UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 2054
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________________ to _____________________
Commission file number 1-3789
SOUTHWESTERN PUBLIC SERVICE COMPANY
(Exact name of registrant as specified in its charter)
New Mexico 75-0575400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Tyler at Sixth, Amarillo, Texas 79101
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code (806) 378-2121
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each Class on which registered
------------------- -------------------
Common Stock New York Stock Exchange
Common Stock Purchase Rights Pacific Stock Exchange
Chicago Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
Not applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
As of November 4, 1996, 40,917,908 shares of the Company's common stock
were outstanding. The aggregate market value of this common stock held by
nonaffiliates based on the closing price on the New York Stock Exchange was
approximately $1,411,668,000.
The definitive proxy statement relating to the Annual Meeting of
Stockholders to be held on January 8, 1997, is incorporated by reference in Item
10, Item 11, Item 12 and Item 13 of Part III of this Form 10-K.
SOUTHWESTERN PUBLIC SERVICE COMPANY
FORM 10-K
For the Fiscal Year Ended August 31, 1996
TABLE OF CONTENTS
Item Description Page
PART I
1 Business ....................................................... 1
General ........................................................ 1
Construction Program ........................................... 4
Peak Load and Capability ....................................... 5
Interconnections ............................................... 6
Fuel Supply and Purchased Power ................................ 7
Regulation ..................................................... 9
Environmental Matters .......................................... 9
Employee Relations ............................................. 10
Nonutility Businesses .......................................... 10
Other .......................................................... 12
Statistical Summary ............................................ 12
Executive Officers of the Registrant ........................... 14
2 Properties ..................................................... 15
Electric Generating Stations ................................... 15
Water Supply ................................................... 16
3 Legal Proceedings .............................................. 16
4 Submission of Matters to a Vote of Security Holders ............ 16
PART II
5 Market for Registrant's Common Equity and
Related Stockholder Matters .................................. 17
6 Selected Financial Data ........................................ 18
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 18
8 Financial Statements and Supplementary Data .................... 23
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .......................... 45
PART III
10 Directors and Executive Officers of the Registrant ............. 45
11 Executive Compensation ......................................... 45
12 Security Ownership of Certain Beneficial Owners
and Management ............................................... 45
13 Certain Relationships and Related Transactions ................. 45
PART IV
14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K .................................................. 45
Signatures............................................................... 47
Exhibit 12. Statements re Computation of Ratio of Earnings .............. 82
Exhibit 99. Unaudited Pro Forma Information ............................. 92
SOUTHWESTERN PUBLIC SERVICE COMPANY
DEFINITIONS
ARCO Atlantic Richfield Company
Articles the Company's Restated Articles of Incorporation
BCH BCH Energy Limited Partnership
CAAA Clean Air Act Amendments of 1990
CAMU Colorado Association of Municipal Utilities
CCN Certificate of Convenience & Necessity
CP&L Carolina Power & Light Company
CPUC Colorado Public Utility Commission
CRMWA Canadian River Municipal Water Authority
Cap Rock Cap Rock Electric Cooperative, Inc.
Carolina Carolina Energy Limited Partnership
Company Southwestern Public Service Company
EDE Empire District Electric Company
EPA Environmental Protection Agency
EPACT Energy Policy Act of 1992
EPE El Paso Electric Company
EWG exempt wholesale generator
FERC Federal Energy Regulatory Commission
Golden Spread Golden Spread Electric Cooperative, Inc.
HSR Act Hart-Scott-Rodino Antitrust Improvements Act of 1976
HVDC high voltage direct current
KCC Kansas Corporation Commission
kwh kilowatt-hour
LSP LS Power, L.L.C.
Merger business combination between the Company and PSCo to form a
registered public utility holding company
Mortgage Indenture of Mortgage and Deed of Trust, dated August 1, 1946, as
supplemented and amended, of the Company
MW megawatts
MWH megawatt-hour
NCE New Century Energies, Inc.
NMPUC New Mexico Public Utility Commission
NOI Notice of Intent
NOPR notice of proposed rulemaking
NOX oxides of nitrogen
NRC Nuclear Regulatory Commission
OCC Oklahoma Corporation Commission
OPUC Office of Public Utilities Council
PNM Public Service Company of New Mexico
PSCo Public Service Company of Colorado
PSO Public Service Company of Oklahoma
PUCT Public Utility Commission of Texas
PUHCA Public Utility Holding Company Act of 1935
QF qualifying facility
QPS Quixx Power Services, Inc., a wholly owned subsidiary of Quixx
Quixx Quixx Corporation
RECs rural electric cooperatives
RFP request for proposals
SAGE S. A. Garza Engineers
SEC Securities and Exchange Commission
SO2 sulfur dioxide
SPP Southwest Power Pool
TNP Texas-New Mexico Power Company
TUCO TUCO INC.
UE Utility Engineering Corporation
WPSC Wyoming Public Service Commission
WSPP Western Systems Power Pool
FORWARD LOOKING INFORMATION
Certain matters discussed in this 10-K are "forward-looking statements"
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as the Company "believes," "anticipates,"
"expects" or words of similar import. Similarly, statements that describe the
Company's future plans, objectives or goals are also forward-looking statements.
Such statements address future events and conditions concerning capital
expenditures, earnings, litigation, rate and other regulatory matters, the
pending Merger, liquidity and capital resources, and accounting matters. Actual
results in each case could differ materially from those currently anticipated in
such statements, by reason of factors such as electric utility restructuring,
including the ongoing state and federal activities; future economic conditions;
developments in the legislative, regulatory and competitive markets in which the
Company operates; and other circumstances affecting anticipated revenues and
costs.
PART I
ITEM 1. BUSINESS
GENERAL
The Company
Southwestern Public Service Company was incorporated in New Mexico in 1921.
The Company's principal business is the generation, transmission, distribution
and sale of electric energy. Substantially all of its operating revenues were so
derived during each of the fiscal years ended August 31, 1996, 1995 and 1994.
