SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 1-12927
NEW CENTURY ENERGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1334327
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1225 17th Street, Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (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 November 10, 1997, 104,616,824 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 $4,433,137,197.
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 ....................................... 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 28
Item 6. Exhibits and Reports on Form 8-K.................................. 28
SIGNATURE.................................................................. 29
EXHIBIT 15 ................................................................ 31
In addition to the historical information contained herein, this report
contains a number of "forward-looking statements", within the meaning of the
Securities Exchange Act of 1934. Such statements address future events and
conditions concerning capital expenditures, earnings, resolution and impact of
litigation, regulatory matters, liquidity and capital resources, and accounting
matters. Actual results in each case could differ materially from those
projected in such statements due to a variety of factors including, without
limitation, restructuring of the utility industry; future economic conditions;
earnings retention and dividend payout policies; developments in the
legislative, regulatory and competitive environments in which the Company
operates; and other circumstances that could affect anticipated revenues and
costs, such as compliance with laws and regulations. These and other factors are
discussed in the Company's filings with the Securities and Exchange Commission,
including this report.
i
TERMS
The abbreviations or acronyms used in the text and notes are defined below:
Abbreviation or Acronym Term
- --------------------------------------------------------------------------------
AEP......................................................American Electric Power
CDPHE.......................Colorado Department of Public Health and Environment
Cheyenne..................................Cheyenne Light, Fuel and Power Company
Company or NCE........................................New Century Energies, Inc.
CPUC....................The Public Utilities Commission of the State of Colorado
Denver District Court..............................District Court in and for the
City and County of Denver
DOE.........................................................Department of Energy
DSM.......................................................Demand Side Management
DSMCA.....................................Demand Side Management Cost Adjustment
ECA.......................................................Energy Cost Adjustment
e prime...........................................e prime, inc. and subsidiaries
FERC........................................Federal Energy Regulatory Commission
Fort St. Vrain................Fort St. Vrain Nuclear Electric Generating Station
Fuelco..........Fuel Resources Development Co., a dissolved Colorado Corporation
GCA..........................................................Gas Cost Adjustment
ICA....................................................Incentive Cost Adjustment
Merger.............................the business combination between PSCo and SPS
Natural Fuels..........................................Natural Fuels Corporation
NCE...................................................New Century Energies, Inc.
NC Enterprises..............................................NC Enterprises, Inc.
NMPUC.......................................New Mexico Public Utility Commission
NOx...............................................................Nitrogen Oxide
PSCo..........................................Public Service Company of Colorado
PUHCA.................................Public Utility Holding Company Act of 1935
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.....................Statement of Financial Accounting Standards No. 71 -
"Accounting for the Effects of Certain Types of Regulation"
SFAS 112...................Statement of Financial Accounting Standards No. 112 -
"Employers' Accounting for Postemployment Benefits"
SFAS 121...................Statement of Financial Accounting Standards No. 121 -
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of"
Thunder Basin.........................................Thunder Basin Coal Company
UE..............................Utility Engineering Corporation and subsidiaries
WGI.....................................................WestGas InterState, Inc.
Yorkshire Electricity............................Yorkshire Electricity Group plc
Yorkshire Power.......................................Yorkshire Power Group Ltd.
ii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Thousands of Dollars)
ASSETS
September 30, December 31,
1997 1996
---- ----
(Unaudited)
Property, plant and equipment, at cost:
Electric ..................................... $6,589,738 $6,448,993
Gas........................................... 1,105,777 1,035,394
Steam and other............................... 117,902 115,766
Common to all departments..................... 422,404 418,262
Construction in progress...................... 318,019 260,943
------- -------
8,553,840 8,279,358
Less: accumulated depreciation ............... 3,130,928 2,990,275
--------- ---------
Total property, plant and equipment......... 5,422,912 5,289,083
--------- ---------
Investments, at cost:
Investment in unconsolidated subsidiaries (Note 4). 302,862 29,672
Other.............................................. 41,768 51,324
------- ------
Total investments................................. 344,630 80,996
------- ------
Current assets:
Cash and temporary cash investments................ 57,433 50,015
Accounts receivable, less reserve for uncollectible
accounts ($8,583 at September 30, 1997; $6,623 at
December 31, 1996) .............................. 276,528 285,912
Accrued unbilled revenues.......................... 87,389 106,198
Recoverable purchased gas and electric energy costs
- net (Note 1) .................................. 91,124 47,003
Materials and supplies, at average cost............ 67,183 66,748
Fuel inventory, at average cost.................... 27,627 27,059
Gas in underground storage, at cost (LIFO)......... 53,774 42,826
Regulatory assets recoverable within one year (Note 1) 60,545 52,110
Prepaid expenses and other......................... 55,982 46,773
------ ------
Total current assets.............................. 777,585 724,644
------- -------
Deferred charges:
Regulatory assets (Note 1)......................... 380,759 414,001
Unamortized debt expense .......................... 21,876 20,839
Other.............................................. 117,317 87,879
------- ------
Total deferred charges............................ 519,952 522,719
------- -------
$7,065,079 $6,617,442
========== ==========
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
(Thousands of Dollars)
CAPITAL AND LIABILITIES
September 30, December 31,
1997 1996
---- ----
(Unaudited)
Common stock.......................................... $1,432,247 $1,396,849
Retained earnings..................................... 637,223 773,191
------- -------
Total common equity............................... 2,069,470 2,170,040
Preferred stock of subsidiaries:
Not subject to mandatory redemption................ 140,002 140,008
Subject to mandatory redemption at par............. 39,254 39,913
SPS obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures of SPS (Note 6) ............. 100,000 100,000
Long-term debt of subsidiaries........................ 1,989,177 1,879,928
--------- ---------
4,337,903 4,329,889
Noncurrent liabilities:
Employees' postretirement benefits other than pensions 62,308 58,551
Employees' postemployment benefits................. 25,679 27,551
------ ------
Total noncurrent liabilities...................... 87,987 86,102
------ ------
Current liabilities:
Notes payable and commercial paper................. 672,892 298,561
Long-term debt due within one year................. 312,420 170,261
Preferred stock subject to mandatory redemption
within one year 2,576 2,576
Accounts payable................................... 229,757 317,260
Dividends payable.................................. 73,244 36,973
Customers' deposits................................ 27,879 27,283
Accrued taxes...................................... 70,221 78,989
Accrued interest................................... 39,705 46,948
Defueling and decommissioning liability............ 2,399 8,665
Current portion of accumulated deferred income taxes 31,260 8,143
Other.............................................. 76,012 97,799
------ ------
Total current liabilities......................... 1,538,365 1,093,458
--------- ---------
Deferred credits:
Customers' advances for construction............... 51,418 50,635
Unamortized investment tax credits ................ 107,704 111,647
Accumulated deferred income taxes ................. 905,057 906,354
Other.............................................. 36,645 39,357
------- ------
Total deferred credits............................ 1,100,824 1,107,993
Commitments and contingencies (Notes 2 and 3).........
