 ------- Total revenues.................... (37,072) Fuel used in generation.............. (31,987) Purchased power...................... 6,789 ------- Net decrease in electric margin... $(11,874) ======== The following table compares electric Kwh sales by major customer classes for the six months ended June 30, 1999 and 1998. Millions of Kwh Sales --------------------- 1999 1998 % Change* ------ ----- --------- Residential ............ 1,346 1,431 (5.9)% Commercial ............ 1,359 1,375 (1.2) Industrial ............ 3,938 4,112 (4.2) Public Authority ....... 274 289 (5.2) ----- ----- Total Retail.......... 6,917 7,207 (4.0) Wholesale............... 3,319 3,532 (6.0) ----- ----- Total................... 10,236 10,739 (4.7) ====== ====== * Percentages are calculated using unrounded amounts. Electric operating revenues decreased $37.1 million or 8.0% during the six months ended June 30, 1999, when compared to the same period in 1998, primarily due to lower retail and wholesale revenues resulting from a decrease in Kwh sales (4.7%) and lower revenues related to the recovery of fuel costs (totaling approximately $37 million) and the $7.7 million settlement for a 1985 FERC rate case settlement recorded in 1998. The decrease in Kwh sales was primarily the result of the mild wet weather, which occurred in the second quarter of 1999 and a decrease in oil well pumping sales. Additionally a portion of the decrease in Kwh sales resulted from a change in the billing cycle of various customers, which is offset by the higher level of unbilled revenues. Fuel used in generation expense decreased $32.0 million or 15.1% during the six months ended June 30, 1999, when compared to the same period in 1998, primarily due to lower coal and gas costs for the current period and a 3.8% decrease in generation levels required to serve retail and wholesale customers. The decrease in coal costs is primarily due to negotiations with a new supplier in mid-1998 and lower transportation costs. Cost of natural gas used in generation decreased $2.7 million during the six months ended June 30, 1999 primarily due to lower gas prices offset, in part, by increased costs related to higher generation at Cunningham Station during the current period. Purchased power increased $6.8 million during the six months ended June 30, 1999, when compared to the same period in 1998, due to an increase in wholesale purchases and capacity costs. SPS generates substantially all of its power for sale to its firm retail and wholesale customers and sells non-firm energy as the 57 market demands. Similarly, SPS will purchase low-cost non-firm energy when available and as needed to meet customer requirements. SPS has fuel cost adjustment mechanisms which recognize the majority of the effects of changes in fuel used in generation and purchased power costs and allow recovery of such costs on a timely basis. As a result, the changes in revenues associated with these mechanisms during the six months ended June 30, 1999, when compared to the six months ended June 30, 1998, had little impact on net income. (See discussion on "SPS Electric Cost Adjustment Mechanisms" Note 4. Regulatory Matters - in Item 1. FINANCIAL STATEMENTS). Non-Fuel Operating Expenses Other operating and maintenance expenses decreased $1.8 million during the six months ended June 30, 1999, when compared to the same period in 1998, primarily due to lower general and administrative expenses, and the continued deployment of cost saving programs instituted as part of the PSCo/SPS Merger. These decreases were offset, in part, by higher maintenance costs. Taxes other than income taxes increased $2.5 million during the six months ended June 30, 1999, as compared to the same period in 1998, primarily due to higher property and franchise taxes. Income taxes decreased $5.1 million during the six months ended June 30, 1999, as compared to the same period in 1998, primarily due to the effect of lower pre-tax income. The effective income tax rates for the first quarter ofsix months ended June 30, 1999 and 1998 were 38.1%37.6% and 38.2%37.4%, respectively. Other Income and Deductions - Net Other income and deductions-net increased $1.0$1.1 million during the first quarter ofsix months ended June 30, 1999, as compared to the same period in 1998, primarily due to the absence of PSCo/SPS Merger and business integration expenses in 1999 ($1.2 million expensed in 1998). Interest Charges Other interest expense decreased $1.0Interest charges increased $1.1 million during the first quarter ofsix months ended June 30, 1999, as compared to the same period in 1998, primarily due to lower short-term borrowinghigher long-term debt costs, resulting from lower interest rates. This decrease was offset bythe issuance of $100 million in new debt in March of 1999 and a decrease in the allowance for funds used during construction of approximately $1.1$2.0 million resulting from lower construction activities. The new debt issuance was used in progress balances. Financial Condition Discussionspart to pay down short-term borrowing, thus lowering other interest expense ($2.6 million). Commitments and Contingencies See Note 5. Commitments and Contingencies in Item 1. FINANCIAL STATEMENTS. Financing Activities Discussion relating to material changes in SPS's financial condition arefinancing activities is covered under "Liquidity and Capital Resources" and "Financing Activities" in NCE's Management's Discussion and Analysis of Financial Condition and Results of Operations. 4458 PART II - OTHER INFORMATION Item 1. Legal Proceedings Part 1. See Note 5. Commitments and Contingencies in Item 1, Part 1. Item 6. Exhibits4. Submission of Matters to a Vote of Security Holders (a) The 1998 Annual Meeting of Shareholders of the Company was held on May 11, 1999. Three matters were voted upon at the above meeting: 1) the election of four class II directors; 2) the appointment of Arthur Andersen LLP as the Company's independent public accountants for the 1999 calendar year; 3) a shareholder proposal to provide for the elimination of a classified Board of Directors. With respect to the election of directors, the votes were as follows: Giles M. Forbess 97,960,186 shares for 2,481,044 shares withheld Bill D. Helton 97,924,242 shares for 2,516,988 shares withheld Albert F. Moreno 97,368,363 shares for 3,072,867 shares withheld J. Michael Powers 97,951,525 shares for 2,489,705 shares withheld With respect to the appointment of Arthur Andersen LLP as the Company's independent public accountants, the vote was: 98,249,664 shares for; 1,428,762 shares against; 798,463 shares abstain. The proposal passed. With respect to the shareholder proposal regarding the elimination of a classified Board of Directors, the vote was : 39,734,874 shares for; 44,214,791 shares against; 3,094,394 shares abstain. The proposal did not pass. There were zero broker non-votes with respect to the election of directors and Reportsthe appointment of Arthur Andersen LLP. Broker non-votes had no effect on Form 8-K (a) Exhibits 2(a)1* NCE/NSPthe outcome of the shareholder proposal. (b) A special meeting of the shareholders of the Company was held on June 28, 1999. One matter was voted upon at the above special meeting: to approve the Agreement and Plan of Merger, dated March 24, 1999, (Formby and between the Company and NSP. With respect to the approval of the Agreement and Plan of Merger, the vote was: 89,813,018 shares for; 5,089,763 shares against; 1,297,284 shares abstain. The proposal passed. Item 6. Exhibits and Reports on Form 8-K March 24, 1999, Exhibit 2.1). 3(a)1* NCE Restated Articles of Incorporation dated December 8, 1995 (Form S-4, Exhibit 3(a)). 3(a)2* PSCO Amended and Restated Articles of Incorporation dated July 10, 1998 (Form 10-K, December 31, 1998, Exhibit 3(a)1). 3(a)3* SPS Amended and Restated Articles of Incorporation dated September 30, 1997 (Form 10-K, December 31, 1997, Exhibit 3(a)2). 3(b)1* NCE Restated By-laws dated December 15, 1998 (Form 10-K, December 31, 1998, Exhibit 3(b)1). 3(b)2* PSCO By-laws dated November 20, 1997 (Form 10-K, December 31, 1997, Exhibit 3(b)1). 3(b)3* SPS By-laws dated September 29, 1997 (Form 10-K, December 31, 1997, Exhibit 3(b)2). 10(a) Senior Executive Severance Policy, effective March 24, 1999, between New Century Energies, Inc. and Senior Executives. 10(b) The employment agreement, dated March 24, 1999, among Northern States Power Company, New Century Energies, Inc., and Wayne H. Brunetti.(a) Exhibits 12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges for PSCo is set forth at page 4963 herein. 12(b) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges for SPS is set forth at page 5064 herein. 15(a) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 5165 herein for NCE. 15(b) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 5266 herein for PSCo. 15(c) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 5367 herein for SPS. 59 27(a) Financial Data Schedule for NCE as of March 31,June 30, 1999. 27(b) Financial Data Schedule for PSCo as of March 31,June 30, 1999. 27(c) Financial Data Schedule for SPS as of March 31,June 30, 1999. 99 Unaudited Pro Forma Combined Condensed Financial Information of New Century Energies, Inc. and Northern States Power Company. * Previously filed as indicated and incorporated herein by reference. 45 (b)(c) Reports on Form 8-K The following reports on Form 8-K were filed since the beginning of the firstsecond quarter of 1999:1999. - - A combined report on Form 8-K dated February 23,June 28, 1999, was filed separately by NCE, PSCo and SPS on February 23,June 28, 1999. The itemitems reported waswere Item 5. Other Events: Filing of audited financial statements of NCESpecial shareholder meetings were held on June 28, 1999, which approved the NCE/NSP Merger; and its subsidiaries, PSCoItem 7. Financial Statements and its subsidiaries and SPS forExhibits: Press release filed as Exhibit 99 providing additional information about the year ended December 31, 1998.merger to form Xcel Energy Inc. - - A report on Form 8-K dated February 25,July 13, 1999, was filed by SPSPSCo on February 25,July 22, 1999. The itemitems reported waswere Item 5. Other Events: Filing of consent of Arthur Andersen LLP and Letter on unaudited financial information of Arthur Andersen LLP. - - A report on Form 8-K dated February 25, 1999, was filed by SPS on March 9, 1999. The item reported was item 5. Other Events: Filing of the Purchase Agreement, the Indenture and the First Supplemental IndentureDocuments related to the saleissuance of $200,000,000 aggregate principal amount of Series A Senior Notes. - - A report on Form 8-K dated March 24, 1999, was filed by NCE on March 25, 1999. The item reported wasNotes and Item 5. Other Events: Filing of an Agreement7. Financial Statements and Plan of Merger dated March 24, 1999, between New Century Energies,Inc. and Northern States Power Company and a joint press release announcing the proposed merger. - - A report on Form 8-K dated March 26, 1999, was filed by NCE on March 29, 1999. The item reported was Item 5. Other Events: Filing of the slide presentation for a joint meeting New Century Energies and Northern States Power Company held with financial analysts. 46Exhibits. 60 NEW CENTURY ENERGIES, INC. SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, New Century Energies, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 13th16th day of May,August, 1999. NEW CENTURY ENERGIES, INC. By /s/ R. C. Kelly --------------------------------- R. C. Kelly Executive Vice President and Chief Financial Officer PUBLIC SERVICE COMPANY OF COLORADO SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Public Service Company of Colorado has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 13th16th day of May,August, 1999. PUBLIC SERVICE COMPANY OF COLORADO By /s/Brian P. Jackson --------------------------------- Brian P. Jackson Senior Vice President, Finance and Administrative Services, Chief Financial Officer and Treasurer SOUTHWESTERN PUBLIC SERVICE COMPANY SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Southwestern Public Service Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 13th16th day of May,August, 1999. SOUTHWESTERN PUBLIC SERVICE COMPANY By /s/Brian P. Jackson --------------------------------- Brian P. Jackson Senior Vice President, Finance and Administrative Services, Chief Financial Officer and Treasurer 4761 EXHIBIT INDEX 2(a)1* NCE/NSP Agreement and Plan of Merger dated March 24, 1999 (Form 8-K, March 24, 1999, Exhibit 2.1). 3(a)1* NCE Restated Articles of Incorporation dated December 8, 1995 (Form S-4, Exhibit 3(a)). 3(a)2* PSCOPSCo Amended and Restated Articles of Incorporation dated July 10, 1998 (Form 10-K, December 31, 1998, Exhibit 3(a)1). 3(a)3* SPS Amended and Restated Articles of Incorporation dated September 30, 1997 (Form 10-K, December 31, 1997, Exhibit 3(a)2). 3(b)1* NCE Restated By-laws dated December 15, 199815,1998 (Form 10-K, December 31, 1998, Exhibit 3(b)1). 3(b)2* PSCOPSCo By-laws dated November 20, 1997 (Form 10-K, December 31, 1997, Exhibit 3(b)1). 3(b)3* SPS By-laws dated September 29, 1997 (Form 10-K, December 31, 1997, Exhibit 3(b)2). 10(a) Senior Executive Severance Policy, effective March 24, 1999, between the Company and Senior Executives. 10(b) The employment agreement, dated March 24, 1999, among Northern States Power Company., New Century Energies, Inc., and Wayne H. Brunetti. 12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges for PSCo is set forth at page 4963 herein. 12(b) Computation of Ratio of Consolidated Earnings to Consolidated Fixed Charges for SPS is set forth at page 5064 herein. 15(a) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 5165 herein for NCE. 15(b) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 5266 herein for PSCo. 15(c) Letter from Arthur Andersen LLP regarding unaudited interim information is set forth at page 5367 herein for SPS. 27(a) Financial Data Schedule for NCE as of March 31,June 30, 1999. 27(b) Financial Data Schedule for PSCo as of March 31,June 30, 1999. 27(c) Financial Data Schedule for SPS as of March 31,June 30, 1999. 99 Unaudited Pro Forma Combined Condensed Financial Information of New Century Energies, Inc. and Northern States Power Company. * Previously filed as indicated and incorporated herein by reference. 4862 EXHIBIT 12(a) PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO CONSOLIDATED FIXED CHARGES (not covered by Report of Independent Public Accountants) ThreeSix Months Ended March 31,June 30, 1999 1998 ---- ---- (Thousands of Dollars, except ratios) Fixed charges: Interest on long-term debt................... $ 28,800 $27,60057,627 $ 57,271 Interest on borrowings against corporate-owned life insurance contracts.................. 13,704 11,67128,268 24,605 Other interest............................... 5,220 5,65311,961 10,152 Amortization of debt discount and expense less premium .................................. 1,083 9782,166 1,995 Interest component of rental expense......... 2,339 2,0614,591 4,139 Dividends on PSCo obligated mandatorily redeemable preferred securities........... 