The Company has two wholly owned subsidiaries, UE and Quixx. See NONUTILITY
BUSINESSES and Note (1) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Electric service is provided through an interconnected system to a
population of about one million in a 52,000-square-mile area of the Panhandle
and south plains of Texas, eastern and southeastern New Mexico, the Oklahoma
Panhandle and southwestern Kansas. The Company provides electric energy to
forty-eight communities with a population of 2,000 or more, thirty-seven in
Texas, nine in New Mexico, and one each in Oklahoma and Kansas. Approximately
54% of the Company's operating revenues during fiscal 1996, excluding sales to
other utilities, were derived from operations in Texas.
The Company's sales are made to retail and wholesale customers. Retail
sales to ultimate consumers include residential, commercial and industrial
customers. Wholesale sales include sales for resale to RECs, and firm and
non-firm sales to other utilities. These non-firm, or economy, wholesale sales
to other utilities also include sales of interruptible power made under FERC
approved contracts. Firm sales are made under contract with other adjoining
utilities while non-firm sales are negotiated on the spot market or sold under
the WSPP agreement. See INTERCONNECTIONS. Non-firm sales are made to adjoining
and other utilities.
The production, transportation and processing of oil and natural gas, and
chemical, mineral and light manufacturing industries are of prime importance in
the area served. Agriculture and the processing of agricultural products,
including wheat, cotton, corn, sugar beets and vegetables, and livestock raising
and meat processing are industries of economic significance. The area also
contains many other diversified industries and commercial enterprises. See
STATISTICAL SUMMARY-ELECTRIC REVENUES.
The Company's largest sales of electric energy are during the summer months
when demand reaches a peak. The Company's 1996 maximum hourly net peak system
demand of 3,876 MW occurred on August 6, 1996. The record net peak of 3,952 MW
occurred on July 28, 1995. See PEAK LOAD AND CAPABILITY.
The information set forth herein, unless otherwise indicated, does not take
into account changes that will result from the Merger.
Merger Agreement
On August 22, 1995, the Company, PSCo, a Colorado corporation, and NCE, a
Delaware corporation, entered into a merger agreement which provided for a
"merger of equals" of the Company and PSCo. As part of the Merger process, NCE
will register as a public utility holding company under the PUHCA. NCE's
business will consist of utility operations and various non-utility enterprises.
NCE will become the parent company of both the Company and PSCo. The corporate
offices of NCE will be located in Denver, Colorado, with significant operating
offices being located in Amarillo, Texas. The Company will remain headquartered
in Amarillo, Texas.
The Company believes that synergies from the Merger will generate
substantial cost savings to the Company which would not be available without the
Merger. Management of both the Company and PSCo estimated at the time of the
Merger that it will result in potential cost savings of approximately $770
million to NCE during the ten-year period following the Merger. Approximately 50
percent of such savings is expected to be achieved through labor efficiencies,
including personnel reductions. Other potentially significant cost savings
include fuel procurement and dispatch, deferred generation capacity costs,
reduced corporate and administrative programs, and other avoided or reduced
operation and maintenance costs.
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On January 31, 1996, the shareholders of the Company and PSCo voted to
approve the Merger. The Merger is subject to various other closing conditions,
including the receipt of all necessary governmental approvals. Subject to
obtaining all requisite approvals, the parties have targeted completion of the
Merger for spring 1997. Set forth below is a summary of the status of various
regulatory approval proceedings.
PUHCA. Upon consummation of the Merger, NCE must register as a holding
company under the PUHCA. The PUHCA imposes restrictions on the operations of
registered holding company systems. Among these are requirements that securities
issuance, sales and acquisitions of utility assets or of securities of utility
companies and acquisitions of interests in any other business be approved by the
SEC. The PUHCA also limits the ability of registered holding companies to engage
in non-utility ventures and regulates holding company system service companies
and the rendering of services by holding company affiliates to the system's
utilities. An application has been filed with the SEC under the PUHCA.
Discussions among the Company, PSCo and the SEC staff are continuing.
Federal Power Act. Section 203 of the Federal Power Act of 1935 requires a
public utility to obtain the approval of the FERC prior to merging its
jurisdictional facilities with those of any other person. The Company and PSCo
reached a non-unanimous agreement with various intervenors, which settlement is
supported by the FERC staff. The settlement agreement, which was filed in August
1996, provides for a comprehensive regional planning process for the proposed
transmission interconnection between the Company and PSCo. Any interested party
will be allowed to participate. The settlement agreement also provides
protections to wholesale customers from the costs to complete the Merger. The
Company does not anticipate any adverse rate or financial impact from this
settlement. Hearings were held before an administrative law judge to address the
concerns of CAMU, the one party not joining the settlement agreement. An initial
decision by the judge is expected by January 1997.
CPUC. On August 23, 1996, the CPUC issued an oral decision approving the
Merger, which is expected to be confirmed in a subsequent written decision. PSCo
agreed to an $18 million annual electric base rate reduction, followed by a five
year base rate freeze. The CPUC's decision also provides for the formation of an
earnings sharing plan for the duration of the five-year freeze period, and
approves the implementation of PSCo's proposed quality of service plan for
electric retail operations, as modified by the stipulation. The CPUC also
indicated its preference that PSCo retain its natural gas operations.
WPSC. On August 16, 1996, the WPSC issued a written order approving the
Merger and reorganization of Cheyenne Light, Fuel and Power Company under NCE.
The Company does not anticipate any adverse rate or financial impact from this
order.
NMPUC. Hearings were concluded on August 22, 1996. Though no settlement was
reached, no party is opposing the Merger. On November 15, 1996, a hearing
examiner filed a recommended decision that the Merger is in the public interest
if certain conditions are met and the Company has substantially agreed to many
of these conditions. After an opportunity for exceptions to be filed, the
commission will consider the hearing examiner's recommended decision.
PUCT. The Company reached a non-unanimous agreement with respect to the
Merger with nine of ten intervenors, including the PUCT staff. The settlement
provides for the resolution of all outstanding issues, including a finding of
the Merger being consistent with the public interest and commencement of the
regulatory plan. The regulatory plan, as modified by the stipulation, generally
provides for an automatic annual credit for 50% of the merger-related operation
and maintenance (O&M) expense savings with a guaranteed annual credit for Texas
rate payers of at least $3 million for the first five years after the Merger
closes, and allows for recovery of merger-related and business integration costs
over the same period. The settlement was submitted to the PUCT, hearings were
concluded on August 14, 1996 and the administrative law judge recommended the
commission approve the Merger. The Company is awaiting a decision of the PUCT.