$7,065,079 $6,617,442
========== ==========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
2
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars Except per Share Data)
Three Months Ended
September 30,
1997 1996
---- ----
Operating revenues:
Electric.......................................... $670,787 $638,999
Gas............................................... 109,396 81,364
Other............................................. 23,971 19,043
-------- --------
804,154 739,406
Operating expenses:
Fuel used in generation........................... 199,726 172,789
Purchased power................................... 138,149 128,335
Gas purchased for resale.......................... 63,403 35,655
Other operating expenses.......................... 120,727 115,383
Maintenance....................................... 23,514 21,500
Depreciation and amortization..................... 61,359 56,383
Taxes (other than income taxes)................... 33,426 33,686
Income taxes...................................... 33,715 40,422
-------- -------
674,019 604,153
------- -------
Operating income..................................... 130,135 135,253
Other income and deductions:
Merger expenses................................... (18,584) (10,017)
Equity in earnings of unconsolidated subsidiaries
(Note 4) ....................................... 17,047 (859)
Miscellaneous income and deductions - net......... 966 7,187
-------- -------
(571) (3,689)
Interest charges and preferred dividends:
Interest on long-term debt........................ 40,302 36,458
Amortization of debt discount and expense less
premium ........................................ 1,590 1,388
Other interest.................................... 22,314 15,084
Allowance for borrowed funds used during
construction ................................... (2,874) (879)
Dividends on SPS obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of SPS .......... 1,963 -
Dividend requirements on preferred stock of
subsidiaries ................................... 2,929 2,962
----- -----
66,224 55,013
------ ------
Income before extraordinary item..................... 63,340 76,551
Extraordinary item - U.K. windfall profits tax (Note 4) (110,565) -
-------- -------
Net income (loss).................................... $(47,225) $ 76,551
======== ========
Weighted average common shares outstanding (thousands) 104,481 103,196
======= =======
Earnings per weighted average share of common stock
outstanding:
Income before extraordinary item.................. $ 0.61 $ 0.74
Extraordinary item ............................... (1.06) -
-------- --------
Net income (loss)................................. $ (0.45) $ 0.74
======== ========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
3
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars Except per Share Data)
Nine Months Ended
September 30,
1997 1996
---- ----
Operating revenues:
Electric.......................................... $1,853,809 $1,815,660
Gas............................................... 571,494 440,987
Other............................................. 62,464 54,811
-------- ---------
2,487,767 2,311,458
Operating expenses:
Fuel used in generation........................... 512,498 474,349
Purchased power................................... 389,925 380,864
Gas purchased for resale.......................... 385,898 268,762
Other operating expenses.......................... 355,946 338,868
Maintenance....................................... 71,811 70,555
Depreciation and amortization..................... 182,843 166,419
Taxes (other than income taxes)................... 100,007 100,200
Income taxes...................................... 94,665 126,129
-------- -------
2,093,593 1,926,146
--------- ---------
Operating income..................................... 394,174 385,312
Other income and deductions:
Merger expenses................................... (33,040) (17,992)
Write-off of investment in Carolina Energy Project
(Note 5) ....................................... (16,052) -
Equity in earnings of unconsolidated subsidiaries
(Note 4) ....................................... 21,319 (292)
Miscellaneous income and deductions - net......... (3,521) 5,778
-------- -------
(31,294) (12,506)
Interest charges and preferred dividends:
Interest on long-term debt........................ 119,312 102,960
Amortization of debt discount and expense less
premium ........................................ 4,657 4,277
Other interest.................................... 56,292 48,553
Allowance for borrowed funds used during
construction ................................... (7,624) (4,227)
Dividends on SPS obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of SPS .......... 5,888 -
Dividend requirements on preferred stock of
subsidiaries ................................... 8,814 9,026
----- -----
187,339 160,589
------- -------
Income before extraordinary item..................... 175,541 212,217
Extraordinary item - U.K. windfall profits tax (Note 4) (110,565) -
-------- ------
Net income........................................... $ 64,976 $212,217
======== ========
Weighted average common shares outstanding (thousands) 104,247 102,873
======= =======
Earnings per weighted average share of common stock
outstanding:
Income before extraordinary item................... $ 1.68 $ 2.06
Extraordinary item ................................ (1.06) -
-------- --------
Net income......................................... $ 0.62 $ 2.06
======== ========
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)
Nine Months Ended
September 30,
1997 1996
---- ----
Operating activities:
Net income........................................ $ 64,976 $212,217
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary item - U.K. windfall profits tax
(Note 4) ....................................... 110,565 -
Depreciation and amortization.................... 188,969 173,466
Amortization of investment tax credits........... (3,943) (3,909)
Deferred income taxes............................ 40,957 19,842
Write-off of investment in Carolina Energy Project
(Note 5) ....................................... 16,052 -
Equity in earnings of unconsolidated subsidiaries,
net ........................................... (20,099) 292
Allowance for equity funds used during construction (4) (765)
Change in accounts receivable.................... 9,384 (16,627)
Change in inventories............................ (11,951) 14,503
Change in other current assets................... (43,100) 24,513
Change in accounts payable....................... (87,503) (1,697)
Change in other current liabilities.............. (33,716) (29,723)
Change in deferred amounts....................... (32,371) 4,892
Change in noncurrent liabilities................. 1,885 (9,062)
Other............................................ 921 2,001
------- -------
Net cash provided by operating activities..... 201,022 389,943
------- -------
Investing activities:
Construction expenditures......................... (307,338) (312,371)
Allowance for equity funds used during construction 4 765
Proceeds from disposition of property,
plant and equipment ............................ 2,163 24,597
Acquisition of Yorkshire Electricity (Note 4)..... (362,430) -
Payment for purchase of companies, net of cash
acquired ....................................... - 3,649
Purchase of other investments..................... (26,283) (7,524)
Sale of other investments......................... 17,971 4,113
------- -------
Net cash used in investing activities......... (675,913) (286,771)
-------- --------
Financing activities:
Proceeds from sale of common stock................ 25,027 22,295
Proceeds from sale of long-term notes and bonds... 333,517 200,530
Redemption of long-term notes and bonds........... (85,468) (87,323)
Short-term borrowings - net....................... 374,331 (48,627)
Retirement of preferred stock of subsidiaries..... (666) (1,636)
Dividends on common stock......................... (164,432) (166,990)
-------- --------
Net cash provided by (used in) financing
activities ................................... 482,309 (81,751)
------- -------
Net increase in cash and temporary cash
investments .................................. 7,418 21,421
Cash and temporary cash investments at
beginning of period ......................... 50,015 28,306
------ ------
Cash and temporary cash investments at end of
period $ 57,433 $ 49,727
======== ========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
5
NEW CENTURY ENERGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
Merger and Financial Statement Presentation
Effective August 1, 1997, following receipt of all required state and
Federal regulatory approvals, SPS and PSCo merged in a tax-free "merger of
equals" transaction and became wholly-owned subsidiaries of NCE. Each
outstanding share of PSCo common stock was canceled and converted into the right
to receive one share of NCE common stock and each outstanding share of SPS
common stock was canceled and converted into the right to receive 0.95 of one
share of NCE common stock. Effective with the Merger, certain utility and
non-utility subsidiaries were transferred within NCE's common controlled
subsidiaries. The common stock of Quixx and UE, former SPS subsidiaries, were
transferred through the sale by SPS of the common stock of such subsidiaries at
net book value, aggregating approximately $119.0 million, to NC Enterprises in
exchange for notes payable of NC Enterprises. Subsidiaries of PSCo (Cheyenne,
WGI, e prime, and Natural Fuels) were transferred by a declaration of a dividend
of the subsidiaries' stock, at net book value, aggregating approximately $49.9
million, to NCE. NCE then made a capital contribution of the e prime and Natural
Fuels common stock, at net book value, aggregating approximately $29.5 million,
to NC Enterprises.
The consolidated financial statements reflect the accounting for the
Merger as a pooling of interests and are presented as if the companies were
combined as of the earliest period presented. 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.
Business, Utility Operations and Regulation
NCE is a registered holding company under the PUHCA and its utility
subsidiaries are engaged principally in the generation, purchase, transmission,
distribution and sale of electricity and in the purchase, transmission,
distribution, sale and transportation of natural gas. Both the Company and its
subsidiaries are subject to the regulatory provisions of the PUHCA. The utility
subsidiaries are subject to regulation by the FERC and state utility commissions
in Colorado, Texas, New Mexico, Wyoming, Kansas and Oklahoma. Over 90% of the
Company's revenues are derived from its regulated utility operations.
Regulatory Assets and Liabilities
The Company's regulated subsidiaries prepare their financial statements in
accordance with the provisions of 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. During 1996,
NCE's subsidiaries adopted SFAS 121, which imposes stricter criteria for the
continued recognition of regulatory assets on the balance sheet by requiring
that such assets be probable of future recovery at each balance sheet date. The
adoption of this statement did not have a material impact on the Company's
results of operations, financial position or cash flows.
6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
The following regulatory assets are reflected in the Company's consolidated
condensed balance sheets:
September 30, December 31,
1997 1996
(Thousands of Dollars)
Nuclear decommissioning costs, net........ $ 78,383 $ 89,731
Income taxes ............................. 167,276 179,757
Employees' postretirement benefits
other than pensions..................... 61,670 57,641
Early retirement costs.................... 10,314 15,505
Employees' postemployment benefits........ 24,507 24,797
Demand-side management costs.............. 43,619 41,462
Unamortized debt reacquisition costs...... 37,122 39,794
Thunder Basin judgment.................... 7,626 -
Other..................................... 10,787 17,424
------- ------
Total................................... 441,304 466,111
Classified as current..................... 60,545 52,110
------- -------
Classified as noncurrent.................. $380,759 $414,001
======== ========
The regulatory assets of the Company's regulated subsidiaries as of
September 30, 1997 are reflected in rates charged to customers over periods
ranging from two to thirty years (see discussion below regarding recovery
periods). The Company believes its utility subsidiaries will continue to be
subject to rate regulation to the extent necessary to recover these assets. In
the event that a portion of the Company's operations is no longer subject to the
provisions of SFAS 71 as a result of a change in regulation or the effects of
competition, the Company's subsidiaries could be required to write-off related
regulatory assets, determine any impairment to other assets resulting from
deregulation and write-down any impaired assets to their estimated fair value
which could have a material adverse effect on the Company's results of
operations, financial position or cash flows.
Effective July 1, 1993, PSCo began collecting from customers nuclear
decommissioning costs expected to total approximately $124.4 million (plus a 9%
carrying cost). Such amount, which is being collected over a twelve year period,
represented the inflation-adjusted estimated remaining cost of decommissioning
activities not previously recognized as expense at the time of CPUC approval.