3,800 - -------7,600 2,111 ------ Total ..................................... $ 54,946 $ 47,963------ Total...................................... $112,213 $100,273 ======== ======== Earnings (before fixed charges and taxes on income): Net income................................... $100,759 $ 65,939 $ 68,89799,805 Fixed charges as above....................... 54,946 47,963112,212 100,273 Provisions for Federal and state taxes on income, net of investment tax credit amortization.... 29,214 36,81843,982 50,368 ------ ------ Total...................................... $150,099 $153,678$256,953 $250,446 ======== ======== Ratio of earnings to fixed charges.............. 2.73 3.202.29 2.50 ====== ====== 63 EXHIBIT 12(b) SOUTHWESTERN PUBLIC SERVICE COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO CONSOLIDATED FIXED CHARGES (not covered by Report of Independent Public Accountants) ThreeSix Months Ended March 31,June 30, 1999 1998 ---- ---- (Thousands of Dollars, except ratios) Fixed charges: Interest on long-term debt................... $10,643 $10,943$23,714 $ 21,980 Other interest............................... 1,590 2,5792,549 5,112 Amortization of debt discount and expense less premium .................................. 552 5611,121 1,121 Interest component of rental expense......... 191 202382 404 Dividends on SPS obligated mandatorily redeemable preferred securities...................... 1,963 1,9633,925 3,925 ------ ------ Total ..................................... $14,939 $16,248Total...................................... $31,691 $ 32,542 ======= =============== Earnings (before fixed charges and taxes on income): Net income................................... $23,391 $18,139$ 46,226 $ 55,056 Fixed charges as above....................... 14,939 16,24831,691 32,542 Provisions for Federal and state taxes on income, net of investment tax credit amortization.... ......................... 14,365 11,22527,848 32,954 ------ ------ Total...................................... $52,695 $45,612 ======= =======$105,765 $120,552 ======== ======== Ratio of earnings to fixed charges.............. 3.53 2.81 ====== ====== 503.34 3.70 ==== ==== 64 EXHIBIT 15(a) MayAugust 13, 1999 New Century Energies, Inc.: We are aware that New Century Energies, Inc. has incorporated by reference in its Registration Statement (Form S-8, File No. 333-28639) pertaining to the Omnibus Incentive Plan; its Registration Statement (Form S-3, File No. 333-28637) pertaining to the Dividend Reinvestment and Cash Payment Plan andPlan; its Registration Statements (Form S-3, File Nos. 333-40361 and 333-64067) pertaining to the registration of NCE Common Stock;Stock and its Registration Statement (Form S-8, File No. 333-58117) pertaining to the NCE Employee Investment Plan and NCE Employees' Savings and Stock Ownership Plan and its Form 10-Q for the quarter ended March 31,June 30, 1999, which includes our report dated MayAugust 13, 1999, covering the unaudited consolidated condensed financial statements contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our Firm or a report prepared or certified by our Firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP 5165 EXHIBIT 15(b) MayAugust 13, 1999 Public Service Company of Colorado: We are aware that Public Service Company of Colorado has incorporated by reference in its Registration Statement (Form S-3, File No. 33-62233) pertaining to the Automatic Dividend Reinvestment and Common Stock Purchase Plan; its Registration Statement (Form S-3, File No. 33-37431) as amended on December 4, 1990, pertaining to the shelf registration of Public Service Company of Colorado's First Mortgage Bonds; its Registration Statement (Form S-8, File No. 33-55432) pertaining to the Omnibus Incentive Plan; its Registration Statement (Form S-3, File No. 33-51167) pertaining to the shelf registration of Public Service Company of Colorado's First Collateral Trust Bonds; its Registration Statement (Form S-3, File No. 33-54877) pertaining to the shelf registration of Public Service Company of Colorado's First Collateral Trust Bonds and Cumulative Preferred Stock and its Registration Statement (Form S-3, File No. 333-81791) pertaining to the shelf registration of Public Service Company of Colorado's Senior Debt Securities its Form 10-Q for the quarter ended March 31,June 30, 1999, which includes our report dated MayAugust 13, 1999, covering the unaudited consolidated condensed financial statements contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our Firm or a report prepared or certified by our Firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP 5266 EXHIBIT 15(c) MayAugust 13, 1999 Southwestern Public Service Company: We are aware that Southwestern Public Service Company has incorporated by reference in its Registration Statement (Form S-3, File No. 333-05199) pertaining to Southwestern Public Service Company's Preferred Stock and Debt Securities; its Registration Statement (Form S-8, File No. 33-27452) pertaining to Southwestern Public Service Company's 1989 Stock Incentive Plan and its Registration Statement (Form S-8, File No. 33-57869) pertaining to Southwestern Public Service Company's Employee Investment Plan and Non-Qualified Salary Deferral Plan and its Form 10-Q for the quarter ended March 31, 1998,June 30, 1999, which includes our report dated MayAugust 13, 1999, covering the unaudited condensed financial statements contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our Firm or a report prepared or certified by our Firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP 53 EXHIBIT 99 UNAUDITED PROFORMA COMBINED CONDENSED FINANCIAL INFORMATION The following unaudited pro forma combined condensed balance sheet at March 31, 1999 gives effect to the NCE/NSP Merger as if it had occurred at March 31, 1999. The unaudited pro forma combined condensed statements of income for the three months ended March 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1998 give effect to the NCE/NSP Merger as if it had occurred on January 1, 1996. These statements are prepared on the basis of accounting as required under a pooling of interests and do not reflect any cost savings anticipated by Management as a result of the NCE/NSP Merger. Accordingly, the pro forma information is not necessarily indicative of the financial position or results of operations that would have occurred had the NCE/NSP Merger been consummated for the periods for which it is given effect, nor is it necessarily indicative of future operating results or financial condition. 54 Unaudited Pro Forma Combined Condensed Statement of Income Reflecting Completion of the NCE/NSP Merger Three Months ended March 31, 1999 (Thousands of Dollars, Except per Share Data)
Northern New Century Reporting States Power Energies Adjustments Pro Forma Pro Forma (as Reported) (as Reported) (Note 2) Adjustments Combined ------------- ------------- -------- ----------- -------- Operating revenues: Electric................. $556,856 $628,706 $(14,011) $ $1,171,551 Gas...................... 186,327 347,688 (88,304) 445,711 Nonregulated and other revenues - 15,029 164,750 179,779 Earnings from equity investments - - 23,842 23,842 ------ ----- ------- ------ ------ Total operating revenues 743,183 991,423 86,277 1,820,883 Operating expenses: Electric fuel and purchased power 168,028 295,269 (13,627) 449,670 Cost of gas sold and transported 112,178 261,631 (83,495) 290,314 Other operation and maintenance 193,918 150,109 (20,683) 323,344 Depreciation and amortization 87,485 69,502 (2,124) 154,863 Taxes other than income taxes 57,632 37,620 (592) 94,660 Income taxes - utility... 36,288 - (36,288) - Nonregulated operating expenses - - 199,147 199,147 ------ ------- ------- ------ ------- Total operating expenses 655,529 814,131 42,338 1,511,998 Operating income............ 87,654 177,292 43,939 308,885 Other income (expense): Income from nonregulated businesses before interest and taxes...... (7,353) - 7,353 - Equity earnings from unconsolidated subsidiaries............ - 15,811 (15,811) - Other income (deductions) - net (1,836) (3,542) 807 (4,571) Income taxes on nonregulated and nonoperating items - benefit...... 16,142 - (16,142) - -------- ------ ------- ------- ------ Total other income (expense) 6,953 12,269 (23,793) (4,571) Financing costs Interest charges......... 38,348 45,383 - 83,731 Distributions on mandatorily redeemable preferred securities of subsidiary trusts ............. 3,938 5,763 - 9,701 ----- ----- ------ ------ ----- Total financing costs............ 42,286 51,146 - 93,432 Income before income taxes............ 52,321 138,415 20,146 210,882 Income taxes.......................... - 37,115 20,146 57,261 ------ ------ ------- ------- ------ Net income............................ 52,321 101,300 - 153,621 Preferred dividends & redemption premiums of NSP..................... 1,060 - - 1,060 ------ ------ ------- ------- ----- Earnings available for common shareholders ....................... $51,261 $101,300 $ - $ - $ 152,561 ======= ======== ======= ======= ========== Average common shares outstanding (Note 1) ........................... 152,392 114,681 63,075 330,148 Average common and potentially diluted shares outstanding (Note 1)........ 152,553 114,743 63,109 330,405 Basic and diluted earnings per share $0.34 $0.88 $0.46 ===== ===== =====
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements. 55 Unaudited Pro Forma Combined Condensed Statement of Income Reflecting Completion of the NCE/NSP Merger Three Months ended March 31, 1998 (Thousands of Dollars, Except per Share Data)
Northern New Century Reporting States Power Energies Adjustments Pro Forma Pro Forma (as Reported) (as Reported) (Note 2) Adjustments Combined ------------- ------------- -------- ----------- -------- Operating revenues: Electric......................... $521,571 $599,988 $(15,364) $ $1,106,195 Gas.............................. 179,831 319,707 (48,476) 451,062 Nonregulated and other revenues . - 19,809 106,463 126,272 Earnings from equity investments - - 19,080 19,080 ------ ------- ------- ------ ------ Total operating revenues 701,402 939,504 61,703 1,702,609 Operating expenses: Electric fuel and purchased power 148,162 289,783 (15,142) 422,803 Cost of gas sold and transported 113,582 224,912 (43,348) 295,146 Other operation and maintenance . 189,990 147,681 (18,076) 319,595 Depreciation and amortization ... 84,100 62,418 (1,466) 145,052 Taxes other than income taxes ... 55,960 32,873 (595) 88,238 Income taxes - utility........... 30,558 - (30,558) - Nonregulated operating expenses - - 131,413 131,143 ------ ------- ------- ------ ------- Total operating expenses 622,352 757,667 22,228 1,402,247 Operating income..................... 79,050 181,837 39,475 300,362 Other income (expense): Income from nonregulated businesses before interest and taxes......... 4,380 - (4,380) - Equity earnings from unconsolidated subsidiaries...................... - 3,752 (3,752) - Other income (deductions) - net ... 2,450 (2,968) (785) (1,303) Income taxes on nonregulated and nonoperating items - benefit...... 14,026 - (14,026) - ------ ------ ------- ------- ------ Total other income (expense) 20,856 784 (22,943) (1,303) Financing costs: Interest charges.................... 38,851 44,461 - 83,312 Distributions on mandatorily redeemable preferred securities of subsidiary trusts .............. 3,938 1,963 - 5,901 Dividends & redemption premiums on preferred stock of subsidiaries.... - 2,929 - 2,929 ------ ------ ------- ------- ------ Total financing costs............ 42,789 49,353 - 92,142 Income before income taxes............ 57,117 133,268 16,532 206,917 Income taxes.......................... - 47,119 16,532 63,651 ------ ------ ------- ------- ------ Net income............................ 57,117 86,149 - 143,266 Preferred dividends & redemption premiums of NSP..................... 2,367 - - 2,367 ----- ------ ------- ------- ----- Earnings available for common shareholders ....................... $54,750 $86,149 $ - $ - $140,889 ======= ======= ======= ======= ======== Average common shares outstanding (Note 1) ............................. 149,214 110,973 61,035 321,222 Average common and potentially diluted shares outstanding (Note 1)........... 149,467 111,134 61,124 321,725 Basic and diluted earnings per share .. $0.37 $0.78 $0.44 ===== ===== =====
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements. 56 Unaudited Pro Forma Combined Condensed Statement of Income Reflecting Completion of the NCE/NSP Merger Year ended December 31, 1998 (Thousands of Dollars, Except per Share Data)
Northern New Century Reporting States Power Energies Adjustments Pro Forma Pro Forma (as Reported) (as Reported) (Note 2) Adjustments Combined ------------- ------------- -------- ----------- -------- Operating revenues: Electric........................ $2,362,351 $2,697,486 $ (74,518) $ $4,985,319 Gas............................. 456,823 841,276 (188,095) 1,110,004 Nonregulated and other revenues - 72,143 444,843 516,986 Earnings from equity investments - - 115,985 115,985 ------ ------- ------- ------- ------- Total operating revenues 2,819,174 3,610,905 298,215 6,728,294 Operating expenses: Electric fuel and purchased power 689,275 1,357,198 (72,709) 1,973,764 Cost of gas sold and transported . 267,050 562,583 (170,140) 659,493 Other operation and maintenance .. 794,332 637,743 (90,607) 1,341,468 Depreciation and amortization .... 338,225 268,743 (8,055) 598,913 Taxes other than income taxes .... 220,620 134,137 (2,175) 352,582 Income taxes - utility............ 145,383 - (145,383) - Nonregulated operating expenses - - 592,106 592,106 ------- --------- ------- ------- ------- Total operating expenses 2,454,885 2,960,404 103,037 5,518,326 Operating income..................... 364,289 650,501 195,178 1,209,968 Other income (expense): Income from nonregulated businesses before interest and taxes......... 51,171 - (51,171) - Equity earnings from unconsolidated subsidiaries...................... - 36,101 (36,101) - Other income (deductions) - net 4,812 (4,250) 37,477 38,039 Income taxes on nonregulated and nonoperating items - benefit...... 40,588 - (40,588) - ------ ------ ------- ------- ------ Total other income (expense) 96,571 31,851 (90,383) 38,039 Financing costs: Interest charges................... 162,737 181,906 - 344,643 Distributions on mandatorily redeemable preferred securities of subsidiary trusts ............. 15,750 17,561 - 33,311 Dividends & redemption premiums on preferred stock of subsidiaries... - 5,332 - 5,332 ------ ------ ------- ------- ------ Total financing costs............ 178,487 204,799 - 383,286 Income before income taxes............ 282,373 477,553 104,795 864,721 Income taxes.......................... - 135,596 104,795 240,391 -------- ------- ------- ------- ------- Net income............................ 282,373 341,957 - 624,330 Preferred dividends & redemption premiums of NSP..................... 5,548 - - 5,548 -------- ------ ------- ------- ------ Earnings available for common shareholders ....................... $ 276,825 $341,957 $ - $ - $ 618,782 ========= ======== ======= ======= ========== Average common shares outstanding (Note 1) ............................ 150,502 111,859 61,522 323,883 Average common and potentially diluted shares outstanding (Note 1). 150,743 112,008 61,604 324,355 Basic earnings per share.............. $1.84 $3.06 $1.91 ===== ===== ===== Diluted earnings per share............ $1.84 $3.05 $1.91 ===== ===== =====