KCC. The KCC issued its order on November 28, 1995 granting the Company the
authority to issue stock certificates to NCE. Kansas law also provides that the
Company must enter into an agreement to keep the KCC fully informed about
transactions between NCE and the Company in matters which could affect the rates
charged to the Company's Kansas retail customers. On November 12, 1996, the
Company and the KCC entered into a rate agreement.
OCC. No approval of the OCC is required for consummation of the Merger and
the OCC has stated that they will not oppose the Merger. However, the OCC staff
filed an investigation into the rate effects of the Merger on Oklahoma retail
customers. The Company has entered into a rate agreement with the OCC staff and
the Oklahoma Attorney General's office providing for rate treatment similar to
the Texas stipulation. The OCC approved the rate agreement on September 23,
1996. The Company does not anticipate any adverse rate or financial impact from
this agreement.
Antitrust. An application was filed pursuant to the HSR Act on August 22,
1996. The applicable waiting period expired September 21, 1996. Therefore, the
Company and PSCo may, under the HSR Act, consummate the Merger at any time
during the twelve month period ending September 20, 1997.
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NRC. The NRC has issued a letter ruling allowing the transfer of PSCo's
ownership to NCE. PSCo has a nuclear plant decommissioning license issued by the
NRC.
The future operations and financial position of the Company will be
significantly affected by the Merger. Unaudited pro forma combined financial
information for NCE at September 30, 1996 and for the twelve months then ended
and each of the two years ended December 31, 1995 is included in this report as
Exhibit 99. Unaudited Pro Forma Financial Information. Additional information
may be found in Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS and in Notes (2) and (3) of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
Competition
The EPACT significantly changed the U.S. energy policy and, together with
other changes in regulation, including integrated resource planning, and
developing technology, is effecting substantial changes to the electric utility
industry. As permitted by the EPACT, the Company is providing wholesale
transmission service to others. However, the EPACT specifically prohibits FERC
mandating transmission service to retail customers.
The EPACT has stimulated competition in the wholesale electric markets by
creating a new class of independent power producers in addition to QFs.
Revisions to the PUHCA have allowed both utilities and non-utilities to form
independent power production companies called EWGs, which operate without the
restrictions of the PUHCA. EWGs offer alternative sources of power supply to
electric utilities across the country. Utilities are often required by state
regulation to solicit to purchase power from EWGs, QFs and other utilities
before seeking approval to construct new generation of their own. See
CONSTRUCTION PROGRAM.
Operating in this competitive environment will place pressure on utility
profit margins and credit quality. However, since the Company is a low-cost
producer, competition for wholesale markets and large industrial customers will
create opportunities for the Company to compete for new customers and revenues.
Increasing competition has recently resulted in credit rating agencies applying
more stringent guidelines when making utility credit rating determinations.
On May 31, 1995, the Company filed with the FERC comparable open access
transmissions service tariffs to provide other utilities use of the Company's
transmission system for wholesale sales. On August 1, 1995, the FERC accepted
the proposed tariffs for filing, subject to hearing and refund. On December 8,
1995, the Company filed a settlement agreement covering rates for transmission
services. The settlement is pending before the FERC. On April 24, 1996, the FERC
issued its Order No. 888 establishing industry-wide regulations promoting
wholesale competition through open access non-discriminatory transmission
services by public utilities and recovery of the related stranded costs. On the
same day, FERC also issued its Order No. 889 implementing regulations on
standards of conduct and information availability on transmission capacity,
prices, and other information that will enable power competitors to obtain open
access non-discriminatory transmission service. On July 9, 1996, the Company
filed its open access transmission tariff in compliance with Order No. 888. This
transmission tariff is in effect subject to refund and final approval of the
FERC. In January 1997 the Company must implement its standards of conduct and
its computerized open access same-time information system. The recent FERC
requirements will greatly increase wholesale power competition in regional
markets.
On May 31, 1995, the Company also filed with the FERC a tariff to allow the
Company to sell wholesale power at market based rates. On September 1, 1995, the
FERC accepted the Company's market based power sales tariff, subject to the
refund and the final resolution of the Company's comparable open access
transmission tariff filing of May 31, 1995. FERC also stated that the Company
cannot use the tariff for sales of power to affiliates.
State regulatory authorities are in the process of changing utility
regulations in response to federal and state statutory changes and evolving
competitive markets. Texas legislation enacted in 1995 recognizes the movement
to a more competitive market-place by requiring the PUCT to issue new
regulations relating to, among other things, allowance of less than fully costed
rates in wholesale and retail markets; recognition of and essentially waiving
all Texas utility regulation of EWGs and power marketers; and implementation of
transmission access comparable to the owning utility's use of its transmission
system for non-FERC regulated utilities (the Company is a FERC regulated
utility). These new regulations are under consideration. The Company believes
that these statutory and conforming regulations may result in increased
wholesale competition. While increased wholesale competition is not expected to
adversely affect the Company in the near term, due to the Company's low cost
structure, and may favorably impact it in the long term, the Company is unable
to predict what financial impact or effect the adoption of any such legislation
would have on its operations.
All of the Company's regulatory jurisdictions continue to evaluate utility
regulations with respect to retail competition ("retail wheeling"). The New
Mexico legislature, in 1996, rejected retail wheeling proposals; however, it
continued post
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session committee investigation of the matter. Texas, as well as
all other jurisdictions in which the Company operates, are expected to introduce
legislative proposals relating to retail wheeling in the 1997 sessions. Although
the Company believes it is well positioned to take advantage of the movement
towards deregulation and competition, the Company is unable to predict what
financial impact or effect the adoption of these proposals would have on its
operations. The Company's electric rates are among the lowest in the nation for
investor-owned utilities, and its service territory is situated at the
intersection of the nation's three electrical grids. These low rates permit the
Company to compete effectively with other utilities, EWGs and QFs for sales to
retail and wholesale customers within and outside the Company's traditional
service territory, as well as retain and develop new retail load. Furthermore,
the Company, together with its subsidiary UE, is able to construct new
generating facilities at a cost low enough to enable it to compete with EWGs and
QFs in their efforts to construct generation for sale to wholesale customers or
to self-generate their own needs. The Company is also competing with independent
power producers in markets through its subsidiary Quixx. See NONUTILITY
BUSINESSES and CONSTRUCTION PROGRAM.