PSCo is recovering approximately $13.9 million per year from its customers for
such costs.
On January 27, 1997, the CPUC issued its order on PSCo's 1996 gas rate
case. The CPUC allowed recovery of postemployment benefit costs associated with
its gas operations on an accrual basis under SFAS 112 and denied amortization of
the approximately $8.7 million regulatory asset recognized upon the adoption of
SFAS 112. On June 9, 1997, PSCo filed its appeal in Denver District Court. PSCo
is assessing the impact of this decision on the future recovery of the electric
jurisdictional portion of postemployment benefit costs totaling approximately
$13.8 million. If the appeal to the Denver District Court is unsuccessful, PSCo
will appeal this issue to the Colorado Supreme Court. PSCo believes it will
ultimately be successful in its appeals. If appeals are unsuccessful, including
pursuing the establishment of an alternative form of regulatory recovery, these
amounts will be written off.
Certain costs associated with PSCo's DSM programs are deferred and
recovered in rates over five to seven year periods through the DSMCA. Non-labor
incremental expenses, carrying costs associated with deferred DSM costs and
incentives associated with approved DSM programs are recovered on an annual
basis. Costs associated with SPS's DSM programs are also deferred and, as part
of a negotiated settlement agreement reached in July 1995, will be included in
rate base and cost of service in future PUCT proceedings.
7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
Costs incurred to reacquire debt prior to scheduled maturity dates are
deferred and amortized over the life of the debt issued to finance the
reacquisition or as approved by the applicable regulatory authority.
In early 1997, SPS recorded an approximate $22.3 million regulatory asset
associated with the Thunder Basin judgment pending authorization of recovery
from state regulators (see Note 2. Regulatory Matters - Thunder Basin).
Management believes that the judgment amount paid is recoverable from customers
and that the ultimate resolution will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
Recovered/Recoverable Purchased Gas and Electric Energy Costs -Net
The Company's utility subsidiaries have adjustment mechanisms in place
which allow for the recovery of certain purchased gas and electric energy costs
in excess of the level of such costs included in base rates. Currently, these
cost adjustment tariffs are revised periodically, as prescribed by the
appropriate regulatory agencies, for any difference between the total amount
collected under the clauses and the recoverable costs incurred (see Note 2.
Regulatory Matters - Electric and Gas Cost Adjustments).
Other Property
Property, plant and equipment includes approximately $18.4 million and
$25.4 million, respectively, for costs associated with the engineering design of
a planned 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 PSCo's weighted average cost of
debt and preferred stock in accordance with a CPUC rate order.
Non-utility Subsidiaries and Foreign Investments
The Company's non-utility subsidiaries are principally involved in
engineering, design and construction management, 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 the
investment in cogeneration facilities, foreign utility investments, electric
wholesale generators and other non-utility investments. The Company's
international investments are subject to regulation in the countries in which
such investments are made.
Statements of Cash Flows - Non-cash Transactions
Prior to the Merger, shares of PSCo's common stock (250,058 in 1997 and
274,934 in 1996), valued at the market price on the date of issuance
(approximately $10 million in each year), were issued to the Employees' Savings
and Stock Ownership Plan of Public Service Company of Colorado and Participating
Subsidiary Companies. The estimated issuance values were recognized in other
operating expenses during the respective preceding years. Shares of common stock
valued at the market price on the date of issuance ($0.6 million in 1997 and
$0.2 million in 1996), were issued to certain executives pursuant to the
applicable provisions of the executive compensation plans. These stock issuances
were non-cash financing activities and are not reflected in the consolidated
condensed statements of cash flows.
General
See Note 1. of the Notes to Supplemental Consolidated Financial Statements
in NCE's August 1, 1997 Form 8-K for a summary of the Company's significant
accounting policies. Certain prior year amounts have been reclassified to
conform to the current year's presentation. Additional description of the
businesses of PSCo and
8
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
SPS are contained in their reports under Section 13 or 15(d) of the
Securities Exchange Act of 1934, including their respective Form 10-Q's for the
quarter ended September 30, 1997.
2. Regulatory Matters
Merger Rate Filings
The discussion below summarizes the significant state utility regulatory
matters in Colorado, Texas, New Mexico, Wyoming, Oklahoma, Kansas and the FERC.
PSCo
The CPUC decision approving the Merger establishes a five year performance
based regulatory plan and acknowledges that the Merger is in the public
interest. The major provisions of the decision include:
- a $6 million electric rate reduction, which was instituted October 1,
1996, followed by an additional $12 million electric rate reduction
effective with the implementation of new gas rates on February 1,
1997;
- 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. PSCo has established an estimated customer refund
obligation of approximately $7.4 million in connection with the
electric department sharing of earnings in excess of 11% return on
equity for the results of operations through September 30, 1997. It is
expected, at a minimum, that a similar amount will be recognized in
the fourth quarter of 1997;
- a freeze in base electric rates for the period through December 31,
2001 with the flexibility to make certain other rate changes,
including those necessary to allow for the recovery of DSM, QF and
decommissioning costs. The freeze in base electric rates does not
prohibit the Company from filing a general rate case or deny any other
party the opportunity to initiate a complaint or rate proceeding;
- a replacement of the Company's ECA with an ICA to allow for a 50%/50%
sharing of certain fuel and energy cost increases or decreases among
customers and shareholders;
- and the implementation of a Quality of Service Plan ("QSP") which
provides for bill credits totaling up to $5 million in year one and
increasing to $11 million in year five, if the Company does not
achieve certain performance measures relating to electric service
reliability, customer complaints and telephone response to inquiries.
On October 15, 1997, the CPUC issued an order addressing the
implementation of a reward mechanism in the QSP which provides up to
$3 million of annual rewards if the Company achieves certain
performance measures relating to electric reliability. Based on
performance measurements through September 30, 1997, the QSP will not
have a material adverse effect on the Company's financial position,
results of operations, or cash flows.
In November 1997, in connection with the annual electric department
earnings test discussed above, the CPUC held a hearing to review the prudence of
merger costs, allocation methodologies of merger costs, and the ratemaking
treatment of a transmission agreement with a wholesale customer. A final
decision on these issues is expected in early 1998.
SPS
Under the various state regulatory approvals, SPS is required to provide
credits to retail customers over five years for one-half of the measured
non-fuel operation and maintenance expense savings associated with the business
combination. SPS will provide a guaranteed minimum annual savings of $3 million
in Texas, $1.2 million in New Mexico, $100,000 in Oklahoma and $10,000 in
Kansas.
9
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
Rate Cases
PSCo
On June 5, 1996, PSCo filed a retail rate case with the CPUC requesting an
annual increase in its jurisdictional gas department revenues of 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. PSCo has appealed the CPUC's decision with
the Denver District Court, which disallowed the recovery of certain
postemployment benefit costs under SFAS 112 and imputed anticipated merger
related cost savings related to the gas business (see Note 1. Accounting
Policies - Regulatory Assets and Liabilities).
SPS
On December 19, 1989, the FERC issued its final order regarding a 1985
rate case. SPS appealed certain portions of the order that related to
recognition in rates of the reduction of the federal income tax rate from 46% to
34%. The United States Court of Appeals for the District of Columbia Circuit
remanded the case, directing the FERC to reconsider SPS's claim of an offsetting
cost and limiting the FERC's actions. The FERC issued its Order on Remand in
July 1992, required filings were made and a hearing was completed in February
1994. In October 1994, the administrative law judge issued a favorable initial
decision that, if approved by the FERC, would result in a substantial recovery
for SPS. Negotiated settlements with SPS's partial requirements customers and
Texas-New Mexico Power Company were approved by the FERC in July 1993 and
September 1993, respectively, and SPS received approximately $2.8 million,
including interest. In a settlement with SPS's New Mexico cooperative customers,
SPS received approximately $7.0 million, including interest. The FERC approved
this settlement in July 1995. Resolutions of these matters with the remaining
wholesale customers, Golden Spread member cooperatives and Lyntegar Electric
Cooperative, have not been reached. SPS cannot reasonably estimate the remaining
amount recoverable from these proceedings; however, a favorable resolution could
materially improve its consolidated earnings in the year in which it is
resolved.
Cheyenne
On May 12, 1997, Cheyenne filed an application with the Public Service
Commission of Wyoming ("WPSC") for an overall annual increase in retail gas
revenues of approximately $1.25 million. On September 23, 1997, the WPSC
approved an increase in retail gas revenues of approximately $1.19 million with
an 11.71% return on equity, effective October 1, 1997.