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements. 57 Unaudited Pro Forma Combined Condensed Statement of Income Reflecting Completion of the NCE/NSP Merger Year ended December 31, 1997 (Thousands of Dollars, Except per Share Data)
Northern New Century Reporting States Power Energies Adjustments Pro Forma Pro Forma (as Reported) (as Reported) (Note 2) Adjustments Combined ------------- ------------- -------- ----------- -------- Operating revenues: Electric................. $2,218,550 $2,473,359 $ (22,861) $ $4,669,048 Gas...................... 515,196 816,596 (179,257) 1,152,535 Nonregulated and other revenues - 52,570 425,689 478,259 Earnings from equity investments - - 52,766 52,766 ------ ------- ------- ------ ------ Total operating revenues 2,733,746 3,342,525 276,337 6,352,608 Operating expenses: Electric fuel and purchased power 596,238 1,203,292 (21,938) 1,777,592 Cost of gas sold and transported . 331,296 543,291 (167,902) 706,685 Other operation and maintenance .. 745,828 594,359 (57,268) 1,282,919 Depreciation and amortization .... 325,880 243,078 (9,414) 559,544 Taxes other than income taxes .... 227,893 129,280 (2,007) 355,166 Income taxes - utility... ........ 144,855 - (144,855) - Nonregulated operating expenses .. - - 525,668 525,668 ------ ----- ------- ----- ------ Total operating expenses 2,371,990 2,713,300 122,284 5,207,574 Operating income..................... 361,756 629,225 154,053 1,145,034 Other income (expense): Income from nonregulated businesses before interest and taxes........ 12,078 - (12,078) - Equity earnings from unconsolidated subsidiaries..................... - 34,166 (34,166) - Merger costs...................... (29,005) (34,088) - (63,093) Other income (deductions) 3,515 (27,267) 37,046 13,294 Income taxes on nonregulated and nonoperating items - benefit.. 48,145 - (48,145) - -------- ------ ------- ------ ------ Total other income (expense) 34,733 (27,189) (57,343) (49,799) Financing costs: Interest charges.................. 144,732 187,028 - 331,760 Distributions on mandatorily redeemable preferred securities of subsidiary trusts ............ 14,437 7,850 - 22,287 Dividends & redemption premiums on preferred stock of subsidiaries - 11,752 - 11,752 -------- ------ ------- ------- ------ Total financing costs........... 159,169 206,630 - 365,799 Income before income taxes and extraordinary item ................ 237,320 395,406 96,710 729,436 Income taxes......................... - 133,919 96,710 230,629 -------- ------- ------- ------- ------- Income before extraordinary item .... 237,320 261,487 - 498,807 Extraordinary item - U.K.windfall tax - (110,565) - (110,565) ------ -------- ------- ------- ------ Net income........................... 237,320 150,922 - 388,242 Preferred dividends & redemption premiums of NSP.................... 11,071 - - 11,071 -------- ------ ------- ------- ------ Earnings available for common shareholders ...................... $226,249 $150,922 $ - $ - $ 377,171 ======== ======== ======= ======= ========== Average common shares outstanding (Note 1) ........................... 140,594 104,805 57,643 303,042 Average common and potentially diluted shares outstanding (Note 1) 140,870 104,872 57,680 303,422 Earnings per share - basic and diluted: Income before extraordinary item $1.61 $2.50 $1.61 Extraordinary item................ - (1.06) (0.37) --- ----- ----- Total............................ $1.61 $1.44 $1.24 ==== ===== =====
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements. 58 Unaudited Pro Forma Combined Condensed Statement of Income Reflecting Completion of the NCE/NSP Merger Year ended December 31, 1996 (Thousands of Dollars, Except per Share Data)
Northern New Century Reporting States Power Energies Adjustments Pro Forma Pro Forma (as Reported) (as Reported) (Note 2) Adjustments Combined ------------- ------------- -------- ----------- -------- Operating revenues: Electric....................... $2,127,413 $2,416,539 $ (7,806) $ $4,536,146 Gas............................ 526,793 640,497 (68,880) 1,098,410 Nonregulated and other revenues - 39,998 380,589 420,587 Earnings from equity investments - - 31,057 31,057 ------ ------- ------- ------ ------ Total operating revenues ..... 2,654,206 3,097,034 334,960 6,086,200 Operating expenses: Electric fuel and purchased power 544,763 1,145,862 (7,649) 1,682,976 Cost of gas sold and transported 335,453 393,163 (61,257) 667,359 Other operation and maintenance 707,280 568,581 (35,389) 1,240,472 Depreciation and amortization 306,432 224,865 (7,561) 523,736 Taxes other than income taxes 232,824 128,980 (1,429) 360,375 Income taxes - utility.......... 161,410 - (161,410) - Nonregulated operating expenses - - 455,163 455,163 ------ -------- ------- ------ ------ Total operating expenses ..... 2,288,162 2,461,451 180,468 4,930,081 Operating income................... 366,044 635,583 154,492 1,156,119 Other income (expense): Income from nonregulated businesses before interest and taxes...... 18,543 - (18,543) - Equity earnings from unconsolidated subsidiaries................... - 389 (389) - Merger costs.................... - (21,107) - (21,107) Other income (deductions) - net 6,051 (13,775) 25,850 18,126 Income taxes on nonregulated and nonoperating items - benefit.... 14,600 - (14,600) - ------ ------ ------- ------ ------ Total other income (expense) 39,194 (34,493) (7,682) (2,981) Financing costs: Interest charges................. 130,699 161,601 - 292,300 Distributions on mandatorily redeemable preferred securities of subsidiary trusts ............ - 1,526 - 1,526 Dividends & redemption premiums on preferred stock of subsidiaries - 11,969 - 11,969 -------- ------ ------- ------- ------ Total financing costs.......... 130,699 175,096 - 305,795 Income before income taxes.......... 274,539 425,994 146,810 847,343 Income taxes........................ - 153,653 146,810 300,463 -------- ------- ------- ------- ------- Net income.......................... 274,539 272,341 - 546,880 Preferred dividends & redemption premiums of NSP................... 12,245 - - 12,245 -------- ------- ------- ------- ------ Earnings available for common shareholders ..................... $262,294 $272,341 $ - $ - $ 534,635 ======== ======== ======== ======= ========= Average common shares outstanding (Note 1) ......................... 137,121 103,059 56,682 296,862 Average common and potentially diluted shares outstanding (Note 1) 137,358 103,102 56,706 297,166 Basic and diluted earnings per share $1.91 $2.64 $1.80 ===== ===== =====
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements. 59 Unaudited Pro Forma Combined Condensed Balance Sheet Reflecting Completion of the NCE/NSP Merger March 31, 1999 (Thousands of Dollars)
Northern New Century Reporting States Power Energies Adjustments Pro Forma Pro Forma (as Reported) (as Reported) (Note 2) Adjustments Combined ------------- ------------- -------- ----------- -------- ASSETS Property, plant and equipment: Electric..................... $7,258,627 $7,116,116 $ (121,849) $ $14,252,894 Gas.......................... 885,730 1,220,178 (7,709) 2,098,199 Other........................ 370,401 1,003,126 542,316 1,915,843 -------- ---------- ------- ------- ---------- Total property, plant and equipment ................. 8,514,758 9,339,420 412,758 18,266,936 Accumulated provision for depreciation .............. (4,236,127) (3,410,190) (127,511) (7,773,828) Nuclear fuel - net........... 103,510 - 103,510 -------- ------ ------- ------- ------- Net property, plant and equipment 4,382,141 5,929,230 285,247 10,596,618 Current assets: Cash and cash equivalents ..... 58,280 84,817 143,097 Accounts receivable - net ..... 326,174 323,767 649,941 Accrued unbilled utility revenues .................... 102,585 113,400 215,985 Fuel and gas inventories....... 45,306 58,869 104,175 Material and supplies inventories 112,455 70,552 183,007 Prepayments and other.......... 49,219 105,822 155,041 ------- ------- ------- ------- ------- Total current assets.......... 694,019 757,227 1,451,246 Other assets: Equity investments............. 874,414 347,911 1,222,325 External decommissioning fund and other investments......... 503,400 71,152 574,552 Regulatory assets.............. 311,694 375,476 687,170 Non-regulated property - net .. 285,247 - (285,247) - Other........................ 328,462 213,396 - 541,858 -------- ------- ------- ------- ------- Total other assets............ 2,303,217 1,007,935 (285,247) 3,025,905 --------- --------- -------- ------- --------- Total assets...................... $7,379,377 $7,694,392 $ - $ - $15,073,769 ========== ========== ========= ======= =========== LIABILITIES AND EQUITY Capitalization: Common stock (Note 1).......... $ 382,985 $ 114,925 $ $330,409 $ 828,319 Other stockholders' equity (Note 1) 2,113,171 2,541,922 (330,409) 4,324,684 --------- --------- ------- ------- ----------- Total common stockholders equity 2,496,156 2,656,847 - 5,153,003 Preferred stockholders' equity 105,340 - 105,340 Mandatorily redeemable preferred securities of subsidiary trusts 200,000 294,000 494,000 Long-term debt................. 1,844,071 2,304,985 4,149,056 --------- --------- ------- ------- --------- Total capitalization.......... 4,645,567 5,255,832 9,901,399 Current liabilities: Current portion of long-term debt 168,731 124,477 293,208 Short-term debt................ 369,632 408,900 778,532 Accounts payable............... 256,839 255,555 512,394 Taxes accrued.................. 226,497 133,954 360,451 Other accrued liabilities ..... 166,364 284,176 450,540 ------- ------- ------- ------- ------- Total current liabilities 1,188,063 1,207,062 2,395,125 Other liabilities: Deferred income taxes.......... 814,355 954,295 1,768,650 Deferred investment tax credits 125,993 99,650 225,643 Regulatory liabilities......... 392,285 - 392,285 Other.......................... 213,114 177,553 390,667 -------- -------- ------- ------- ------- Total other liabilities....... 1,545,747 1,231,498 2,777,245 --------- --------- ------- ------- --------- Total liabilities and equity $7,379,377 $7,694,392 $ - $ - $15,073,769 ========== ========== ======= ======= ===========
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements. 60 Notes to Unaudited Pro Forma Combined Condensed Financial Statements 1. The unaudited pro forma combined condensed financial statements reflect the conversion of each share of NCE common stock, par value $1.00 per share, into 1.55 share of common stock of the combined company and the continuation of each share of NSP common stock, par value $2.50 per share, as one share of common stock of the combined company ($2.50 par value), as provided in the NCE/NSP Merger Agreement. The unaudited pro forma combined condensed financial statements are presented as if the companies were combined during all periods included therein. 2. The unaudited pro forma combined condensed income statements reflect certain reclassifications to conform the presentation of operating results. These reporting adjustments include: (a) separate presentation of nonregulated revenues and equity earnings in operating revenues; (b) separate presentation of all nonregulated expenses, including project write-downs, in operating expenses; (c) presentation of nonregulated interest and other income, including gains for project sales, in other income (deductions) - net; and (d) presentation of all income taxes (regulated and nonregulated) on a single line before arriving at net income. 3. The unaudited pro forma combined condensed balance sheet at March 31, 1999 reflects reporting adjustments to conform the presentation of: (a) investments and deferred charges (in other assets); (b) nonregulated property (in property, plant and equipment); and (c) construction work in progress (in other property, plant and equipment). 4. The allocation of the estimated costs savings resulting from the merger to NCE, NSP and their customers, net of the costs incurred to achieve such savings, will be subject to regulatory review and approval. At the time the merger agreement was signed, cost savings resulting from the merger were estimated to be approximately $1.1 billion over a ten-year period, net of transaction costs (including fees for financial advisors, attorneys, accountants, filings and printing) and net of costs to achieve the savings. None of the estimated cost savings, the costs to achieve such savings, or the transaction costs have been reflected as pro forma adjustments in the unaudited pro forma combined financial statements. Nonrecurring costs directly attributable to the merger are expected to be deferred and amortized to expense in periods subsequent to the consummation of the merger consistent with the anticipated recovery in rates. Accordingly, no pro forma adjustments have been made to retained earnings. 5. Intercompany transactions (including purchased and exchanged power transactions) between NCE and NSP during the periods presented were not material and, accordingly, no pro forma adjustments were made to eliminate such transactions. 