In the current regulatory and competitive environments, the Company
believes that all of its costs are recoverable through rates. Based on the
Company's cost structure and the potential competitive market, the Company
believes, but can give no assurance, that it does not have significant stranded
cost exposure. See also Note (9) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSTRUCTION PROGRAM
Cash expenditures for the Company's construction program were $112.0
million in fiscal 1996. The following general discussion of the Company's
construction program and related expenditures are for a stand-alone company;
that is, without consideration to the proposed Merger. On that basis, the
Company's estimated construction expenditures for the next five years are as
follows:
Estimated for fiscal years ending August 31,
--------------------------------------------
1997 1998 1999 2000 2001 TOTAL
---- ---- ---- ---- ---- -----
(In Millions)
Generating facilities $123 $189 $59 $60 $45 $476
Transmission facilities 22 31 30 31 31 145
Distribution facilities 30 33 33 34 35 165
Other 21 14 15 14 15 79
-- -- -- -- -- --
Total cash requirements $196 $267 $137 $139 $126 $865
==== ==== ==== ==== ==== ====
Estimated annual construction expenditures are substantially higher than
actual 1996 expenditures due to a projected increase in demand. In 1997, two 104
MW natural gas-fueled combustion turbines are planned for peaking service at
Cunningham Station near Hobbs, New Mexico. The NMPUC has granted the Company a
CCN for one of the Cunningham units; the Company's application for the CCN for
the second unit is pending before the NMPUC.
The costs in 1998 for generating facilities contain estimates for the
construction of approximately 500 MW of additional capacity, including
approximately $100 million for three gas-fueled combustion turbines contingent
upon the outcome of the proposed Golden Spread project discussed below.
Construction plans for 1998 also include a 200 MW natural gas-fueled
cogeneration facility at the Phillips Petroleum complex near Borger, Texas. The
Company was granted a NOI by the PUCT for the 1998 cogeneration facility and
also for a 100 MW combustion turbine in 1999. PUCT regulations require that a
solicitation be conducted before a utility seeks certification of a new
generating unit located in Texas. Consequently, five RFPs were issued to
prospective bidders on September 15, 1995, and the initial bids, which were due
January 17, 1996, were screened by an independent evaluator, who selected short
lists of qualified bidders in each of the five RFP categories. On March 1, 1996,
the Company announced that twelve electric power resource proposals,
representing 604 MW of capacity had been placed on short lists that may avoid or
defer the 300 MW of new generating capacity associated with the Company's NOI.
Preliminary analysis of the best and final offers for demand side proposals
occurred this summer. However, receipt and analysis of the best and final offers
for supply side proposals have been delayed pending determination by the Company
of the status of the proposed Golden Spread project discussed below. If the
Company's proposed rate-base 1998 cogeneration unit and 1999 combustion turbine
unit are not selected through the solicitation process, the estimated total
construction budget would decrease by approximately $125 million.
Golden Spread, currently a significant full requirements customer of the
Company, was granted an NOI by the PUCT in 1995 for construction of 400 MW of
peaking generation. Subsequently, Golden Spread, LSP and Quixx entered into a
memorandum of understanding to construct the Mustang Station project, a 488 MW
combined cycle generating facility. Golden Spread, LSP and Quixx would own an
undivided interest in 50%, 25%, and 25%, respectively, of the station. This
facility, near Denver City, Texas, would be completed in two phases, one
(approximately 273 MW) in 1998 and
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one (approximately 215 MW) in 1999. Approval of this project by the PUCT would
decrease the Company's total estimated construction expenditures by
approximately $117 million. The Company has agreed to provide back-up, and
commitment and dispatch services for this facility should the project be
approved. See PEAK LOAD AND CAPABILITY and INTERCONNECTIONS.
The estimates for transmission facilities in the years 1998 through 2000
include $18 million for a transmission line that will extend from the area of
Amarillo, Texas to Clovis, New Mexico. This line will improve the reliability of
the Company's system.
These estimated expenditures have been prepared for planning purposes as
part of the Company's resource planning process (discussed below), and are
subject to review and revision. Actual expenditures will vary from these
estimates, as they have in the past, due to a number of factors, including
regulatory requirements related to the planning and siting of facilities,
changes in the rate of inflation, construction scheduling, environmental
matters, the cost and availability of funds, the rate of kwh sales growth and
other changes in business conditions, regulation and legislation. See GENERAL -
Competition. The completion of the Merger would significantly impact these
estimates.
The Company's resource planning process is designed to determine the
optimal mix of resources that will reliably meet its load and reserve
requirements at the least possible cost, while providing flexibility to respond
to uncertainty in the forecasts of load, fuel prices, and financial and other
conditions. The Company typically considers its load forecast, demand-side
management programs, SPP reserve requirements, and new generating unit
alternatives, and after consideration of these and any other relevant factors,
arrives at a resource plan which balances cost and reliable system operations.
During the five fiscal years ended August 31, 1996, the Company had
property additions (including work in progress) to utility plant of $503 million
and retirements of $45 million. At August 31, 1996, net utility plant was
approximately $1.6 billion.
See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-Liquidity and Capital Resources for information on the Company's
estimated capital expenditures and financing program. Also see NONUTILITY
BUSINESSES-QUIXX for information on Quixx's investment expenditures.
PEAK LOAD AND CAPABILITY
Plant capability, peak load, capacity margin and load factor were as
follows for the last three fiscal years:
Net
Fiscal Capability Peak Load Increase (Decrease) Capacity Load
Year (MW) (MW) Over Prior Year Margin Factor
1996 4,235* 3,876 (1.9)% 8.5% 62.9%
1995 4,135 3,952** 7.3 4.4 58.4
1994 4,062 3,682 9.3 9.4 61.7
* Includes 100 MW firm purchase from WestPlains Energy.
** This is an all-time high peak.
As a member of the SPP, the Company's goal is to maintain a net capacity
margin of 13%. Through the expansion of an existing interruptible program for
wholesale load, new interruptible programs for retail irrigation and industrial
loads, purchased power, and additional capacity installations on the system, the
Company expects to be within the SPP guideline after 1997. See CONSTRUCTION
PROGRAM.