Electric and Gas Cost Adjustment Mechanisms
PSCo
During 1994 and 1995, the CPUC conducted several proceedings to review
issues related to the ECA. The CPUC opened a docket to review whether the ECA
should be maintained in its present form, altered or eliminated, and on January
8, 1996, combined this docket with the merger docket discussed above. The CPUC
decision on the Merger modified and replaced the ECA with an ICA. The ICA, which
became effective October 1, 1996, allows for a 50%/50% sharing of certain fuel
and energy cost increases and decreases among customers and shareholders.
Management does not believe this will have a significant impact on the Company's
results of operations, financial position or cash flows.
10
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
SPS
A PUCT substantive rule requires 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.
On May 1, 1995, SPS filed with the PUCT a petition for a fuel reconciliation for
the months of January 1992 through December 1994. The PUCT issued an order in
January 1996 requiring SPS to make a $3.9 million fuel refund consisting of $2.1
million of overrecovered fuel costs and $1.8 million of disallowed fuel costs
for the period. This refund was made in April 1996. Additionally, the order
required SPS to flow through to customers 100% of margins from non-firm
off-system opportunity sales as of January 1995. Prior PUCT rulings had allowed
SPS to retain 25% of these margins. The 100% flow through is required by PUCT
rules, absent rule waiver. A motion for rehearing on the fuel disallowance
(which was adjusted to $1.9 million) was subsequently denied by the PUCT and SPS
was ordered to flow through 100% of the margin effective with the first billing
cycle after the date of the order. Upon appeal by SPS to the Travis County
District Court in May 1996, the PUCT's decision on the disallowed fuel costs was
upheld. The Travis County District Court decision has been appealed to the Texas
Court of Appeals which has not yet ruled in the matter. Management does not
believe that the ultimate outcome of this matter will have a significant impact
on the Company's financial position, results of operations or cash flows. At
September 30, 1997, SPS had approximately $18.1 million in underrecovered fuel
costs in Texas and has requested to surcharge Texas retail customers for the
underrecovery.
Thunder Basin
SPS was named as a defendant in a case entitled Thunder Basin Coal Co. v
Southwestern Public Service Co., No. 93-CV304B (D. Wyo.). On November 1, 1994,
the jury returned a verdict in favor of Thunder Basin and awarded them damages
of approximately $18.8 million. SPS appealed the judgment to the Tenth Circuit
Court of Appeals and, on January 7, 1997, that Court found in favor of Thunder
Basin and upheld the judgment. SPS filed a motion for rehearing which was
denied. 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 and a regulatory asset was recorded.
Management believes that the judgment amount paid is recoverable from
customers and as such recognized a regulatory asset, although any such recovery
would be subject to review by various regulatory agencies. On September 17,
1996, the FERC issued an order granting SPS approval to collect the FERC
jurisdictional portion of the judgment from wholesale customers. On October 24,
1997, the NMPUC issued an order granting recovery of the New Mexico retail
jurisdictional portion of Thunder Basin costs. On May 1, 1997, SPS filed a
request with the PUCT to surcharge under-collected fuel and purchased power
expenses, which included $9.1 million of the Thunder Basin judgment. On November
4, 1997, an administrative law judge ("ALJ") issued a proposal for decision
which denied recovery of the judgment through the surcharge. SPS filed
exceptions to this ALJ recommendation and on November 19, 1997 the PUCT will
consider this matter. Management believes that recovery of the Thunder Basin
costs in the Texas retail jurisdiction will be approved either in this surcharge
request or through a fuel reconciliation proceeding in 1998.
3. Commitments and Contingencies
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 hazardous materials and hazardous waste compliance and remediation
activities.
11
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
Environmental Site Cleanup
As described below, the Company and its subsidiaries have been or are
currently involved with the clean-up of certain hazardous substances. In all
situations, the Company is pursuing or intends to pursue insurance claims and
believes it will recover some portion of these costs through such claims.
Additionally, where applicable, the Company intends to pursue recovery from
other Potentially Responsible Parties ("PRPs"). To the extent such costs are not
recovered, the Company and its subsidiaries believe it is probable that such
costs will be recovered through the rate regulatory process. To the extent any
costs are not recovered through the options listed above, the Company would be
required to recognize an expense for such unrecoverable amounts.
Under the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), the U.S. Environmental Protection Agency ("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 CDPHE indicating that no further action is required related to
these properties. On January 3, 1996, in a lawsuit by PSCo against its insurance
providers, the Denver District Court entered final judgment in favor of PSCo in
the amount of $5.6 million for certain cleanup costs at Barter. Several appeals
and cross appeals 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 million ($7.7 million attributable to the Barter
judgment). On July 10, 1997, the Colorado Court of Appeals overturned 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 some
of the policies. A retrial is expected. 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. PSCo plans to appeal the Colorado Court of Appeals
decision to the Colorado Supreme Court. In addition, PSCo expects to recoup
additional expenditures beyond insurance proceeds through the sale of the Barter
property and from other PRPs. In August 1996, PSCo filed a lawsuit against four
PRPs seeking recovery of certain Barter related costs.
Polychlorinated biphenyl ("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, on October 5,
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. On August 8, 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, complaints were filed by PSCo against all applicable insurance
carriers in the Denver District Court. On June 30, 1997, the Court ruled in
favor of the carriers on summary judgment motions addressing late notice and
other issues. PSCo is pursuing recovery from one carrier. On August 27, 1997,
PSCo filed an appeal of the decision with the Colorado Court of Appeals.
In addition to these sites, the Company and its subsidiaries have
identified several other sites where cleanup of hazardous substances may be
required. While potential liability and settlement costs are still under
investigation and negotiation, the Company and its subsidiaries believe that the
resolution of these matters will not have a material adverse effect on the
Company's financial position, results of operations or cash flows. The Company
and its subsidiaries fully intend to pursue the recovery of all significant
costs incurred for such projects through insurance claims and/or the rate
regulatory process.
Environmental Matters Related to Air Quality
Under the Clean Air Act Amendments of 1990 ("CAAA"), coal burning power
plants are required to reduce SO2 and NOx emissions to specified levels through
a phased approach. PSCo's 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 sulfur dioxide emission limitations by using
SO2 allowances allocated to plants by the EPA, using allowances generated by
12
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
reducing emissions at existing plants and by using allowances purchased from
other companies. The Company expects to meet the Phase II emission standards
placed on SO2 through the combination of: a) use of low sulfur coal, b) the
operation of air quality control equipment on certain generation facilities, and
c) allowances issued by the EPA. The Company will be required to modify certain
boilers by the year 2000 to reduce the NOx emissions in order to comply with
Phase II requirements. The estimated Phase II costs for future plant
modifications to meet NOx requirements is approximately $13 million. The Company
is studying its options to reduce NOx and SO2 emissions. PSCo has recently
announced its intention to spend approximately $211 million on its Denver and
Boulder Metro area coal-fired power plants to further reduce such emissions.
Craig Steam Electric Generating Station
On October 9, 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.
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) 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) 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.
A pre-trial conference has been scheduled for December 1997. Management does not
believe that this potential liability or the future impact of this litigation on
plant operations will have a material adverse impact on the Company's financial
position, results of operations, or cash flows. The issues raised in this
litigation are similar to the Hayden Station complaint which was settled in 1996
and disclosed in PSCo's 1996 Annual Report on Form 10-K.
Fort St. Vrain
In 1989, PSCo announced its decision to end nuclear operations at Fort St.
Vrain and to proceed with the defueling and decommissioning of the reactor.
While the defueling of the reactor to the Independent Spent Fuel Storage
Facility ("ISFSI") was completed in June 1992, several issues related to the
ultimate storage/disposal of Fort St. Vrain's spent nuclear fuel remained
unresolved.
On February 9, 1996, PSCo and the DOE entered into an agreement resolving
all the defueling issues. As part of this agreement, PSCo has agreed to the
following: 1) the DOE assumed title to the fuel currently stored in the ISFSI,
2) the DOE will assume title to the ISFSI and will be responsible for the future
defueling and decommissioning of the facility, 3) the DOE agreed to pay PSCo $16
million for the settlement of claims associated with the ISFSI, 4) ISFSI
operating and maintenance costs, including licensing fees and other regulatory
costs, will be the responsibility of the DOE, and 5) PSCo provided to the DOE a
full and complete release of claims against the DOE resolving all contractual
disputes related to storage/disposal of Fort St. Vrain spent nuclear fuel. On
December 17, 1996, the DOE submitted a request to the Nuclear Regulatory
Commission ("NRC") to transfer the title of the ISFSI. This request is being
reviewed by the NRC and PSCo anticipates approval no earlier than mid-1998.