61 EXHIBIT 10(a) THE NCE 1999 SENIOR EXECUTIVE SEVERANCE POLICY Introduction Northern States Power Company, a Minnesota corporation ("NSP") and New Century Energies, Inc., a Delaware corporation ("NCE") have entered into an Agreement and Plan of Merger dated as of March 24, 1999 (the "Merger Agreement"), whereby the NSP and NCE organizations will engage in a merger-of-equals transaction (the "Combination"). The Board of Directors of NCE recognizes that the pendency of the Combination, and the inevitable adjustments that will occur during the transition period following the Combination, may result in the loss or distraction of employees of the Corporation and its Subsidiaries to the detriment of the Corporation and its shareholders. The Board considers the avoidance of such loss and distraction to be essential to protecting and enhancing the best interests of the Corporation and its shareholders. The Board also believes that during the pendency of the Combination and the transition period thereafter, the Board should be able to receive and rely on disinterested service from employees without concern that employees might be distracted or concerned by personal uncertainties and risks. In addition, the Board believes that it is consistent with the Corporation's employment practices and policies and in the best interests of the Corporation and its shareholders to treat fairly its employees whose employment terminates in connection with or following the Combination. Accordingly, the Board has determined that appropriate steps should be taken to assure the Corporation of the continued employment and attention and dedication to duty of its employees and to seek to ensure the availability of their continued service, notwithstanding the Combination. Therefore, in order to fulfill the above purposes, the following plan has been developed and is hereby adopted. ARTICLE I ESTABLISHMENT OF PLAN As of the Effective Date, the Corporation hereby establishes, subject to Section 7.4 hereof, a separation compensation plan known as the NCE 1999 Senior Executive Severance Policy, as set forth in this document. ARTICLE II DEFINITIONS As used herein the following words and phrases shall have the following respective meanings unless the context clearly indicates otherwise. (a) Annual Incentive Award. The highest amount a Participant received as an annual cash incentive award in any of the three calendar years prior to a termination of employment entitling the Participant to a Separation Benefit. (b) Annual Salary. The Participant's regular annual base salary immediately prior to his or her termination of employment, including compensation converted to other benefits under a flexible pay arrangement maintained by the Corporation or deferred pursuant to a written plan or agreement with the Corporation, but excluding overtime pay, allowances, premium pay, compensation paid or payable under any Corporation long-term or short-term incentive plan or any similar payment. (c) Board. The Board of Directors of NCE. (d) Code. The Internal Revenue Code of 1986, as amended from time to time. (e) Committee. The Compensation Committee of the Board. (f) Corporation. NCE and any successor thereto. (g) Date of the Combination. The Effective Time, as defined in the Merger Agreement. (h) Date of Termination. The date on which a Participant ceases to be an Employee. (i) Effective Date. The date of the Merger Agreement. (j) Employee. Any full-time, regular-benefit, non-bargaining employee of an Employer. The term shall exclude all individuals employed as independent contractors, temporary employees, other benefit employees, non-benefit employees, leased employees, even if it is subsequently determined that such classification is incorrect. (k) Employer. The Corporation or a Subsidiary which has adopted the Plan pursuant to Article V hereof. 2 (l) Long-Term Incentive Award. For Stock Awards, the highest aggregate Value granted (or deemed to have been granted as determined under the definition of Value) to a Participant during any of the three calendar years prior to a termination of employment entitling the Participant to a Separation Benefit. For Non-Stock Awards, the highest target opportunity for any cycle which begins during the 36 month period prior to a termination of employment entitling the Participant to a Separation Benefit. (m) Multiple. For each Participant, the number set forth opposite the Participant's name on Schedule 1 hereto. (n) Non-Stock Award. The opportunity to receive a cash payment under the "value creation plan" component of the Corporation's long-term incentive program, which long-term incentive program is incorporated into the Corporation's omnibus incentive plan. (o) Participant. An individual who is designated as such pursuant to Section 3.1. (p) Plan. The NCE 1999 Senior Executive Severance Policy. (q) Release Agreement. An agreement substantially in the form set forth in Exhibit A to this Plan, with such amendments as the Committee may determine to be necessary in order for such agreement to constitute a valid release by the Participant in question of all claims described therein. (r) Separation Benefits. The payments and benefits described in Section 4.3 that are provided to qualifying Participants under the Plan. (s) Separation Period. The period beginning on a Participant's Date of Termination and ending upon expiration of a number of years equal to the Participant's Multiple. (t) Stock Award. An award of stock options, stock appreciation rights (other than in conjunction with a stock option) or restricted stock or a performance award, in each case granted pursuant to the Corporation's long-term incentive program incorporated into the Corporation's omnibus incentive plan or any predecessor, successor or similar plan of the Corporation. (u) Subsidiary. Any corporation in which the Corporation, directly or indirectly, holds a majority of the voting power of such corporation's outstanding shares of capital stock. 3 (v) Target Annual Incentive. The Annual Incentive Award that the Participant would have received for the year in which his or her Date of Termination occurs, if the target goals had been achieved. (w) Value. The Value of a Stock Award shall be the dollar value of such award at the time of grant, as determined by the Committee in connection with the grant of such Stock Award; it being understood that the Committee's practice, as of the date of adoption of this Plan, is to determine (i) the value of a Stock Award that is a stock option, stock appreciation right or similar right that derives its value from the appreciation of the value of equity securities using a modified version of the Black-Scholes option valuation method; provided, however, that the value of stock options shall be prorated over the period of time the grant was intended to cover and the grant will be deemed to have been made proportionately in each calender year of such period, and (ii) the value of other Stock Awards based upon the fair market value of the underlying equity securities. ARTICLE III ELIGIBILITY 3.1 Participation. Each of the individuals named on Schedule 1 hereto shall be a Participant in the Plan. Schedule 1 may be amended by the Board from time to time to add individuals as Participants. 3.2 Duration of Participation. A Participant shall only cease to be a Participant in the Plan as a result of an amendment or termination of the Plan complying with Article VII of the Plan, or when he ceases to be an Employee of any Employer, unless, at the time he ceases to be an Employee, such Participant is entitled to payment of a Separation Benefit as provided in the Plan or there has been an event or occurrence described in Section 4.2(a) which would enable the Participant to terminate his employment and receive a Separation Benefit. A Participant entitled to payment of a Separation Benefit or any other amounts under the Plan shall remain a Participant in the Plan until the full amount of the Separation Benefit and any other amounts payable under the Plan have been paid to the Participant. ARTICLE IV SEPARATION BENEFITS 4.1 Right to Separation Benefit. A Participant shall be entitled to receive Separation Benefits in accordance with Section 4.3 if the Participant ceases to be an Employee for any reason specified in Section 4.2(a). 4.2 Termination of Employment. 4 (a) Terminations Which Give Rise to Separation Benefits Under This Plan. Except as set forth in subsection (b) below, a Participant shall be entitled to Separation Benefits if, at any time before the third anniversary of the Date of the Combination: (i) the Participant ceases to be an Employee by action of the Employer or any of its affiliates (excluding any transfer to another Employer); (ii) the Participant's Annual Salary is reduced below the higher of (x) the amount in effect on the Effective Date and (y) the highest amount in effect at any time thereafter, and the Participant ceases to be an Employee by his or her own action within 130 days after the occurrence of such reduction; (iii) the Participant's duties and responsibilities are materially and adversely diminished in comparison to the duties and responsibilities enjoyed by the Participant on the Effective Date, and the Participant ceases to be an Employee by his or her own action within 130 days after the occurrence after such reduction; (iv) the program of incentive compensation and retirement and welfare benefits offered to the Participant (determined in the aggregate) is materially and adversely diminished in comparison to the program of benefits enjoyed by the Participant on the Effective Date, and the Participant ceases to be an Employee by his or her own action within 130 days after the occurrence after such reduction; or (v) an Employer or any affiliate of an Employer sells or otherwise distributes or disposes of the subsidiary, branch or other business unit in which the Participant was employed before such sale, distribution or disposition and the requirements of subsection (b)(iv) of this Section 4.2 are not met, and the Participant ceases to be an Employee upon or within 130 days after such sale, distribution or disposition. With respect to a termination by the Participant pursuant to clause (ii), (iii), (iv), or (v) of this Section 4.2(a), such termination shall be effective if and only if the Participant has given written notice to his or her Employer of his or her intent to terminate for such reason (stating the event(s) relied upon for such termination and the provisions of this Section 4.2(a) relied upon) within 90 days of the date on which the event(s) first occurred, and the Employer or an affiliate of the Employer, as the case may be, has failed to remedy such event within the 30 day period following receipt of such notice. 5 (b) Terminations Which Do Not Give Rise to Separation Benefits Under This Plan. If a Participant's employment is terminated for Cause, death, disability, retirement, or a qualified sale of business (as those terms are defined below), or voluntarily by the Participant in the absence of an event described in subsection (a)(ii), (iii) or (iv) of this Section 4.2, the Participant shall not be entitled to Separation Benefits under the Plan. (i) A termination for disability shall have occurred where a Participant is terminated because of an illness or injury and the Participant has become eligible to receive long-term disability benefits under, or would have become so eligible if such Participant were covered by, the Corporation's long-term disability plan, as it exists at the time of termination of employment. (ii) A termination by retirement shall have occurred where a Participant's termination is due to his voluntary late, normal or early retirement under a pension plan sponsored by his Employer or its affiliates, as defined in such plan. (iii) A termination for Cause shall have occurred where a Participant is terminated because of: (A) the willful and continued failure of the Participant to perform substantially the Participant's duties with the Corporation or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Participant by the Board or an elected officer of the Corporation which specifically identifies the manner in which the Board or the elected officer believes that the Participant has not substantially performed the Participant's duties, or (B) the willful engaging by the Participant in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Corporation. 6 For purposes of this provision, no act or failure to act, on the part of the Participant, shall be considered "willful" unless it is done, or omitted to be done, by the Participant in bad faith or without reasonable belief that the Participant's action or omission was in the best interests of the Corporation. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board, or upon the advice of counsel for the Corporation, shall be conclusively presumed to be done, or omitted to be done, by the Participant in good faith and in the best interests of the Corporation. (iv) A termination due to a qualified sale of business shall have occurred where an Employer or an affiliate of an Employer has sold, distributed or otherwise disposed of the subsidiary, branch or other business unit in which the Participant was employed before such sale, distribution or disposition and the Participant has been offered employment with the purchaser of such subsidiary, branch or other business unit or the corporation or other entity which is the owner thereof on substantially the same terms and conditions under which he worked for the Employer (including, without limitation, duties and responsibilities, and the aggregate of the Participant's base salary and program of benefits). Such terms and conditions shall also include, without limitation, a legally binding agreement or plan covering such Participant, providing that upon a qualifying termination of employment with the subsidiary, branch or business unit (or the corporation or other entity which is the owner thereof) or any successor thereto of the kind described in Article VI of this Plan, at any time before the third anniversary of the Date of the Combination, the Participant's employer or any successor will pay to each such former Participant an amount equal to the separation benefit and other benefits that such former Participant would have received under the Plan had he been a Participant at the time of such termination. For purposes of this subsection, the new employer plan or agreement must treat service with any Employer (irrespective of whether the Employer was an affiliate of the Corporation or the Employee was a Participant at the time of such service) and the new employer as continuous service for purposes of calculating separation benefits. 7 4.3 Separation Benefits. (a) If a Participant's employment is terminated in circumstances entitling him to a separation benefit as provided in Section 4.2(a), and the Participant executes and does not revoke a Release Agreement, the Participant's Employer shall pay such Participant within fifteen days of the Date of Termination or, if later, upon the date such Release Agreement becomes irrevocable, a cash lump sum as set forth in subsection (b) below and the continued benefits set forth in subsection (c) below, subject to Section 4.6 below. For purposes of determining the benefits set forth in subsection (b) and (c), if the termination of the Participant's employment is based upon a reduction of the Participant's Annual Salary or benefits as described in subsection (ii) or (iii) of Section 4.2, such reduction shall be ignored. (b) The cash lump sum referred to in Section 4.3(a) shall equal the aggregate of the following amounts: (i) the sum of (1) the Participant's Annual Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the sum of the Target Annual Incentive plus the Long-Term Incentive and (y) a fraction, the numerator of which is the number of days in such year through the Date of Termination, and the denominator of which is 365, and (3) any compensation previously deferred by the Participant (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid and in full satisfaction of the rights of the Participant thereto; (ii) an amount equal to the product of (1) the Participant's Multiple and (2) the sum of (x) the Participant's Annual Salary, (y) the higher of the Target Annual Incentive or the Annual Incentive Award, and (z) the Long-Term Incentive Award; (iii) an amount equal to the difference between (a) the actuarial equivalent of the benefit under the Corporation's qualified defined benefit retirement plan (the "Retirement Plan") and any excess or supplemental retirement plans in which the Participant participates and/or other supplemental retirement benefits to which the Participant may be entitled under any contract or agreement (together, the "SERP") which the Participant would receive if his or her employment continued during the Separation Period, assuming that the Participant's compensation during the Separation Period would have been equal to his or her compensation as in effect