During the period 1997 through 2001, the Company currently estimates that
its compound annual growth rates will be 4.6% for wholesale sales, excluding
non-firm sales, and 2.3% for retail sales. Total kwh sales estimates show a
compound annual growth rate of 2.7% for this forecast period. If the PUCT
approves the Golden Spread project (as discussed in CONSTRUCTION PROGRAM),
wholesale sales would decrease by approximately 11%, but the overall growth
rates are expected to continue to rise. The Company periodically reviews
expected growth patterns in its service area and these growth rate estimates are
subject to change. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
5
INTERCONNECTIONS
The Company is connected with utilities west of its service territory
through two HVDC interconnections in New Mexico and has four interconnecting
transmission lines with utilities of the SPP. These interconnections are
described in the following table:
Voltage (kilovolts)
-------------------
Location Interconnecting Utility The Company Other Utility In-Service Date
- -------- ----------------------- ----------- ------------- ---------------
Near Artesia, NM El Paso Electric Company and
Texas-New Mexico Power Company 230* 345 9/84
Near Clovis, NM Public Service Company of New Mexico 230* 345 1/85
Near Oklaunion, TX Public Service Company of Oklahoma 345 345 6/85
Near Elk City, OK Public Service Company of Oklahoma 230 230 5/72
Near Shamrock, TX West Texas Utilities 115 115 7/72
Near Guymon, OK WestPlains Energy 115 115 3/63
* These are HVDC interconnections owned by the interconnecting utilities. The
Company has scheduling capabilities over these facilities through the WSPP
agreement and pursuant to the agreements with the interconnecting utilities
described below.
Transactions with the SPP are handled through interties near Elk City and
Guymon, Oklahoma, and Shamrock and Oklaunion, Texas. These interties allow the
Company to sell or to purchase energy from the eastern electrical grid. Sales
through eastern interties accounted for 1.0% of fiscal 1996 total sales.
HVDC interconnections link the Company with the western electrical grid of
the United States. The Company purchases and sells energy through HVDC interties
near Artesia and Clovis, New Mexico. Sales through these interties accounted for
3.2% of fiscal 1996 total sales.
The Company is a participant in the FERC approved WSPP bulk power market.
This arrangement provides for short-term energy and capacity exchanges,
transmission services, flexible pricing, and electronic bulletin board postings
of available power and energy. The WSPP encompasses a wide portion of Canada and
the United States with over 90 members from northwestern Canada to Mississippi.
In fiscal 1996, 1.0% of total sales were due to WSPP bulk power sales.
Under an agreement which expires in December 1996, the Company increased
sales to EPE through the HVDC interconnection in Eddy County, New Mexico, from
50 MW in 1995 to 75 MW in 1996. Additional firm power sales through this HVDC
connection to TNP are made under an agreement with an initial term that expires
in 2004. In accordance with this contract, TNP may increase or decrease the
contract amount by up to 10% with one year's notice. TNP purchased 59 MW in
calendar 1996 and plans to reduce the amount to 53 MW in calendar 1997.
The Company has an interconnection agreement with PNM to sell power through
the HVDC interconnection near Clovis, New Mexico. Under this agreement PNM
purchased 100 MW of interruptible power service through April 1995. Beginning in
May 1995, PNM began purchasing 200 MW. The agreement provides that PNM may
continue purchasing 200 MW annually through May 2011 except that it may reduce
purchases in 25 MW increments upon written notice given at least three years in
advance of each incremental reduction. However, the purchase may not be reduced
by more than one 25 MW increment in any twelve-month period. PNM has provided
written notice of intent to reduce its purchases each year under this agreement,
beginning in 1999 with a 25 MW reduction.
Under a firm wholesale power agreement which expires in 2014, the Company
has contracted to serve the West Texas requirements load of Cap Rock. Cap Rock
purchased 100 MW of service in 1996 and sales to it are forecasted to increase
approximately 3% annually in 1997 and beyond.
The Company currently supplies power to Golden Spread under a full
requirements contract approved by the FERC. As discussed under CONSTRUCTION
PROGRAM, Golden Spread has announced its intention to construct generation and
Quixx and an unaffiliated third party have entered preliminary arrangements with
Golden Spread under which a 488 MW power plant would be constructed with
approximately 273 MW being completed in 1998 and 215 MW in 1999. The amount of
power purchased by Golden Spread from the Company would be reduced
correspondingly upon such capacity being placed in service.
6
The Company entered into an agreement with EDE to sell interruptible
wholesale power through the interconnections near Elk City, Oklahoma and
Oklaunion, Texas. Under this agreement, which expires in 2001, EDE purchased 35
MW in 1996 with such purchases to increase to 45 MW by 1999. PSO provides
transmission service for this power.
The Company entered into an agreement with WestPlains Energy to purchase
100 MW of firm power for the summer months of 1996 and 1997.
Interconnection sales for fiscal 1996 to the eastern electrical grid
totaled 214,015 MWH, including 190,149 MWH of WSPP sales. Sales to the western
electrical grid totaled 668,878 MWH, consisting of 175,987 MWH of firm sales and
492,891 MWH of non-firm sales, including 6,707 MWH of WSPP sales.
FUEL SUPPLY AND PURCHASED POWER
Fuel Supply
Approximately 53% of the Company's present generating capacity is fueled by
coal, 46% by gas and 1% by inert by-product gases, purchased steam and oil. See
PROPERTIES for information about generating plants.
The Company's actual and anticipated fuel use, as reported in the table
below, is based on MMBtu use for generation of electricity excluding non-firm
sales. The unpredictability of the non-firm sales market precludes its inclusion
as a factor in determining these fuel use projections.
Estimated for fiscal years ending August 31,
--------------------------------------------
Fiscal
Fuel 1996 1997 1998 1999 2000 2001
- ---- ---- ---- ---- ---- ---- ----
Coal 69.7% 71.0% 65.6% 63.0% 62.1% 61.3%
Gas 29.5 28.3 33.6 36.2 37.2 37.9
Other 0.8 0.7 0.8 0.8 0.7 0.8
Anticipated fuel use is based upon numerous assumptions with respect to,
among other things, regulatory requirements relating to cogeneration,
environmental protection and competition, load growth, cost and availability of
boiler fuels and the extent to which the Company receives and can utilize
contracted-for gas, renegotiates present gas contracts and enters into new
agreements. Consummation of the Merger will also impact anticipated fuel use.