On March 22, 1996, PSCo and the decommissioning contractors announced that
the physical decommissioning activities at the facility were completed. On
August 5, 1997, the NRC approved PSCo's request to terminate the Part 50
operating license. This concludes the decommissioning activities and the
facilities and site are suitable to be released for unrestricted use. Under the
Price-Anderson Act, PSCo remains subject to potential assessments levied in
response to any nuclear incidents prior to early 1994, as disclosed in PSCo's
1996 Annual Report on Form 10-K. At September 30, 1997, a remaining $2.4 million
defueling and decommissioning liability was reflected on the consolidated
condensed balance sheet. Management believes this remaining decommissioning
liability is adequate to finalize the payment of all related obligations.
13
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
As a result of the DOE settlement, coupled with a complete review of
expected remaining decommissioning costs and establishment of the anticipated
refund to customers, pre-tax earnings for 1996 were positively impacted by
approximately $16 million. In accordance with the 1991 CPUC approval to recover
certain decommissioning costs, 50% of any cash amounts received from the DOE as
part of a settlement, net of costs incurred by PSCo, including legal fees, is to
be refunded or credited to customers. PSCo established an $8 million refund
liability. In early 1997, such obligation was reduced by $1.1 million after
amounts to be refunded were finally determined and approved by the CPUC. Such
amounts are being refunded over a three year period.
Employee Matters
Several employee lawsuits have been filed against PSCo involving alleged
discrimination, sexual harassment or workers' compensation issues which have
arisen during the normal course of business. Also, lawsuits have been filed
against PSCo alleging breach of certain fiduciary duties to employees. The
plaintiffs lawsuits are in various stages of litigation and/or appeal(s),
including settlement discussions, with the appropriate state judicial courts.
PSCo intends to contest, or is actively contesting, all such lawsuits, and
believes the ultimate outcome will not have a material adverse impact on the
Company's results of operations, financial position or cash flows.
4. Yorkshire Electricity and U.K. Windfall Profits Tax
On April 1, 1997, Yorkshire Power (a 50/50 joint venture between AEP and
PSCo) effectively acquired all of the outstanding ordinary shares of Yorkshire
Electricity, a United Kingdom regional electricity company. The Company accounts
for its investment in Yorkshire Power using the equity method. Yorkshire Power's
results of operations includes 100% of Yorkshire Electricity's results since
April 1, 1997. The Company's equity earnings in Yorkshire Power is 50%, the same
as its ownership share.
The total consideration paid by Yorkshire Power was approximately $2.4
billion (1.5 billion pounds sterling). The acquisition was financed by Yorkshire
Power through a combination of approximately 25% equity and 75% debt, including
the assumption of the existing debt of Yorkshire Electricity. The funds for the
acquisition were obtained from PSCo's and AEP's investment in Yorkshire Power of
approximately $360 million (220 million pounds sterling) each, with the
remainder obtained by Yorkshire Power through the issuance of non-recourse debt.
PSCo funded its entire equity investment in Yorkshire Power through $250 million
of publicly issued secured medium-term notes with varying maturities and
drawings of approximately $110 million on its short-term lines of credit
pursuant to its short-term credit agreement with Bank of America, as agent.
In July 1997, the U.K. government enacted a windfall profits tax on
certain privatized business entities which will be payable in two installments
with the first in December 1997 and the second installment a year later. The
windfall profits tax was a retroactive adjustment to the privatization value
based on post-privatization profits during the 1992 to 1995 period. During the
third quarter of 1997, Yorkshire Power recorded an extraordinary charge of
approximately $221 million (135 million pounds sterling) for this windfall
profits tax. The Company's share of this tax is approximately $110.6 million.
14
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
Summarized income statement information for the period April 1, 1997 (date
of acquisition) to September 30, 1997 is presented below (in millions):
Yorkshire Power:
Operating revenues....................... $ 917.6
Operating income......................... 124.1
Income from continuing operations before
extraordinary item ...................... 42.8
Extraordinary item - U.K. windfall
profits tax ............................ (221.1)
--------
Net loss................................. $ (178.3)
========
Company's equity in the earnings (losses):
Extraordinary item - U.K. windfall
profits tax ............................ $ (110.6)
Equity in earnings of Yorkshire Power (1) 21.4
----
$ (89.2)
========
(1) Includes the impact of approximately $10 million related to the change in
the U.K. corporate income tax rate from 33% to 31%.
The pro forma financial information presented below assumes that the
acquisition of Yorkshire Power was acquired on the first day of each respective
period. The pro forma adjustments include recognition of equity in the estimated
earnings of Yorkshire Power, an adjustment for interest expense on debt
associated with PSCo's investment in Yorkshire Power and related income taxes.
The estimated earnings of Yorkshire Power was based on prior historical earnings
of Yorkshire Electricity, prior to its acquisition by Yorkshire Power, adjusted
for the estimated effects of purchase accounting (including the amortization of
goodwill), conversion to United States generally accepted accounting principles,
interest expense on debt issued by Yorkshire Power associated with the
acquisition and related income taxes. Sales of electricity are affected by
seasonal weather patterns and, therefore, the results of Yorkshire
Power/Yorkshire Electricity will not be distributed evenly during the year.
Equity in earnings of Yorkshire Power has been converted at the average exchange
rates for the nine months ended September 30, 1997 and September 30, 1996,
$1.6318/pound and $1.5367/pound, respectively.
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
Earnings Earnings
available for Earnings available for Earnings
common stock per share(1) common stock per share(1)
------------ ------------ ------------ ------------
(in millions) (in millions)
NCE's income before
before extraordinary
item................. $ 175.5 $ 1.68 $ 212.2 $ 2.06
Pro forma adjustments:
Equity in earnings of
Yorkshire Power, net
of U.S. tax benefits (2) (10.1) 19.6
Interest expense, net
of tax .............. (3.5) (10.4)
----- ------
Pro forma result........ $ 161.9 $ 1.55 $ 221.4 $ 2.15
======= ========
(1)Based on the weighted average number of common shares outstanding for the
period.
(2)The nine months ended September 30, 1997 amounts include $24.0 million
($17.9 million after-tax) of nonrecurring write-offs of certain computer
development costs, acquisition expenses and costs incurred for the
preparation for deregulation.
15
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
5. Acquisitions and Divestitures
Acquisition of Texas-Ohio Gas, Inc. and Texas-Ohio Pipeline, Inc.
Effective September 1, 1996, e prime acquired all of the outstanding stock
of Texas-Ohio Gas and Texas-Ohio Pipeline in exchange for a combination of
common stock of PSCo and cash. Such acquisitions were accounted for using the
purchase method and the acquired assets and liabilities have been valued at
their estimated fair market values as of the date of acquisition. These
companies are primarily engaged in gas brokering and marketing activities and
are subsidiaries of e prime.
Quixx Underground Water Rights
During August 1996, Quixx sold a portion of its underground water rights for
approximately $14 million. Quixx recognized an after-tax gain on the sale of
these water rights of approximately $7.7 million.
BCH Energy Limited Partnership Investment
As discussed in the SPS's 1996 Transition Report on Form 10-K as of December
31, 1996 under BUSINESS. Nonutility Businesses, Quixx holds a 49% limited
partnership interest in BCH Energy Limited Partnership ("BCH"), which owns a
waste-to-energy cogeneration facility located near Fayetteville, North Carolina.
Limited commercial operation of the BCH project began in June 1996; however, the
facility did not achieve the expected performance level. An effort was made to
restructure the project but it was not possible to achieve the required
improvements on economically viable terms; therefore, in December 1996, Quixx
wrote off its investment of approximately $16 million.
Carolina Energy Limited Partnership Investment
The Carolina Energy Project is similar to the BCH project, but with design
modifications. Construction was originally scheduled to be completed later in
1997 but was halted pending an independent analysis of the project's engineering
and financial viability. Additionally, the banks providing debt financing to the
project withheld funds for continued construction. Quixx, UE, other equity
owners, senior creditors and the construction contractor have been unable to
restructure the project on mutually agreeable terms. The construction contractor
is demobilizing and the creditors have initiated remedies provided under the
credit agreement. Accordingly, management has determined it is unlikely the
project will be completed under the present ownership, if at all, and Quixx's
and UE's net investments in the Carolina Energy Project are unlikely to be
recovered.
As a consequence, in June 1997, Quixx wrote-off its investment of
approximately $13.64 million in the Carolina Energy Limited Partnership.
Additionally, UE wrote-off its net investment of approximately $2.42 million in
this same partnership. Quixx held a one-third ownership interest, including a 1%
general partnership interest, in the partnership. UE's net investment in the
partnership was comprised of subordinated debt, the related interest receivable,
as well as engineering services. This combined investment represents
approximately $16.1 million.
16
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
6. SPS Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trust Holding Solely Subordinated Debentures of SPS
In October 1996, Southwestern Public Service Capital I, a wholly-owned trust,
issued in a public offering $100 million of its 7.85% Trust Preferred
Securities, Series A. The sole asset of the trust is $103 million principal
amount of SPS's 7.85% Deferrable Interest Subordinated Debentures, Series A due
September 1, 2036.