immediately before the termination or, if higher, on the Effective Date, and (b) the actuarial equivalent of the Participant's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP as of the Date of 8 Termination. The actuarial assumptions used for purposes of determining actuarial equivalence shall be no less favorable to the Participant than the most favorable of those in effect under the Retirement Plan and the SERP on the Date of Termination and the Effective Date; and (iv) The sum of the additional contributions (other than pre-tax salary deferral contributions by the Participant) that would have been made or credited by the Company to the Participant's accounts under each qualified defined contribution plan and non-qualified supplemental executive savings plan, if any, that covered the Participant on the date the termination of employment occurred, determined by assuming that: (A)The Participant's employment had continued for the Separation Period; (B) The Participant's rate of compensation being recognized by each plan immediately prior to the Date of Termination had continued in effect during the Separation Period; (C) In the case of matching contributions, the Participant's rate of pre-tax salary deferral contributions in effect for the last plan year beginning prior to the Date of Termination had remained in effect throughout the Separation Period; and (D) In the case of discretionary contributions by the Company, the Company continued to make such contributions during the Separation Period at the rate that applied to the most recent plan year that ended prior to the Date of Termination. (c) The continued benefits referred to above shall be as follows. (i) During the Separation Period, the Participant and his family shall be provided with medical, dental and life insurance benefits as if the Participant's employment had not been terminated; provided, however, that if the Participant becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility; and for purposes of determining eligibility (but not the time of commencement of benefits) of the Participant for retiree 9 medical, dental and life insurance benefits under the Corporation's plans, practices, programs and policies, the Participant shall be considered to have remained employed during the Separation Period and to have retired on the last day of such period; (ii) The Corporation shall, at its sole expense as incurred, provide the Participant with outplacement services the scope and provider of which shall be selected by the Participant in his or her sole discretion (but at a cost to the Corporation of not more than $30,000); (iii) The Corporation shall continue to provide the Participant with financial planning counseling benefits through the second anniversary of the Date of Termination, on the same terms and conditions as were in effect immediately before the termination or, if more favorable, on the Effective Date; and (iv) the Corporation will continue to provide the Executive with his or her "flexible perquisite allowance" through the Separation Period. To the extent any benefits described in this Section 4.3(c) cannot be provided pursuant to the appropriate plan or program maintained for Employees, the Employer shall provide such benefits outside such plan or program at no additional cost (including without limitation tax cost) to the Participant. Notwithstanding the foregoing, if a group insurance carrier refuses to provide the coverage described in this Section 4.3(c) under its contract issued to the Company, or if the Company reasonably determines that the coverage required under this Section 4.3(c) would cause a welfare plan sponsored by the Company to violate any provision of the Code prohibiting discrimination in favor of highly compensated employees or key employees, the Company will use its best efforts to obtain for the Participant an individual insurance policy providing comparable coverage. However, if the Company determines in good faith that comparable coverage cannot be obtained for less than two times the premium or premium equivalent for such coverage under the Company welfare plan or plans, the Company's sole obligation under this Section 4.3(c) with respect to that coverage will be limited to paying the Participant a monthly amount equal to two times the monthly premium or premium equivalent for that coverage under the Company's plans. 10 4.4 Other Benefits Payable. The cash lump sum and continuing benefits described in Section 4.3 above shall be payable in addition to, and not in lieu of, all other accrued or vested or earned but deferred compensation, rights, options or other benefits which may be owed to a Participant upon or following termination, including but not limited to accrued vacation or sick pay, amounts or benefits payable under any bonus or other compensation plans, stock option plan, stock ownership plan, stock purchase plan, life insurance plan, health plan, disability plan or similar or successor plan, except as provided in Section 4.6 below. 4.5 Certain Additional Payments by the Corporation. (a) Anything in this Plan to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Corporation or its affiliates to or for the benefit of the Participant (whether paid or payable or distributed or distributable pursuant to the terms of this Plan or otherwise, but determined without regard to any additional payments required under this Section 4.5) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Participant with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Participant shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Participant of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Participant retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. If a Gross-Up Payment is made as discussed above, as calculated under Internal Revenue Service regulations, it shall be exclusive of all amounts attributable to any cash payment based on a Stock Award. Notwithstanding the foregoing provisions of this Section 4.5(a), if it shall be determined that the Participant is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Participant such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Participant and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 4.5(c), all determinations required to be made under this Section 4.5, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized accounting firm selected by the Corporation (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Corporation and the Participant within 15 business days of the receipt of notice from the Participant that there has been a Payment, or such earlier time as is requested by the Corporation. All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any Gross-Up Payment, as determined pursuant to this Section 4.5, shall be paid by the Corporation to the 11 Participant within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Corporation and the Participant. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Corporation should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Corporation exhausts its remedies pursuant to Section 4.5(c) and the Participant thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of the Participant. (c) The Participant shall notify the Corporation in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Corporation of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Participant is informed in writing of such claim and shall apprise the Corporation of the nature of such claim and the date on which such claim is requested to be paid. The Participant shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Corporation (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Corporation notifies the Participant in writing prior to the expiration of such period that it desires to contest such claim, the Participant shall: (i) give the Corporation any information reasonably requested by the Corporation relating to such claim, (ii) take such action in connection with contesting such claim as the Corporation shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Corporation, (iii) cooperate with the Corporation in good faith in order effectively to contest such claim, and (iv) permit the Corporation to participate in any proceedings relating to such claim; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Participant harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4.5(c), the Corporation shall control all proceedings taken in connection with such contest and, at its sole option, may 12 pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Participant to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Participant agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall determine; provided, however, that if the Corporation directs the Participant to pay such claim and sue for a refund, the Corporation shall advance the amount of such payment to the Participant, on an interest-free basis and shall indemnify and hold the Participant harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Participant with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Corporation's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Participant shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Participant of an amount advanced by the Corporation pursuant to Section 4.5(c), the Participant becomes entitled to receive any refund with respect to such claim, the Participant shall (subject to the Corporation's complying with the requirements of Section 4.5(c)) promptly pay to the Corporation the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Participant of an amount advanced by the Corporation pursuant to Section 4.5(c), a determination is made that the Participant shall not be entitled to any refund with respect to such claim and the Corporation does not notify the Participant in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 4.6 Conditions to Payment Obligations. (a) Except as provided in Section 4.6(b) below, the obligations of the Corporation and the Employers to pay the Separation Benefits and the Gross-Up Payment and other payments described in Section 4.5 shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Corporation or any of its Subsidiaries may have against any Participant. (b) Notwithstanding any other provision of this Plan or any other plan, program, practice or policy of any Employer: (i) any cash Separation Benefits that a Participant becomes entitled to receive under Section 4.3(b) of 13 this Plan shall be reduced (but not below zero) by the aggregate amount of cash severance, separation, or similar benefits that the Participant may be entitled to receive under any other plan, program, policy, contract, agreement or arrangement of any Employer (including without limitation the NCE Senior Executive Severance Policy), except to the extent the Participant waives his or her right thereto, and by the aggregate amount of such cash benefits or pay in lieu of notice that the Participant may be entitled to receive under applicable law; and (ii) any continued benefits that a Participant becomes entitled to receive under Section 4.3(c) of this Plan shall be provided concurrently (not consecutively) with any such benefits that such Participant may be entitled to receive under any other plan, program, policy, contract, agreement or arrangement of any Employer or applicable law (including without limitation the health continuation coverage required by Section 4980B of the Code and Section 601 et seq. of the Employee Retirement Income Security Act of 1974, as amended). In no event shall a Participant be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to a Participant under any of the provisions of this Plan, nor shall the amount of any payment hereunder be reduced by any compensation earned by a Participant as a result of employment by another employer, except as specifically provided in Section 4.3(c)(i). ARTICLE V PARTICIPATING EMPLOYERS This Plan may be adopted by any Subsidiary of the Corporation. Upon such adoption, the Subsidiary shall become an Employer hereunder and the provisions of the Plan shall be fully applicable to the Employees of that Subsidiary who are Participants pursuant to Section 3.1. ARTICLE VI SUCCESSOR TO CORPORATION This Plan shall bind any successor of the Corporation, its assets or its businesses (whether direct or indirect, by purchase, merger, consolidation or otherwise), in the same manner and to the same extent that the Corporation would be obligated under this Plan if no succession had taken place. In the case of any transaction in which a successor would not by the foregoing provision or by operation of law be bound by this Plan, the Corporation shall require such successor expressly and unconditionally to assume and agree to perform the Corporation's obligations under this Plan, in the same 14 manner and to the same extent that the Corporation would be required to perform if no such succession had taken place. The term "Corporation," as used in this Plan, shall mean the Corporation as hereinbefore defined and any successor or assignee to the business or assets which by reason hereof becomes bound by this Plan. ARTICLE VII DURATION, AMENDMENT AND TERMINATION 7.1 Duration. If the Combination has not occurred, this Plan shall expire five years from the Effective Date, unless extended for an additional period or periods by resolution adopted by the Board. If the Combination occurs, this Plan shall continue in full force and effect and shall not terminate or expire until after all Participants who become entitled to any payments hereunder shall have received such payments in full and all payments and adjustments required to be made pursuant to Section 4.5 have been made. 7.2 Amendment. Except as provided in Section 7.1, the Plan shall not be subject to amendment, change, substitution, deletion, revocation or termination in any respect which adversely affects the rights of Participants. 7.3 Form of Amendment. The form of any amendment of the Plan shall be a written instrument signed by a duly authorized officer or officers of the Corporation, certifying that the amendment has been approved by the Board. 7.4 Pooling-of-Interests. Notwithstanding any other provision contained in this Plan to the contrary, if any action taken or required to be taken pursuant to the terms of this Plan would preclude the use of the "pooling of interests" accounting method with respect to the Combination, this Plan and any rights created hereunder shall be deemed null and void ab initio and of no further force or effect. ARTICLE VIII MISCELLANEOUS 8.1 Indemnification. If a Participant institutes any legal action in seeking to obtain or enforce, or is required to defend in any legal action the validity or enforceability of, any right or benefit provided by this Plan, the Corporation or the Employer will pay for all reasonable legal fees and expenses incurred (as incurred) by such Participant, regardless of the outcome of such action. 15 8.2 Employment Status. This Plan does not constitute a contract of employment or impose on the Participant or the Participant's Employer any obligation to retain the Participant as an Employee, to change the status of the Participant's employment, or to change the Corporation's policies or those of its Subsidiaries regarding termination of employment. 