Actual fuel mix in future years may vary substantially from these estimates
because these assumptions may not be realized.
Coal
The Company purchases all of its coal requirements for Harrington and Tolk
Stations from TUCO, in the form of crushed, ready-to-burn coal delivered by
coal-handling facilities owned by Wheelabrator Coal Services Co. to the
Company's boiler bunkers located within the Company's coal-fueled stations where
it is processed for burning. The coal is transported for TUCO by rail, primarily
from mines located in Wyoming, to TUCO's stockpiles which are adjacent to the
Company's coal-burning generating stations. At August 31, 1996, TUCO's coal
inventories at the Harrington and Tolk sites were 777,978 tons and 745,392 tons
(approximately 60 days supply), respectively. The Company's planned purchase of
TUCO from Cabot Corporation was cancelled because the PUCT declined to grant a
needed waiver in fuel-cost rules. See Note (2) of NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
TUCO has long-term contracts with ARCO for a supply of coal in sufficient
quantities to meet all of the Company's needs for Harrington and Tolk Stations.
See ITEM 3. LEGAL PROCEEDINGS. Specific coal reserves in the Powder River Basin
in Wyoming have been dedicated by ARCO to meet the contract quantities. The coal
is transported for TUCO by Burlington Northern Railroad to Harrington Station
near Amarillo, Texas, a distance of approximately 896 railroad miles, and by
Burlington Northern Railroad and the Atchison, Topeka and Santa Fe Railway
Company to Tolk Station near Muleshoe, Texas, a distance of approximately 1,032
railroad miles. Transportation charges make up approximately 51% of the total
cost of the coal.
The coal purchased from TUCO had an average heat content of 8,683 Btu per
pound at Harrington Station and 8,698 Btu per pound at Tolk Station for the
twelve months ended August 31, 1996. The Company expects that the Btu content of
the coal will vary between 8,200 and 9,000 Btu per pound and average 8,700 Btu
per pound.
The low sulfur content of this coal enables the Harrington and Tolk units
to operate without the use of flue gas desulfurization scrubbers and to meet
current state and federal SO2 emissions requirements. Unit No. 1 at Harrington
Station is equipped with an electrostatic precipitator, and Unit Nos. 2 and 3 at
Harrington Station and both units at Tolk
7
Station are equipped with fabric filtration systems. These units have
historically emitted less than one pound of SO2 per MMBtu of heat input compared
to the EPA New Source Performance Standard applicable to these units of 1.2
pounds of SO2 per MMBtu of heat input. See ENVIRONMENTAL MATTERS.
Natural Gas
The Company has a number of contracts of short and intermediate terms with
various natural gas suppliers operating in gas fields with long life
expectancies in or near its service area. In fiscal 1996 these gas contracts
allowed the Company to maximize competition between fuel suppliers and helped
minimize the Company's fuel cost during volatile market conditions. During this
period, the Company had under contract sufficient firm gas to meet all its
requirements. However, due to flexible contract terms, approximately 24% of the
Company's gas requirements were purchased under spot agreements.
Oil
Certain of the Company's generating stations can burn oil in emergency
situations. Oil is stored at these stations in sufficient quantities to meet
anticipated emergency requirements. These stations have an aggregate capability
of 975 MW. Small quantities of oil are also burned for maintenance purposes.
Cost of Fuel and Purchased Power
Details of the Company's cost of fuel and purchased power are presented
below:
Fiscal year ended August 31,
1996 1995 1994
Cost of fuel and purchased power (000):
Coal $277,908 $250,551 $276,825
Natural gas 136,139 116,481 123,503
Oil (1) 97 119 49
Other (2) 2,879 2,901 2,830
Purchased power 18,010 5,241 4,604
Total fuel and purchased power cost $435,033 $375,293 $407,811
Cost of fuel per MMBtu:
Coal $1.883 $1.814 $1.801
Natural gas 2.154 1.631 2.015
Oil (1) 4.194 3.635 3.741
Other (2) 1.766 1.754 1.806
Average (excluding purchased power) 1.963 1.752 1.862
Cost of fuel per net kwh generated (in cents):
Coal 1.875 1.797 1.788
Natural gas 2.288 1.687 2.118
Oil (1) 4.858 3.784 4.160
Other (2) .941 .934 .953
Average cost of fuel (excluding purchased power) 1.978 1.749 1.866
Average cost of fuel (including purchased power) 1.957 1.745 1.865
Average cost of purchased power per net
kwh purchased (in cents) 1.569 1.535 1.829
MMBtu of fuel consumed (000) 212,485 211,202 216,576
(1) Small quantities of fuel oil are burned for maintenance purposes.
(2) Includes purchased steam used at CZ-2 plant and hot nitrogen used at CZ-1
plant.
The average cost of fuel per MMBtu for fiscal 1996 increased 12.0% to $1.96
when compared to 1995; and for the three months ended August 31, 1996, the
average was $2.03. The average cost of fuel per net kwh generated for fiscal
1996 increased 13.1% to 1.98 cents when compared to last year and for the three
months ended August 31, 1996 was 2.09 cents. This increase in fuel cost per net
kwh in fiscal 1996 was primarily the result of increased coal and gas costs.
8
Fuel Cost Recovery
Fuel and purchased power costs are recoverable in Texas through a fixed
fuel factor which is a part of the Company's rates. If it appears that the
factor will materially overrecover or underrecover these costs, the factor may
be revised upon application by the Company or action by the PUCT. The rule
requires refunding and surcharging under/overrecovery amounts including interest
when they exceed 4% of the utility's annual fuel and purchased power cost, as
allowed by the PUCT, if this condition is expected to continue. The PUCT
periodically examines the Company's fuel and purchased power costs. In all other
jurisdictions, the Company currently recovers substantially all increases and
refunds substantially all decreases in fuel and purchased power costs pursuant
to monthly adjustment and clauses. Currently the Company has approximately $7
million in underrecovered fuel costs, and on November 1, 1996, filed with the
PUCT for a change in the fuel factor. See MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Notes (1) and (10) of NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS.