7. Management's Representations
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements include all adjustments necessary for the fair
presentation of the financial position of the Company and its subsidiaries at
September 30, 1997 and December 31, 1996 and the results of operations for the
three and nine months ended September 30, 1997 and 1996 and cash flows for the
nine months ended September 30, 1997 and 1996. The consolidated condensed
financial information and notes thereto should be read in conjunction with the
supplemental consolidated financial statements and notes included in the
Company's Form 8-K, dated August 1, 1997.
Because of seasonal and other factors, including the reorganization
associated with the Merger, the results of operations for the three months and
nine months ended September 30, 1997 should not be taken as an indication of
earnings for all or any part of the balance of the year.
17
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 September
30, 1997, and the related consolidated condensed statements of income for the
three and nine month periods ended September 30, 1997 and the consolidated
condensed statements of cash flows for the nine month period ended September 30,
1997. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
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, 1996 (not presented herein), and in our report
dated August 1, 1997, based on our audit and the report of other auditors, we
expressed an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying consolidated condensed balance sheet
as of December 31, 1996 is fairly stated, in all material respects, in relation
to the balance sheets from which it has been derived.
The consolidated condensed statements of income for the three and nine month
periods ended September 30, 1996, and the consolidated condensed statement of
cash flows for the nine month period ended September 30, 1996, of New Century
Energies, Inc. and subsidiaries were not reviewed by us and, accordingly, we do
not express an opinion on them.
ARTHUR ANDERSEN LLP
Denver, Colorado,
November 10, 1997
18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Effective August 1, 1997, following receipt of all required state and
Federal regulatory approvals, PSCo and SPS merged in a tax-free "merger of
equals" transaction and became wholly-owned subsidiaries of NCE, which is a
registered holding company under the Public Utility Holding Company Act of 1935.
This transaction was accounted for as a pooling of interests for accounting
purposes and the Consolidated Financial Statements are presented as if the
Merger were consummated as of the beginning of the earliest period presented.
However, the Consolidated Financial Statements are not necessarily indicative of
the results of operations, financial position or cash flows that would have
occurred had the Merger been consummated for the periods for which it is given
effect, nor is it necessarily indicative of future results of operations,
financial position or cash flows.
References to the Company are to NCE on a consolidated basis; however, in
certain circumstances, the separate subsidiaries are separately referred to in
order to distinguish between the different business activities of the companies.
Three Months Ended September 30, 1997 Compared to the Three Months Ended
September 30, 1996
Earnings
The Company recognized a net loss of $0.45 per share for the third quarter
of 1997 as compared to earnings per share of $0.74 per share for the third
quarter of 1996. The net loss was primarily attributable to the recognition of
an extraordinary item related to the one-time U.K. windfall profits tax of
approximately $110.6 million, or $1.06 per share, by Yorkshire Electricity, a
50% owned investment (see Note 4. Yorkshire Electricity and U.K. Windfall
Profits Tax in Item 1. FINANCIAL STATEMENTS). Income before this extraordinary
charge, decreased approximately $13.2 million or $0.13 per share from the
previous year. An increase in merger and business integration costs resulting
from the August 1, 1997 closing of the Merger, electric rate decreases
instituted in October 1996 and February 1997 and the recognition in 1996 of a
gain from the sale of water rights contributed to the lower earnings. Ongoing
operations of Yorkshire Electricity positively impacted the Company's earnings
by approximately $14.1 million net of borrowing costs and income taxes, or $0.14
per share.
Electric Operations
The following table details the change in electric operating revenues and
energy costs for the third quarter of 1997 as compared to the same period in
1996.
Increase (Decrease)
-------------------
(Thousands of Dollars)
Electric operating revenues:
Retail............................................... $ 3,533
Wholesale............................................ 25,186
Non-regulated power marketing........................ 2,817
Other (including unbilled revenues).................. 252
-------
Total revenues...................................... 31,788
Fuel used in generation............................... 26,937
Purchased power....................................... 9,814
-------
Net decrease in electric margin..................... $(4,963)
=======
19
The following table compares electric Kwh sales by major customer classes
for the third quarter of 1997 and 1996.
Millions of Kwh Sales
---------------------
1997 1996 %Change *
---- ---- ---------
Residential ............................... 2,634 2,557 3.0%
Commercial and Industrial ................ 7,334 7,122 3.0
Public Authority .......................... 219 209 4.6
----- -----
Total Retail............................. 10,187 9,888 3.0
Wholesale.................................. 3,516 2,762 27.3
Non-regulated power marketing.............. 205 101 **
----- -----
Total...................................... 13,908 12,751 9.1
====== ======
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful
Electric margin decreased in the third quarter of 1997, when compared to
the third quarter of 1996, primarily due to PSCo retail rate reductions
(approximately $4.8 million) implemented in October 1996 and February 1997 and
the recognition at PSCo of an estimated customer refund obligation
(approximately $7.4 million) in connection with the earnings sharing in excess
of 11% return on equity which resulted from the settlement of the Merger
proceedings in Colorado (see Note 2. Regulatory Matters in Item 1. FINANCIAL
STATEMENTS). Electric margin was also negatively impacted by the recognition at
SPS of an estimated customer refund obligation (approximately $0.7 million)
related to the guaranteed merger savings, as well as interruptible rates
available to certain classes of retail and wholesale customers. An overall
increase of approximately 3.0% in electric Kwh sales to retail customers
minimized the impact of these rate reductions. Higher wholesale electric sales
and power marketing activities by non-regulated subsidiaries also contributed to
increased operating revenues, however, the margin on such sales is minimal.
The Company's regulated subsidiaries have cost adjustment mechanisms which
recognize the majority of the effects of changes in fuel used in generation and
purchased power costs and allow recovery of such costs on a timely basis. As a
result, the changes in revenues associated with these mechanisms during the
third quarters of 1997 and 1996 had little impact on net income. However, in its
decision on the Merger, the CPUC replaced PSCo's ECA with an ICA, effective
October 1, 1996, which allows for a 50%/50% sharing of certain fuel and energy
cost increases and decreases among customers and shareholders (see Note 2.
Regulatory Matters in Item 1.FINANCIAL STATEMENTS).
Fuel used in generation expense increased approximately 15.6% during the
third quarter of 1997, as compared to the same quarter in 1996, primarily due to
increased generation levels at PSCo and SPS power plants and higher natural gas
costs at SPS.
Purchased power expense increased 7.6% during the third quarter of 1997,
as compared to the same quarter in 1996. This increase is primarily due the
amount of power purchased by PSCo to meet increased wholesale requirements and
other customer demands, as well as an increase in power marketing activities,
which were initiated in the third quarter of 1996.
Gas Operations
The following table details the change in revenues from gas sales and gas
purchased for resale for the third quarter of 1997 as compared to the same
period in 1996.
20
Increase (Decrease)
-------------------
(Thousands of Dollars)
Revenues from gas sales (including unbilled revenues). $27,372
Gas purchased for resale.............................. 27,748
-------
Net decrease in gas sales margin..................... $ (376)
=======
The following table compares gas dekatherm (Dth) deliveries by major
customer classes for the third quarter of 1997 and 1996.
Millions of Dth Deliveries
--------------------------
1997 1996 % Change *
---- ---- ----------
Residential................................ 6.2 6.4 (2.1)%
Commercial................................. 4.0 5.3 (11.5)
Non-regulated gas marketing................ 13.7 4.3 **
----- -----
Total Sales.............................. 23.9 16.0 49.7
Gathering and Processing................... - 0.4 **
Transportation............................. 22.3 20.6 8.2
----- -----
Total.................................... 46.2 37.0 25.2
===== =====
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful
Gas sales margin was relatively flat during the third quarter of 1997,
when compared to the third quarter of 1996, as the effect of lower sales from
utility operations was offset, in part, by higher rates from PSCo's 1996 rate
case and an increase in margin from non-regulated gas marketing activities.
Gas transportation, gathering, processing and other revenues increased
$0.7 million during the third quarter of 1997, when compared to the third
quarter of 1996, primarily due to an increase in deliveries and higher
transportation rates effective February 1, 1997, resulting from PSCo's 1996 rate
case.
PSCo and Cheyenne have in place GCA mechanisms for natural gas sales,
which recognize the majority of the effects of changes in the cost of gas
purchased for resale and adjust revenues to reflect such changes in cost on a
timely basis. As a result, the changes in revenues associated with these
mechanisms during the third quarters of 1997 and 1996 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.
Non-Fuel Operating Expenses
Other operating and maintenance expenses increased $7.4 million during the
third quarter of 1997, as compared to the same period in 1996, primarily due
higher operating costs from non-regulated operations and higher advertising
costs, offset, in part, by lower labor and employee benefit costs attributable
to the Company's overall cost containment efforts.