8.3 Claim Procedure. If an Employee or former Employee makes a written request alleging a right to receive benefits under this Plan or alleging a right to receive an adjustment in benefits being paid under the Plan, the Corporation shall treat it as a claim for benefit. All claims for benefit under the Plan shall be sent to the Human Resources Department of the Corporation and must be received within 30 days after termination of employment. If the Corporation determines that any individual who has claimed a right to receive benefits, or different benefits, under the Plan is not entitled to receive all or any part of the benefits claimed, it will inform the claimant in writing of its determination and the reasons therefor in terms calculated to be understood by the claimant. The notice will be sent within 90 days of the claim unless the Corporation determines additional time, not exceeding 90 days, is needed. The notice shall make specific reference to the pertinent Plan provisions on which the denial is based, and describe any additional material or information is necessary. Such notice shall, in addition, inform the claimant what procedure the claimant should follow to take advantage of the review procedures set forth below in the event the claimant desires to contest the denial of the claim. The claimant may within 90 days thereafter submit in writing to the Corporation a notice that the claimant contests the denial of his or her claim by the Corporation and desires a further review. The Corporation shall within 60 days thereafter review the claim and authorize the claimant to appear personally and review pertinent documents and submit issues and comments relating to the claim to the persons responsible for making the determination on behalf of the Corporation. The Corporation will render its final decision with specific reasons therefor in writing and will transmit it to the claimant within 60 days of the written request for review, unless the Corporation determines additional time, not exceeding 60 days, is needed, and so notifies the Participant. If the Corporation fails to respond to a claim filed in accordance with the foregoing within 60 days or any such extended period, the Corporation shall be deemed to have denied the claim. 8.4 Validity and Severability. The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision of the Plan, which shall remain in full force and effect, and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 8.5 Governing Law. The validity, interpretation, construction and performance of the Plan shall in all respects be governed by the laws of Colorado, without reference to principles of conflict of law, except to the extent preempted by federal law. 16 8.6 Withholding. The Corporation may withhold from any and all amounts payable under this Plan all federal, state, local, and foreign taxes that may be required to be withheld by applicable laws or regulations. New Century Energies, Inc. /s/ Bill D. Helton --------------------------- By : Bill D. Helton Its Chairman and Chief Executive Officer 17 SCHEDULE I Participants Name Multiple ---- -------- Paul J. Bonavia 2.5 Doyle R. Bunch II 2.5 Henry H. Hamilton 2.5 Brian P. Jackson 2.5 Richard C. Kelly 2.5 James T. Petillo 2.5 David M. Wilks 2.5 Gary L. Gibson 2.5 Cathy J. Hart 2 Ross C. King 2 Teresa S. Madden 2 John McAfee 2 Marilyn E. Taylor 2 Patricia Vincent 2 - 1 - EXHIBIT A FORM OF RELEASE AGREEMENT THIS AGREEMENT is entered into this ___ day of ________, 19___ by and between New Century Energies, Inc. (the "Company"), a Delaware corporation, and ________________ ("Participant"). WHEREAS, the Participant has become entitled to receive Separation Benefits under the NCE 1999 Senior Executive Severance Policy (the "Policy") on the condition that the Participant enter into this Release Agreement. NOW, THEREFORE, in consideration of the Covenant Consideration, the Participant, intending to be legally bound, agrees as follows: 1. Acknowledgment. (a) The Participant understands and agrees that, in addition to the Participant's below-described exposure to the Company's Confidential Information or Trade Secrets, the Participant may, in his capacity as an employee, at times meet with the Company's customers and suppliers, and that as a consequence of using and associating with the Company's name, goodwill, and professional reputation, the Participant will be in a position to develop personal and professional relationships with the Company's past, current, and prospective customers and suppliers. The Participant further acknowledges that during the course and as a result of employment by the Company, the Participant may be provided certain specialized training or know-how. The Participant understands and agrees that this goodwill and reputation, as well as the Participant's knowledge of Confidential Information or Trade Secrets and specialized training and know-how, could be used unfairly in competition against the Company. (b) Accordingly, the Participant agrees that during the period of one year after the Date of Termination (the "Covenant Period"), the Participant shall not: (i) Directly or indirectly solicit, service, contract with, or otherwise engage any past (one (1) year prior), existing or prospective customer, client, or account who then has a relationship with the Company for current or prospective business on behalf of an individual or entity that is engaged in a Competing Business (as defined below), or on the Participant's own behalf for a Competing Business; the term "Competing Business" meaning for purposes of this clause (i) a business or enterprise that is engaged in the business of generation, purchase, transmission, distribution, or sale of electricity, or in the purchase, transmission, distribution, sale or transportation of natural gas within the States of Colorado, Kansas, Minnesota, New Mexico, North Dakota, Oklahoma, South Dakota, Texas, Wisconsin or Wyoming; and the Participant and the Company agree that this provision is reasonably enforced with reference to the foregoing states to the extent applicable to such relationships with the Company; (ii) Cause or attempt to cause any existing or prospective customer, client, or account, who then has a relationship with the Company for current or prospective business, to divert, terminate, limit or in any manner modify, or fail to enter into any actual or potential business relationship with the Company; and the Participant and the Company agree that this clause (ii) is reasonably enforced with reference to any geographic area applicable to such relationships with the Company; and (iii) Directly or indirectly solicit, employ or conspire with others to employ any of the Company's employees; the term "employ" for purposes of this clause (iii) meaning to enter into an arrangement for services as a full-time or part-time employee, independent contractor, consultant, agent or otherwise; and the Participant and the Company agree that this clause (iii) is reasonably enforced as to any geographic area. (c) The Participant further agrees to inform any new employer or other person or entity with whom the Participant enters into a business relationship during the Covenant Period, before accepting such employment or entering into such a business relationship, of the existence of this Agreement and give such employer, person or other entity a copy of this Agreement. 2. Return of Property. The Participant agrees that upon the Date of Termination, the originals and all copies of any and all documents (including computer data, diskettes, programs, or printouts) that contain any customer information, financial information, product information, or other information that in any way relates to the Company, its products or services, its clients, its suppliers, or other aspects of its business that are in the Participant's possession shall be immediately returned to the Company. The Participant further agrees to not retain any summary of such information. 3. Confidential Information/Trade Secrets. (a) The Participant acknowledges that during the course and as a result of his or her employment, the Participant may receive or otherwise have access to, or contribute to the production of, Confidential Information or Trade Secrets. "Confidential Information or Trade Secrets" means information that is proprietary to or in the unique knowledge of the Company (including information discovered or developed in whole or in part by the Participant); the Company's business methods and practices; or information that derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and is the subject of efforts that are 2 reasonable under the circumstances to maintain its secrecy. It includes, among other things, strategies, procedures, manuals, confidential reports, lists of clients, customers, suppliers, past, current or possible future products or services, and information concerning research, development, accounting, marketing, selling or leases and the prices or charges paid by the Company's customers to the Company, or by the Company to its suppliers. The Participant acknowledges his continuing agreement to abide by the terms of the Company's Corporate Code of Conduct. (b) The Participant further acknowledges and appreciates that any Confidential Information or Trade Secret constitutes a valuable asset of the Company and that the Company intends any such information to remain secret and confidential. The Participant therefore specifically agrees that except to the extent required by the Participant's duties to the Company or as permitted by the express written consent of the Board of Directors, the Participant shall never, either during employment with the Company or at any time thereafter, directly or indirectly use, discuss or disclose any Confidential Information or Trade Secrets of the Company or otherwise use such information to his or her own or a third party's benefit. 4. Consideration. The Participant and the Company agree that the above provisions of this Agreement are reasonable and necessary for the protection of the Company and its business. In exchange for the Participant's agreement to be bound by the terms of this Agreement, the Company has provided the Participant the Separation Benefits under the Policy. The Participant accepts and acknowledges the adequacy of such consideration for this Agreement. 5. Remedies for Breach. The Participant acknowledges that a breach of the above provisions of this Agreement will cause the Company irreparable harm that would not be fully remedied by monetary damages. Accordingly, the Participant agrees that the Company shall, in addition to the requirement to return the Covenant Consideration to the Company and any relief afforded by law, be entitled to injunctive relief. The Participant agrees that both damages at law and injunctive relief shall be proper modes of relief and are not to be considered alternative remedies. 6. Release. (a) In consideration of the Separation Benefits, the Participant does hereby fully and completely release and waive any and all claims, complaints, causes of action or demands of whatever kind which the Participant has or may have against the Company and its predecessors, successors, subsidiaries and affiliates and all officers, employees and agents of those persons and companies arising out of any actions, conduct, decisions, behavior or events occurring to the date of his or her execution of this Release of which the Participant is or has been made aware or has been reasonably put on notice. (b) The Participant understands and accepts that this release specifically covers but is not limited to any and all claims, complaints, causes of action or demands of whatever kind which the Participant has or may have 3 against the above-referenced released parties relating in any way to the terms, conditions and circumstances of his or her employment to date, whether based on statutory, regulatory or common law claims for employment discrimination, including but not limited to race, color, sex, age or reprisal discrimination, arising under the Federal Civil Rights Act of 1964, as amended, Executive Order 11246, the Age Discrimination in Employment Act, as amended, the Colorado Civil Rights Act or any other administrative order, federal or state statute or local ordinance, wrongful discharge, breach of contract, breach of any express or implied promise, misrepresentation, fraud, reprisal, retaliation, breach of public policy, infliction of emotional distress, defamation, promissory estoppel, invasion of privacy, negligence, or any other theory, whether legal or equitable; except that this release will not impair any existing rights the Participant may have under any presently existing pension, retirement or employee benefit plan of the Company. (c) By signing below, the Participant acknowledges that he or she fully understands and accepts the terms of this release, and represents and agrees that his or her signature is freely, voluntarily and knowingly given [and that he or she has been provided a full opportunity to review and reflect on the terms of this release for at least [21] [45] days and to seek the advice of legal counsel of his or her choice, which advice the Participant has been encouraged to obtain] [include if necessary]. 7. The Participant's Acknowledgment of Review[; Right to Revoke]. [(a) ]The Participant represents that the Participant has carefully read and fully understands all provisions of this Agreement and that the Participant has had a full opportunity to review this Agreement before signing and to have all the terms of this Agreement explained to him or her by counsel. [(b) This Agreement may be revoked by the Participant by written notice given to [insert address] within 7 business days after being signed by the Participant.] 8. General Provisions. The Participant and the Company acknowledge and agree as follows: (a) This Agreement contains the entire understanding of the parties with regard to all matters contained herein. There are no other agreements, conditions, or representations, oral or written, express or implied, with regard to such matters; (b) This Agreement may be amended or modified only by a writing signed by both parties; (c) Waiver by either the Company or the Participant of a breach of any provision, term or condition hereof shall not be deemed or construed as a further or continuing waiver thereof or a waiver of any breach of any other provision, term or condition of this Agreement; 4 (d) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "the Company" shall mean NCE and its affiliates or assigns and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. No assignment of this Agreement shall be made by the Participant, and any purported assignment shall be null and void; (e) If any court finds any provision or part of this Agreement to be unreasonable, in whole or in part, such provision shall be deemed and construed to be reduced to the maximum duration, scope or subject matter allowable under applicable law. Any invalidation of any provision or part of this Agreement will not invalidate any other part of this Agreement; (f) This Agreement will be construed and enforced in accordance with the laws and legal principles of the State of Colorado. The Participant consents to the jurisdiction of the Colorado courts for the enforcement of this Agreement; and (g) This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument. THIS AGREEMENT IS INTENDED TO BE A LEGALLY BINDING DOCUMENT FULLY ENFORCEABLE IN ACCORDANCE WITH ITS TERMS. IF IN DOUBT, SEEK COMPETENT LEGAL ADVICE BEFORE SIGNING. - ------------------------------------------------- ------------------------ (The Participant) Date NCE By_______________________________________________ ________________________ Date Its_________________________________________ 5 The Participant acknowledges that he or she has received a copy of this Agreement. 