The Company is crediting certain wholesale customers' fuel cost with 75% of
the margin from coordination energy sales to other utilities and is crediting
its New Mexico retail customers with 75% and Texas retail customers with 100% of
the margin from coordination sales to other utilities and demand charges on
interruptible wholesale sales (as approved by regulatory agencies in those
jurisdictions). See Note (10) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
This margin is the difference between the revenues from these sales and
incremental costs to generate the power for the sales. Continued coordination
and other non-firm energy sales would act to lower the electric bills of these
customers; however, the Company cannot predict the extent of such sales.
REGULATION
General
In fiscal 1996, 54.3% of total revenues were derived from sales subject to
the jurisdiction of the PUCT and the Texas municipalities served by the Company.
The percentages of revenue subject to the jurisdictions of the FERC, the NMPUC,
and the OCC and the KCC were 28.1%, 16.2%, 1.2% and 0.2%, respectively.
The PUCT has jurisdiction over the Company's Texas operations as an
electric utility, and original and appellate jurisdiction over its Texas retail
rates and services. The Texas municipalities exercise original jurisdiction over
rates within their respective city limits. The FERC has jurisdiction over the
Company's rates for sales of electricity for resale. The NMPUC, the OCC and the
KCC have jurisdiction with respect to retail rates and services in their
respective states. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS and Notes (1) and (10) of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS. The NMPUC and the KCC also regulate the
Company's issuance of securities. The NMPUC also must approve any capital
investment by the Company in its subsidiaries and has limited the amount the
Company can contribute to Quixx. The Company has been authorized to make
investments in Quixx of up to $90 million at the cumulative rate of $15 million
per year for six years. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. The OCC also regulates the issuance of
securities which are secured by a lien on Company assets located within the
State of Oklahoma. The books of the Company are kept in accordance with the
FERC's Uniform System of Accounts and all of the Company's state jurisdictions
have accepted this system.
OPUC recently filed a complaint urging for a rate investigation of the
Company's Texas retail jurisdictional rates. OPUC is claiming that the Company
is over-earning by $10 to $18 million per year on its Texas retail
jurisdictional operations and has requested that the PUCT conduct a general rate
investigation. The Company has filed a response to OPUC's rate investigation
application and moved to dismiss the case. The Company is awaiting further
action by the PUCT.
ENVIRONMENTAL MATTERS
The Company's facilities are regulated by federal and state environmental
agencies. These agencies have jurisdiction over air emissions, water quality,
wastewater discharges, solid wastes and hazardous substances. Various Company
activities require registrations, permits, licenses, inspections and approvals
from these agencies. The Company has received all necessary authorizations for
the construction and continued operation of its generation, transmission and
distribution systems. Company facilities have been designed and constructed to
operate in compliance with the environmental standards.
The CAAA required the Company to undertake a consolidated permitting
program for its existing fossil-fueled plants. Under this permitting program,
the Company is paying emissions fees of approximately $800,000 annually to the
Texas
9
and New Mexico state air quality agencies. Beginning in the year 2000,
Phase II of the CAAA will require more stringent limits on SO2 emissions at the
Company's existing fossil-fueled plants. However, current regulations permit
compliance with sulfur emissions limitations commencing in the year 2000 by
using SO2 allowances allocated to plants by the EPA, using allowances generated
by reducing emissions at existing plants and by using allowances purchased from
other companies. Based upon information from the Company's fuel suppliers, the
SO2 allowances issued by the EPA approximate the Company's projected SO2
emissions. The Company monitors options to insure that allowances will be
sufficient to economically operate the Company's existing plants without
significant emission reductions. The CAAA also requires the EPA to develop new
NOx emission standards for existing and new plants which may be more stringent
than the current standards. The Company anticipates, but can give no assurance,
that it will be able to comply with Phase II NOx emission standards with no
additional material capital cost. The Company continues to monitor the impact
that the CAAA may have on the Company.
Capital expenditures for environmental protection facilities aggregated
approximately $2.8 million, $4.1 million, and $11.6 million for fiscal 1996,
1995 and 1994, respectively. Estimates of future capital expenditures for
environmental protection facilities are subject to change but the Company has
included $9.7 million in its construction program for these expenditures during
the five years ending August 31, 2001, of which $4.2 million is for fiscal 1997.
The Company has not developed any specific site removal and exit plans for
its fossil fuel plants or substation sites. Plant removal and exit plans are
under development. When such plans are developed, the Company intends to treat
removal and exit costs as a cost of retirement in utility plant and include them
in depreciation accruals. An estimated removal cost (based on historical
experience) is currently included in depreciation expense.
EMPLOYEE RELATIONS
The Company had approximately 1,950 utility employees at August 31, 1996.
Of these, approximately 900 operating, maintenance and construction personnel
are represented by Local Union No. 602, International Brotherhood of Electrical
Workers, AFL-CIO. Pursuant to the collective bargaining agreement with this
union which expires October 31, 1999, wages increased 3% effective November 1,
1996. The contract provides for an increase on November 1, 1997 and 1998 of 3%,
plus 80% of the amount by which the Consumer Price Index exceeds 3.5%. The wage
increase effective November 1, 1996, was also provided to employees not
represented by the union. A hiring freeze has been implemented during the Merger
process.
NONUTILITY BUSINESSES
Utility Engineering Corporation
UE is a wholly owned subsidiary formed in 1986. It is engaged in
engineering, design, construction management and other miscellaneous services,
employing approximately 120 employees. UE's assets at August 31, 1996, were
approximately $45.9 million and total revenues for fiscal 1996 were $21.2
million. UE is currently involved in a broad array of projects for nonaffiliate
customers, providing general engineering and design services. UE also is
providing services to the Company, at cost, as well as working jointly with
Quixx on cogeneration and waste-to-energy projects.
Because of the lack of major central station power plant design and
construction in the U.S. electric industry, UE is actively seeking other types
of plant engineering projects and will continue to broaden its base of customers
and diversity of projects. UE is currently the engineer for the Carolina Energy
Project near Kinston, North Carolina, in which Quixx is an equity owner, and,
during the past twelve months, has performed engineering and other services for
combustion turbine projects in the Dominican Republic, Kuwait and Columbia,
South America. UE also has active proposals for engineering work on projects in
several other international locations.