Depreciation and amortization expense increased $5.0 million in the third
quarter of 1997, as compared to the same period in 1996, primarily due to the
depreciation of property additions and the higher amortization of software
costs.
The $6.7 million decrease in income taxes for the third quarter of 1997,
as compared to the same period in 1996, is primarily due to lower pretax income.
Additional income tax expense was recognized in the current period due to the
recognition of certain non-deductible merger and executive severance costs.
21
Other income and deductions increased $3.1 million primarily due to the
recognition of equity earnings in Yorkshire Power ($17.3 million), of which
approximately $10 million is related to the change in the U.K. corporate income
tax rate from 33% to 31%. See Note 4. Yorkshire Electricity and U.K. Windfall
Profits Tax in Item 1. FINANCIAL STATEMENTS. This increase was offset, in part,
by increased merger and business integration costs (approximately $8.6 million),
including executive severance costs, resulting from the closing of the Merger
effective August 1, 1997 and the gain recognized in 1996 on the sale by Quixx of
certain water rights ($11.8 million). While costs associated with the Merger,
transition planning and implementation have negatively impacted earnings during
1997 and 1996, management anticipates that future operating results will benefit
from synergies resulting from the Merger.
Interest charges and preferred dividends increased $11.2 million during
the third quarter of 1997, when compared to the same quarter in 1996, primarily
due to interest on borrowings utilized to finance capital expenditures and the
April 1997 acquisition of Yorkshire Electricity. These borrowings included
PSCo's issuance of $75 million and $250 million of medium-term notes in January
and March 1997, respectively. Additionally, dividends on SPS obligated
mandatorily redeemable preferred securities of subsidiary trust increased due to
the October 1996 issuance of $100 million of SPS Obligated Mandatorily
Redeemable Preferred Securities of a Subsidiary Trust.
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended
September 30, 1996
Earnings
Earnings per share were $0.62 for the first nine months of 1997 as
compared to $2.06 per share during the same period in 1996. The significant
decrease was primarily attributable to the recognition of an extraordinary item
related to the one-time U.K. windfall profits tax of approximately $110.6
million, or $1.06 per share, by Yorkshire Electricity, a 50% owned investment
(see Note 4. Yorkshire Electricity and U.K. Windfall Profits Tax in Item 1.
FINANCIAL STATEMENTS). Earnings per share on income before this extraordinary
item decreased $0.38 per share for the nine months ended in 1997 as compared to
the same period in 1996. This decline was attributable to the favorable impact
in 1996 of the February 9, 1996 settlement agreement with the DOE resolving all
spent nuclear fuel storage and disposal issues at Fort St. Vrain (see Note 3.
Commitments and Contingencies - Fort St. Vrain in Item 1. FINANCIAL STATEMENTS),
the write-off in June 1997 of Quixx and UE's net investment in the Carolina
Energy Limited Partnership and higher merger and business integration costs, as
electric and gas margins on a combined basis, as discussed below were relatively
flat.
Electric Operations
The following table details the change in electric operating revenues and
energy costs for the first nine months of 1997 as compared to the same period in
1996.
Increase (Decrease)
-------------------
(Thousands of Dollars)
Electric operating revenues:
Retail............................................... $ 4,746
Wholesale............................................ 23,045
Non-regulated power marketing........................ 11,550
Other (including unbilled revenues).................. (1,192)
--------
Total revenues...................................... 38,149
Fuel used in generation............................... 38,149
Purchased power....................................... 9,061
-------
Net decrease in electric margin..................... $(9,061)
=======
22
The following table compares electric Kwh sales by major customer classes
for the first nine months of 1997 and 1996.
Millions of Kwh Sales
---------------------
1997 1996 %Change *
---- ---- ---------
Residential ............................... 7,370 7,284 1.2%
Commercial and Industrial ................ 20,370 20,027 1.7
Public Authority .......................... 578 590 (2.0)
----- ------
Total Retail............................. 28,318 27,901 1.5
Wholesale.................................. 8,478 7,529 12.6
Non -regulated power marketing............. 783 100 **
----- ------
Total...................................... 37,579 35,530 5.8
====== ======
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful
Electric margin decreased in the first nine months of 1997, when compared
to the first nine months of 1996. The decrease in electric margin was primarily
attributable to PSCo retail rate reductions implemented in October 1996 and
February 1997 (approximately $12.1 million) and the recognition of an estimated
customer refund obligation (approximately $7.4 million) in connection with the
earnings sharing in excess of 11% return on equity which resulted from the
settlement of the Merger proceedings in Colorado (see Note 2. Regulatory Matters
in Item 1. FINANCIAL STATEMENTS). Electric margin was also negatively impacted
by lower SPS sales during the second quarter of 1997 because of wet and mild
weather, the recognition at SPS of an estimated customer refund obligation
(approximately $0.7 million) related to the guaranteed merger savings, as well
as interruptible rates available to certain classes of SPS retail and wholesale
customers. The impact of these reductions was offset, in part, by an overall
increase of approximately 1.5% in electric Kwh sales to retail customers. Higher
wholesale electric sales and power marketing activities by non-regulated
subsidiaries also contributed to increased operating revenues, however, the
margin on such sales is minimal.
The Company's regulated subsidiaries have cost adjustment mechanisms which
recognize the majority of the effects of changes in fuel used in generation and
purchased power costs and allow recovery of such costs on a timely basis. As a
result, the changes in revenues associated with these mechanisms during the
first nine months of 1997 and 1996 had little impact on net income. However, in
its decision on the Merger, the CPUC replaced PSCo's ECA with an ICA, effective
October 1, 1996, which allows for a 50%/50% sharing of certain fuel and energy
cost increases and decreases among customers and shareholders.
Fuel used in generation expense increased approximately 8.0% during the
first nine months of 1997, as compared to the same period in 1996, primarily due
to the effects of the Thunder Basin judgment on SPS fuel costs ($19.9million;
see Note 2. Regulatory Matters - Coal Litigation in Item 1. FINANCIAL
STATEMENTS), increased generation levels at PSCo and SPS power plants and higher
natural gas costs at SPS.
Purchased power expense increased 2.4% during the first nine months of
1997, as compared to the same period in 1996. This increase is primarily due the
amount of power purchased by PSCo to meet increased wholesale requirements and
other customer demands, as well as an increase in power marketing activities,
which were initiated in the third quarter of 1996.
23
Gas Operations
The following table details the change in revenues from gas sales and gas
purchased for resale for the first nine months of 1997 as compared to the same
period in 1996.
Increase (Decrease)
-------------------
(Thousands of Dollars)
Revenues from gas sales (including unbilled revenues). $128,177
Gas purchased for resale.............................. 117,136
-------
Net increase in gas sales margin..................... $ 11,041
========
The following table compares gas Dth deliveries by major customer classes
for the first nine months of 1997 and 1996.
Millions of Dth Deliveries
--------------------------
1997 1996 % Change *
---- ---- ----------
Residential................................ 64.3 63.9 0.6%
Commercial and resale...................... 35.1 39.1 (10.2)
Non-regulated gas marketing................ 44.4 5.7 **
----- -----
Total Sales.............................. 143.8 108.7 32.3
Gathering and Processing................... 0.1 1.0 **
Transportation............................. 69.8 67.6 3.1
----- -----
Total.................................... 213.7 177.3 20.5
===== =====
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful
Gas sales margin increased in the first nine months of 1997, when compared
to the first nine months of 1996, primarily due to an increase in PSCo base
revenues associated with the higher rates effective February 1, 1997, resulting
from the Company's 1996 rate case and an increase in gas marketing activities by
non-regulated subsidiaries. Gas costs were higher during the first nine months
of 1997, as compared to the same period of 1996, as a result of higher gas
prices incurred through the 1996/97 winter heating season.
Gas transportation, gathering, processing and other revenues increased
$2.3 million during the first nine months of 1997, when compared to the first
nine months of 1996, primarily due to an increase in transportation rates
effective February 1, 1997, resulting from the Company's 1996 rate case and a
3.1% increase in transportation deliveries. The higher transportation deliveries
are attributable to the shifting of various commercial sales customers to firm
transportation customers. Historically, this shifting has not had an impact on
gas margin and is not expected to have an impact in the future.
PSCo and Cheyenne have in place GCA mechanisms for natural gas sales,
which recognize the majority of the effects of changes in the cost of gas
purchased for resale and adjust revenues to reflect such changes in cost on a
timely basis. As a result, the changes in revenues associated with these
mechanisms during the first nine months of 1997 and 1996 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.
Non-Fuel Operating Expenses
Other operating and maintenance expenses increased $18.3 million during
the nine months ended September 30, 1997, when compared to the same period in
1996, primarily due to the favorable impact on 1996 earnings of the February 9,
1996 settlement agreement with the DOE resolving all spent nuclear fuel storage
and disposal issues at Fort St. Vrain (approximately $16 million). In addition,
higher costs of non-regulated
24
subsidiary operations have contributed to the increase in consolidated operating
expenses. However, lower employee benefit costs and other general cost
reductions resulting from the Company's cost containment efforts favorably
impacted current year expenses.