6 EXHIBIT 10(b) EMPLOYMENT AGREEMENT OF WAYNE H. BRUNETTI THIS AGREEMENT by and between Northern States Power Company, a Minnesota corporation (the "Company"), and New Century Energies, Inc., a Delaware corporation ("NCE"), and Wayne H. Brunetti (the "Executive"), dated as of the 24th day of March, 1999. WITNESSETH THAT WHEREAS, the Company and NCE have entered into an Agreement and Plan of Merger dated as of March 24, 1999 (the "Merger Agreement"), whereby NCE will merge with and into the Company (the "Merger"); WHEREAS, the Company and NCE wish to provide for the orderly succession of management of the surviving company in the Merger (the "Company") following the Effective Time (as defined in the Merger Agreement); and WHEREAS, the Company and NCE further wish to provide for the employment by the Company of the Executive, and the Executive wishes to serve the Company, in the capacities and on the terms and conditions set forth in this Agreement; NOW, THEREFORE, it is hereby agreed as follows: 1. Effect on Prior Agreements; Employment Period. (a) The Executive is currently employed by NCE pursuant to an Employment Agreement dated as of August 1, 1997 (the "Prior Agreement"). The Prior Agreement shall remain in effect without amendment until the Effective Time (as defined in the Merger Agreement), and this Agreement shall supersede the Prior Agreement at the Effective Time. The Change in Control Agreement between NCE and the Executive shall remain in effect from and after the date of this Agreement, except that the Executive hereby waives any right that he might otherwise have to receive any severance or other payment or benefit under the Change In Control Agreement that would be duplicative of a payment or benefit to which he is entitled under this Agreement. (b) The Company shall employ the Executive, and the Executive shall serve the Company, on the terms and conditions set forth in this Agreement, for an initial period (the "Initial Period") and a further period (the "Secondary Period") (the Initial Period and the Secondary Period are hereinafter referred to in the aggregate as the "Employment Period"). The Initial Period shall begin at the Effective Time and end on the first anniversary of the Effective Time. The Secondary Period shall begin on the first day after the end of the Initial Period and end on the third anniversary of such day; provided, that on each anniversary of such day, the Secondary Period shall be automatically extended by an additional year unless either the Company or the Executive shall have given notice to the other, not less than 60 days before such anniversary, that the Secondary Period shall not be so extended. (c) Notwithstanding any other provision of this Agreement, this Agreement shall be null and void and of no force or effect unless and until the Merger is consummated. 2. Position and Duties; Location. (a) During the Initial Period, the Executive shall serve as Chief Executive Officer and President of the Company. During the Second Period, the Executive shall serve as Chief Executive Officer of the Company and Chairman of the Board of Directors of the Company (the "Board"). The Executive shall serve in each such case as an employee of the Company and with such duties and responsibilities as are customarily assigned to such positions, and such other duties and responsibilities not inconsistent therewith as may from time to time be assigned to him by the Board. The Executive shall be a member of the Board on the first day of the Employment Period, and the Board shall propose the Executive for re-election to the Board throughout the Employment Period. (b) During the Employment Period as is customary, the Executive shall report to the Board. (c) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive under this Agreement, use the Executive's reasonable best efforts to carry out such responsibilities faithfully and efficiently. It shall not be considered a violation of the foregoing for the Executive to serve on corporation, industry, civic or charitable boards or committees, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. (d) During the period beginning on the first day of the Employment Period and ending as soon as practicable thereafter but in no event later than the date of the first subsequent annual meeting of the shareholders of the Company (the "Transition Period"), the Executive's service shall be performed at the Company's headquarters in Minneapolis, Minnesota and at NCE's headquarters in Denver, Colorado. After the end of the Transition Period, the Executive shall spend the majority of his time and perform the majority of his duties at the Company's headquarters in Minneapolis, Minnesota. No later than the end of the Transition Period, the Executive shall relocate the residence at which he spends the majority of his time to the Twin Cities area. The Company shall reimburse the Executive for all of his moving expenses incurred in such relocation, and during the period from the first day of the Employment Period through the earlier of the end of the Transition Period and the date of such relocation, the Company shall provide the Executive with an apartment in Minneapolis and reimburse him for reasonable expenses of meals while in Minneapolis and travel between Minneapolis and his principal residence, provided in each case that the Executive complies with the policies, practices and procedures of the Company for submission of expense reports, receipts, or similar documentation of such expenses. 2 3. Compensation. (a) Base Salary. The Executive's compensation during the Employment Period shall be determined by the Board upon the recommendation of the Compensation Committee of the Board, subject to the next sentence and Section 3(b). During the Employment Period, the Executive shall receive an annual base salary (the "Annual Base Salary") at least equal to his annual base salary as in effect immediately before the Effective Time. The Annual Base Salary shall be payable in accordance with the Company's regular payroll practice for its senior executives, as in effect from time to time. During the Employment Period, the Annual Base Salary shall be reviewed at least annually for possible increase. Any increase in the Annual Base Salary shall not limit or reduce any other obligation of the Company under this Agreement. (b) Incentive Compensation. During the Employment Period, the Executive shall participate in short-term incentive compensation plans and long-term incentive compensation plans (the latter to consist of plans offering stock options, restricted stock and other long-term incentive compensation) providing him with the opportunity to earn, on a year-by-year basis, short-term and long-term incentive compensation (the "Incentive Compensation") at least equal to the amounts that he had the opportunity to earn under the comparable plans of NCE as in effect immediately before the Effective Time. (c) Other Benefits. (i) Supplemental Executive Retirement Plan. During the Employment Period, the Executive shall participate in a supplemental executive retirement plan ("SERP") such that the aggregate value of the retirement benefits that he and his spouse will receive at the end of the Employment Period under all defined benefit plans of the Company and its affiliates (whether qualified or not) will be not less than the aggregate value of the benefits he and his spouse would have received (and with the same forms of benefit payments) had he continued, through the end of the Employment Period, to accrue the supplemental retirement benefits provided by the terms of his employment agreement with NCE as in effect immediately before the Effective Time and those of Public Service Company of Colorado ("PSCo") as in effect as of August 1, 1997. (ii) During the Employment Period, the Company shall provide the Executive with life insurance coverage providing a death benefit to such beneficiary or beneficiaries as the Executive may designate of not less than 400% of the Executive's then-current Annual Base Salary if death occurs during employment, and equal to 200% his final Annual Base Salary if death occurs following termination of employment. (iii) In addition, and without limiting the generality of the foregoing, during the Employment Period and thereafter: (A) the Executive shall be entitled to participate in all applicable incentive, savings and retirement plans, practices, policies and programs of the Company and its subsidiaries to the same extent as other senior executives of the Company; and (B) the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in, and shall receive all benefits under, all applicable welfare benefit plans, practices, policies and programs provided by the Company and its 3 subsidiaries, other than severance plans, practices, policies and programs but including, without limitation, medical, prescription, dental, disability, sick leave, employee life insurance, group life insurance, accidental death and travel accident insurance plans and programs, to the same extent as other senior executives of the Company (but excluding the Company's Senior Executive Severance Policy and 1999 Senior Executive Severance Policy and NCE's 1999 Senior Executive Severance Policy (the "Severance Policies"). (d) Fringe Benefits. During the Employment Period, the Executive shall be entitled to receive fringe benefits on the same terms and conditions as the greater of (i) the fringe benefits received by, or available to, him from NCE immediately before the Effective Time, or (ii) the fringe benefits provided by the Company or its subsidiaries which are available to the next highest executive officer of the Company for the year. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. The Company shall be entitled to terminate the Executive's employment because of the Executive's Disability during the Employment Period. "Disability" means that (i) the Executive has been unable, for a period of 180 consecutive business days, to perform the Executive's duties under this Agreement, as a result of physical or mental illness or injury, and (ii) a physician selected by the Company or its insurers, and acceptable to the Executive or the Executive's legal representative, has determined that the Executive's incapacity is total and permanent. A termination of the Executive's employment by the Company for Disability shall be communicated to the Executive by written notice, and shall be effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date") unless the Executive returns to full-time performance of the Executive's duties before the Disability Effective Date. (b) By the Company. (i) The Company may terminate the Executive's employment during the Employment Period for Cause or without Cause. "Cause" means: A. the willful and continued failure of the Executive substantially to perform the Executive's duties under this Agreement (other than as a result of physical or mental illness or injury), after the Board of the Company delivers to the Executive a written demand for substantial performance that specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties; or B. illegal conduct or gross misconduct by the Executive, in either case that is willful and results in material and demonstrable damage to the business or reputation of the Company. 4 No act or failure to act on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act or failure to act that is based upon authority given pursuant to a resolution duly adopted by the Board, or the advice of counsel for the Company, shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. (ii) A termination of the Executive's employment for Cause shall be effected in accordance with the following procedures. The Company shall give the Executive written notice ("Notice of Termination for Cause") of its intention to terminate the Executive's employment for Cause, setting forth in reasonable detail the specific conduct of the Executive that it considers to constitute Cause and the specific provision(s) of this Agreement on which it relies, and stating the date, time and place of the Special Board Meeting for Cause. The "Special Board Meeting for Cause" means a meeting of the Board called and held specifically for the purpose of considering the Executive's termination for Cause, that takes place not less than ten and not more than twenty business days after the Executive receives the Notice of Termination for Case. The Executive shall be given an opportunity, together with counsel, to be heard at the Special Board Meeting for Cause. The Executive's termination for Cause shall be effective when and if a resolution is duly adopted at the Special Board Meeting for Cause by an affirmative vote of at least the greater of (A) two-thirds (2/3) of the entire membership of the Board (excluding the Executive who shall not vote on this matter) or (B) ten (10) members of the Board, stating that in the good faith opinion of the Board, the Executive is guilty of the conduct described in the Notice of Termination for Cause, and that conduct constitutes Cause under this Agreement. (iii) A termination of the Executive's employment without Cause shall be effective in accordance with the following procedures. The Company shall give the Executive written notice ("Notice of Termination without Cause") of its intention to terminate the Executive's employment without Cause, stating the date, time and place of the Special Board Meeting without Cause. The "Special Board Meeting without Cause" means a meeting of the Board called and held specifically for the purpose of considering the Executive's termination without Cause, that takes place not less than ten and not more than twenty business days after the Executive receives the Notice of Termination without Cause. The Executive shall be given an opportunity, together with counsel, to be heard at the Special Board Meeting without Cause. The Executive's termination without Cause shall be effective when and if a resolution is duly adopted at the Special Board Meeting without Cause by an affirmative vote of the greater of (A) at least two-thirds (2/3) of the entire membership of the Board (excluding the Executive who shall not vote on this matter) or (B) ten members of the Board stating that the Executive is terminated without Cause. (c) Good Reason. (i) The Executive may terminate employment for Good Reason or without Good Reason. "Good Reason" means the occurrence (without the Executive's express written consent) of any of the following acts by the Company, or 5 failures by the Company to act, unless such act or failure to act is corrected within thirty days of a Notice of Termination for Good Reason (as that term is defined below) given in respect thereof: A. the Executive's duties and responsibilities are materially and adversely diminished in comparison to the duties and responsibilities set forth in Section 2(a) of this Agreement (for purposes of this Agreement, it shall be considered a material and adverse diminishment of duties and responsibilities if the Executive occupies the same position but only with a non-publicly held company); B. any failure by the Company to comply with any provision of Section 3 of this Agreement; C. any purported termination of the Executive's employment by the Company for a reason or in a manner not expressly permitted by this Agreement; D. any failure by the Company to comply with paragraph (c) of Section 11 of this Agreement; E. any other substantial breach of this Agreement by the Company; or F. the Executive is no longer a member of the Board or the Board fails to propose the Executive for re-election to the Board. The Company and the Executive, upon mutual written Agreement, may waive any of the foregoing provisions which would otherwise constitute Good Reason. (ii) A termination of employment by the Execute for Good Reason shall be effectuated by giving the Company written notice ("Notice of Termination for Good Reason") of the termination within one year (but not after the end of the Employment Period) of the date of the event which is the basis of the Notice of Termination for Good Reason, setting forth in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provision(s) of this Agreement on which the Executive relies. A termination of employment by the Executive for Good Reason shall be effective on the fifth business day following the date when the Notice of Termination for Good Reason is given, unless the notice sets forth a later date (which date shall in no event be later than 30 days after the notice is given). For purposes of this Section 4(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (iii) A termination of the Executive's employment by the Executive without Good Reason shall be effected by giving the Company written notice of the termination. 6 (d) No Waiver. The failure to set forth any fact or circumstance in a Notice of Termination for Cause, a Notice of Termination without Cause or a Notice of Termination for Good Reason shall not constitute a waiver of the right to assert, and shall not preclude the party giving notice from asserting, such fact or circumstance in an attempt to enforce any right under or provision of this Agreement. (e) Date of Termination. The "Date of Termination" means the date of the Executive's death, the Disability Effective Date, the date on which the termination of the Executive's employment by the Company for Cause or without Cause or by the Executive for Good Reason is effective, or the date on which the Executive gives the Company notice of a termination of employment without Good Reason, as the case may be. 5. Obligations of the Company upon Termination. (a) By the Company other than for Cause or Disability; by the Executive for Good Reason. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or Disability, or the Executive terminates employment for Good Reason, the Company shall continue to provide the Executive with the compensation and benefits set forth in paragraphs (a), (b) and (c) of Section 3 as if he had remained employed by the Company pursuant to this Agreement through the end of the Employment Period and then retired (at which time he will be treated as eligible for all retiree welfare benefits and other benefits provided to retired senior executives, as set forth in Section 3(c)(ii) and (iii); provided, that the Incentive Compensation for such period shall be based upon the target Incentive Compensation for the year in which the Date of Termination occurs; provided, further, that in lieu of stock options, restricted stock and other stock-based awards, the Executive shall be paid cash equal to the fair market value as of the Date of Termination (without regard to any restrictions and based upon a valuation model generally utilized for purposes of valuing comparable stock-based compensation awards) of the stock options, restricted stock and other stock-based awards that would otherwise have been granted with such cash being paid within 90 days after the Date of Termination; provided, further that, to the extent any benefits described in paragraph (c) of Section 3 cannot be provided pursuant to the plan or program maintained by the Company for its executives, the Company shall provide such benefits outside such plan or program at no additional cost (including without limitation tax cost) to the Executive and his family, and provided, finally, that during any period when the Executive is eligible to receive benefits of the type described in clause (B) of paragraph (c)(iii) of Section 3 under another employer-provided plan, the benefits provided by the Company under paragraph (a) of Section 5 may be made secondary to those provided under another plan. In addition to the foregoing, any restricted stock outstanding on the Date of Termination shall be fully vested as of the Date of Termination and all options outstanding on the Date of Termination shall be fully vested and exercisable and shall remain in effect and exercisable through the end of their respective terms, without regard to the termination of the Executive's employment. The payments and benefits provided pursuant to this paragraph (a) of Section 5 are intended as liquidated damages for a termination for the Executive's employment by the Company other than for Cause or Disability or for the actions of the Company leading to a termination of the Executive's employment by the Executive for Good Reason, and shall be the sole and exclusive remedy therefor. 7 (b) Death or Disability. If the Executive's employment is terminated by reason of the Executive's death or Disability during the Employment Period, the Company shall pay to the Executive, or in the cause of the Executive's death, to the Executive's designated beneficiaries (or, if there is no such beneficiary, to the Executive's estate or legal representative) in a lump sum in cash within 30 days after the Date of Termination, the sum of the following amounts (the "Accrued Obligations"): (1) any portion of the Executive's Annual Base Salary through the Date of Termination that has not yet been paid; (2) an amount representing the target Incentive Compensation for the year that includes the Date of Termination, computed by assuming that the amount of all such target Incentive Compensation would be equal to the amount of such target Incentive Compensation that the Executive would have been eligible to earn for such period, and multiplying that amount by a fraction, the numerator of which is the number of days in such period through the Date of Termination, and the denominator of which is the total number of days in the relevant period; (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) that has not yet been paid; and (4) any accrued but unpaid Incentive Compensation and vacation pay; and the Company shall have no further obligations under this Agreement, except as specified in Section 6 below. If the Executive's employment is terminated by reason of Disability, he shall be entitled to receive the maximum disability payments which can be provided under the disability plans described in Section 3(c)(iii), reduced, however, by actual disability benefits received under such plans. (c) By the Company for Cause; by the Executive other than for Good Reason. If the Executive's employment is terminated by the Company for Cause during the Employment Period, the Company shall pay the Executive the Annual Base Salary through the Date of Termination and the amount of any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon), in each case to the extent not yet paid, and the Company shall have no further obligations under this Agreement, except as specified in Section 6 below. If the Executive voluntarily terminates employment during the Employment Period, other than for Good Reason, the Company shall pay the Accrued Obligations to the Executive in a lump sum in cash within 30 days of the Date of Termination, and the Company shall have no further obligations under this Agreement, except as specified in Section 6 below. 8 6. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies for which the Executive may qualify, nor, subject to paragraph (f) of Section 12, shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Vested benefits and other amounts that the Executive is otherwise entitled to receive under the SERP or any other plan, policy, practice or program of, or any contract or agreement with, the Company or any of its affiliated companies on or after the Date of Termination shall be payable in accordance with the terms of each such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. 7. Full Settlement. The Company's obligation to make the payments provided for in, and otherwise to perform its obligations under this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as specifically provided in paragraph (a) of Section 5 with respect to benefits described in clause (B) of paragraph (c)(iii) of Section 3, such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 8. Non-Competition Provision and Confidential Information. (a) Without the prior written consent of the Company, while actively employed, and if and only if the Executive becomes entitled to receive severance benefits pursuant to Section 5(a) hereof, for 24 months following the termination of the Executive's employment, the Executive shall not, as a shareholder, officer, director, partner, consultant, or otherwise, engage directly or indirectly in any business or enterprise which is "in competition" with the Company or its successors or assigns; provided, however, that the Executive's ownership of less than five percent of the issued and outstanding voting securities of a publicly-traded company shall not be deemed to constitute such competition. A business or enterprise is deemed to be "in competition" if it is engaged in the business of generation, purchase, transmission, distribution, or sale of electricity, or in the purchase, transmission, distribution, sale or transportation of natural gas within the States of Colorado, Kansas, Minnesota, New Mexico, North Dakota, Oklahoma, South Dakota, Texas, Wisconsin or Wyoming. (b) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies and their respective businesses that the Executive obtains during the Executive's employment by the Company or any of its affiliated companies and that is not public knowledge (other than as a result of the Executive's violation of this Section 8) ("Confidential Information"). The Executive shall not communicate, divulge or disseminate Confidential Information at any time during or after the Executive's employment with the Company, except with the prior written consent of the Company or as otherwise required by law or legal process. In no event shall any 9 asserted violation of the provisions of this Section 8 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined with regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes) including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of paragraph (c) of this Section 9, all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment") consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to paragraph (c) of this Section 9 and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but not later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of 10 such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this paragraph (c) of Section 9, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine, provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 11 (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (c) of this Section 9, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of paragraph (c) of this Section 9) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (c) of this Section 9, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Attorney's Fees. The Company agrees to pay, as incurred, to the fullest extent permitted by law, all legal fees and expenses that the Executive may reasonably incur as a result of any contest regardless of the outcome by the Company, the Executive or others of the validity or enforceability of or liability under or otherwise involving, any provision of this Agreement, together with interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code. 11. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Minnesota, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force and effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. 12 (b) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Wayne H. Brunetti If to the Company: Northern States Power Company 414 Nicollet Mall Minneapolis, Minnesota 55401 Attention: General Counsel or to such other address as either party furnishes to the other in writing in accordance with this paragraph (b) of Section 12. Notices and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. (d) Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement (including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to paragraph (c) of Section 4 of this Agreement) shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. (f) The Executive and the Company acknowledge that this Agreement supersedes and terminates any other severance and employment agreements between the Executive and the Company, NCE and their respective affiliates, except as specifically provided in Section 1 hereof. Without limiting the generality of the foregoing, the Executive hereby expressly waived any right that he might otherwise have to receive any payments or benefits under the Severance Policies. (g) The rights and benefits of the Executive under this Agreement may not be anticipated, assigned, alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process except as required by law. Any attempt by the Executive to anticipate, alienate, assign, sell, transfer, pledge, encumber or charge the same shall be void. Payments 13 hereunder shall not be considered assets of the Executive in the event of insolvency or bankruptcy. (h) This Agreement may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same instrument. 14 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of their respective Boards of Directors, the Company and NCE have caused this Agreement to be executed in their names on their behalf, all as of the day and year first above written. /s/Wayne H. Brunetti --------------------------- Wayne H. Brunetti NORTHERN STATES POWER COMPANY By: /s/ Grant P. Butts Name: Grant P. Butts Title: VP-Human Resources NEW CENTURY ENERGIES, INC. By: /s/Bill D. Helton Name: Bill D. Helton Title: Chairman and Chief Executive Officer67