Depreciation and amortization expense increased $16.4 million in the first
nine months of 1997, as compared to the same period in 1996, primarily due to
the depreciation of property additions.
The $31.5 million decrease in income taxes for the first nine months of
1997, as compared to the same period in 1996, is primarily due to lower pre-tax
income.
Other income and deductions decreased $18.8 million primarily due the
write-off in June 1997 of Quixx and UE's net investment in the Carolina Energy
Limited Partnership (see Note 5. Acquisition and Divestiture of Investments in
Item 1. FINANCIAL STATEMENTS ). In addition, increased merger and business
integration costs, including executive severance costs, resulting from the
closing of the Merger effective August 1, 1997 served to reduce other income and
deductions. While costs associated with the Merger, transition planning and
implementation have negatively impacted earnings during 1997 and 1996,
management anticipates that future operating results will benefit from synergies
resulting from the Merger. These decreases were offset, in part, by the
recognition of equity earnings in Yorkshire Electricity ($21.4 million), of
which approximately $10 million is related to the change in the U.K. corporate
income tax rate from 33% to 31% (see Note 3. Acquisition of Yorkshire
Electricity and U.K. Windfall Profits Tax in Item 1.FINANCIAL STATEMENTS).
Interest charges and preferred dividends increased $26.8 million during
the nine months ended September 30, 1997, when compared to the same period in
1996, primarily due to interest on borrowings utilized to finance capital
expenditures and the April 1997 acquisition of Yorkshire Electricity. These
borrowings included PSCo's issuance of $75 million and $250 million of
medium-term notes in January and March 1997, respectively. Additionally,
dividends on SPS obligated mandatorily redeemable preferred securities of
subsidiary trust increased due to the October 1996 issuance of $100 million of
SPS Obligated Mandatorily Redeemable Preferred Securities of a Subsidiary Trust.
Commitments and Contingencies
Issues relating to regulatory and environmental matters are discussed in
Notes 2 and 3 in Item 1. FINANCIAL STATEMENTS. These matters and the future
resolution thereof may impact the Company's future results of operations,
financial position or cash flows.
Based on a preliminary analysis, the Company expects to incur costs of
approximately $50-65 million over the next two years to modify its computer
software, hardware and other automated systems used in operatings enabling
proper data processing relating to the year 2000 and beyond. The Company
continues to evaluate appropriate courses of corrective action, including the
replacement of certain systems. A significant portion of these costs will
represent the redeployment of existing information technology resources.
Management does not anticipate these activities will have a material adverse
impact on the Company's financial position, results of operations or cash flows.
Common Stock Dividend
During the third quarter, the Board of Directors approved a $0.58 per
share dividend payable to shareholders of the Company on November 15, 1997. The
Company's common stock dividend level is dependent upon the Company's results of
operations, financial position, cash flows and other factors. The Board of
Directors of the Company will continue to evaluate the common stock dividend on
a quarterly basis.
25
Liquidity and Capital Resources
Cash Flows - Nine Months Ended September 30
1997 1996 Decrease
---- ---- --------
Net cash provided by operating activities (in millions) $201.0 $389.9 $(188.9)
Cash provided by operating activities decreased in the first nine months
of 1997, when compared to the same period in 1996, primarily due to the SPS
payment in April 1997 of the Thunder Basin judgment and an increase in payments
to gas suppliers resulting from the higher gas costs in late 1996 and early
1997. A portion of these higher gas costs have been deferred through PSCo's GCA
and will be recovered from customers in the future.
1997 1996 Increase
---- ---- --------
Net cash used in investing activities (in millions) $(675.9) $(286.8) $389.1
Cash used in investing activities increased during the nine months ended
September 30, 1997, when compared to the same period in 1996, primarily due to
the acquisition of an equity interest in Yorkshire Electricity for approximately
$362 million and the 1996 sale by Quixx of certain water rights.
1997 1996 Increase
---- ---- --------
Net cash provided by (used in) financing
activities (in millions) $482.3 $(81.8) $564.1
Cash provided by financing activities increased (indicating that there
were more borrowings) in the first nine months of 1997, when compared to the
same period in 1996, primarily due to PSCo's issuance of $75 million and $250
million of medium term notes in January and March 1997, respectively. The
proceeds from the $75 million financing were used to fund PSCo's construction
program. The proceeds from the $250 million medium term notes, together with
additional borrowings of approximately $110 million on its short-term lines of
credit, were used to fund the acquisition of Yorkshire Electricity (see Note 4.
Yorkshire Electricity and U.K. Windfall Profits Tax in Item 1. FINANCIAL
STATEMENTS). As a result of the increase in recoverable purchased gas and
electric energy costs and reduced cash flows resulting from lower electric
rates, coupled with increased merger and business integration costs, PSCo has
utilized the proceeds from additional short-term borrowings to finance ongoing
construction expenditures. With the consummation of the Merger effective August
1, 1997, management anticipates that future operating results and related cash
flows will benefit from synergies resulting from the Merger.
Short-Term Borrowing Arrangements
On August 11, 1997, NCE entered into a $225 million credit facility with
several banks. The credit facility provides for $100 million of direct
borrowings by NCE until the outstanding common stock of PSCCC, a wholly-owned
subsidiary of PSCo, is transferred to NCE. After the transfer, NCE will have
access to $225 million of direct borrowings under the credit facility. The $30
million bridge loan facility which provided funds necessary for the repayment of
certain pre-merger PSCo subsidiary short-term borrowings to permit the transfer
of such subsidiaries to NCE on the effective date of the Merger was terminated
on August 11, 1997.
NCE Common Stock
NCE intends to file a shelf registration statement with the SEC during the
fourth quarter of 1997 covering the offering and sale of up to 9 million shares
of Common Stock ($1 par value). The Company intends to use the net proceeds to
retire short-term debt and for general corporate purposes.
26
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 non-utility power producers and the FERC is requiring
utilities, including the Company, to provide wholesale transmission service to
others and may order electric utilities to enlarge their transmission systems to
facilitate transmission services without impairing reliability. State regulatory
authorities are in the process of changing utility regulations in response to
federal and state statutory changes and evolving markets, including
consideration of providing open access to retail customers. All of the Company's
jurisdictions continue to evaluate utility regulations with respect to
competition. The Company is unable to predict what financial impact or effect
the adoption of these proposals would have on its operations. The Merger between
PSCo and SPS was, in part, in response to these changing conditions.
27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Part 1. See Note 3. Commitments and Contingencies in Item 1, Part 1.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Form of Key Executive Change in Control Agreement, effective August 1,
1997.
15 Letter from Arthur Andersen LLP regarding unaudited interim
information is set forth at page 31 herein.
27 Financial Data Schedule UT
(b) Reports on Form 8-K
- A report dated August 1, 1997, was filed on August 1, 1997 which included
Item 2. Acquisition or Disposition of Assets and Item 7.
Financial Statements and Exhibits.
Exhibits included:
Exhibit No. Description
----------- -----------
99-1 News Release of New Century Energies, Inc., dated August 1, 1997
99-2 Supplemental Consolidated Financial Statements for the following
periods were included:
-supplemental consolidated balance sheets as of December 31, 1996 and
1995 and the related supplemental consolidated statements of income,
shareholders' equity and cash flows for the years ended December 31,
1996, 1995, and 1994.
99-3 Supplemental Consolidated Condensed Quarterly Financial Statements
-supplemental consolidated condensed balance sheet as of March 31,
1997 and the related supplemental consolidated condensed statements
of income and cash flows for the three months ended March 31, 1997
and March 31, 1996.
- A report dated August 1, 1997, was filed on August 4, 1997, which
included Item 5. Other Events and Item 7. Financial Statements and
Exhibits.
- A report dated July 2, 1997 was filed on September 26, 1997, which
included Item 5. Other Events.
28
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NEW CENTURY ENERGIES, INC.
By /s/R. C. Kelly
---------------------------------
R. C. KELLY
Executive Vice President and
Chief Financial Officer
Dated: November 14, 1997
29
EXHIBIT INDEX
10 Form of Key Executive Change in Control Agreement, effective August 1,
1997.
15 Letter from Arthur Andersen LLP regarding unaudited interim information is
set forth at page 31 herein.
27 Financial Data Schedule UT.
30
EXHIBIT 15
November 10, 1997
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 and the Company's Registration Statement (Form S-3, File
No. 333-28637) pertaining to the Dividend Reinvestment and Cash Payment Plan,
its Form 10-Q for the quarter ended September 30, 1997, which includes our
report dated November 10, 1997, 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
31