In 1996, UE created two wholly owned subsidiaries _ Universal Utility
Services Company (UUC) and Precision Resource Company (PRC). UUC was created
from operations and services which UE has provided since it was formed. Through
UCC, UE provides cooling tower maintenance and repair, certain other industrial
plant improvement services, and engineered maintenance of high voltage plant
electrical equipment. Through PRC, UE provides contract professional and
technical resources for customers in the energy and industrial sectors. In
fiscal 1996, UE wrote off its investment in SAGE, due to unprofitability of this
business. UE also owns a 49% interest in Vista Environmental Services, LLC,
which performs environmental consulting for energy and industrial customers in
both the private and government sectors, primarily in the southwestern United
States.
10
Quixx Corporation
Quixx is a wholly owned subsidiary formed in 1986. Its primary business is
investing in and developing cogeneration and energy-related projects. Quixx also
holds water rights and certain other nonutility assets. Quixx employs
approximately 65 employees. Quixx's assets at August 31, 1996, were
approximately $99.0 million and total revenues for fiscal 1996 were $17.7
million.
In 1996 Quixx invested $10.8 million in independent power projects and
expects to continue to make similar investments in the future dependent upon
suitable investment opportunities and the availability of capital. The NMPUC has
authorized the Company to make investments in Quixx of up to $90 million at the
cumulative rate of $15 million per year for six years.
Quixx holds a 42% limited partnership interest in BCH which owns a
waste-to-energy cogeneration facility located near Fayetteville, North Carolina.
The facility provides steam to a nearby DuPont plant and electric power is sold
to CP&L. The facility provides 17 MW of power to the CP&L grid. Limited
commercial operation of the BCH project began in June 1996; however, the
facility has not yet achieved the expected performance level. Quixx has invested
approximately $14.3 million in this project to meet its capital requirements.
Improvement plans are currently being evaluated, some of which may require
additional capital. Quixx is currently negotiating with the project debt and
equity holders concerning the restructuring of the project to achieve the
required improvements on economically viable terms. This investment in BCH was
funded with a capital contribution from the Company. QPS is the contract
operator of the BCH project.
Quixx also holds a 95% interest in Vedco Louisville L.L.C., a Delaware
limited liability company, which owns a facility consisting of two gas-fired
boilers providing steam to a DuPont plant in Louisville, Kentucky. Quixx's
investment of approximately $6.0 million in this facility was funded by a
capital contribution from the Company. Commercial operation began in December
1994.
Quixx Jamaica, Inc., a Delaware corporation and a wholly owned subsidiary
of Quixx, holds a 99% limited partnership interest in KES Jamaica, L.P. which
owns a facility consisting of two oil-fired combustion turbines located in
Montego Bay, Jamaica, W.I. The facility receives fuel from Jamaica Public
Service Company, Ltd. and returns up to 43 MW of power to their grid. Commercial
operation began in December 1994. Quixx's investment of approximately $10.8
million in this facility was funded by a capital contribution from the Company.
Quixx holds a 32 1/3% limited partnership interest, and through Quixx
Carolina, Inc., a Delaware corporation and a wholly owned subsidiary of Quixx, a
1% general partnership interest in Carolina which is constructing
waste-to-energy cogeneration facilities in Wilson and Lenoir Counties, North
Carolina. The facilities will provide steam to a DuPont plant located near
Kinston, North Carolina and up to 5 MW of electric power to the CP&L grid.
Quixx's investment of approximately $13.4 million in this facility was funded
primarily by a capital contribution from the Company. QPS will be the contract
operator for the Carolina project. Commercial operation is scheduled for July
1997.
Quixx provided $5.5 million for a 24.67% limited liability partnership
interest and through Quixx WPP94, Inc., a wholly owned subsidiary of Quixx, a
0.33% general partnership interest in Windpower Partners, 1994, L.P. which
constructed a 35 MW wind generation facility in Culberson County, Texas.
Electricity from the facility is being provided to the Lower Colorado River
Authority and the City of Austin. Commercial operation began in September 1995.
Quixx owns and operates Amarillo Railcar Services, a railcar maintenance
facility which provides inspection, light and heavy maintenance and storage for
unit trains. Quixx also finances sales of heat pumps and continues to market
other nonutility goods and services. In addition Quixx has royalty interests in
coal and other minerals produced and to be produced from certain New Mexico
properties owned by the Pittsburgh and Midway Coal Mining Company. In August
1996 Quixx completed the sale of certain water rights to the CRMWA for $14.5
million which resulted in an after-tax gain of approximately $7.7 million.
Quixx holds a 99% limited partner interest and through Quixlin Corp., a
Nevada corporation and a wholly owned subsidiary, a 1% general partner interest
in Quixx Linden, L.P. which will construct a 23 MW natural gas fired
cogeneration facility located in Linden, New Jersey. This facility, estimated to
be completed in mid-1998, will provide steam, compressed air and electricity to
General Motors. Fifty percent of this ownership interest will be sold to an
unaffiliated party on or prior to completion of this project. QPS will operate
this facility.
11
OTHER
City of Las Cruces
The City of Las Cruces (the City) continues to pursue a municipal electric
utility system by purchase or through condemnation of the EPE facilities serving
the City. In August 1994 the Company and the City entered into a fifteen year
contract for the Company to provide all of the wholesale electric power and
energy required by the City during the term of the contract if the City
establishes a municipal system. The City's wholesale requirements are expected
to be approximately 86 MW in 1997, the earliest it is believed service could
commence. The contract becomes effective on the acquisition of (i) a
distribution system by the City; (ii) the necessary transmission delivery and
back-up agreements by the Company; and (iii) the required regulatory approvals
by the City and the Company. If the specified events are not completed by July
1, 1998, either the Company or the City has the right to cancel the contract.
Under the contract, the rates and charges for service to the City are fixed
until January 1, 2001.
The Company and the City also entered into a System Purchase Option and
Rate Agreement in August 1994. That agreement grants the City the option to sell
to the Company the electric utility system serving the City (including
distribution, subtransmission, and transmission facilities) which the City plans
to acquire by purchase or through condemnation proceedings. The agreement has a
three-year term beginning at the time the City acquires the facilities and
ending no later than January 1, 2002. The purchase price that would be paid by
the Company would be equal to the amount required to retire the unamortized
outstanding debt incurred by the City in acquiring the facilities from EPE plus
the City's reasonable costs in acquiring the facilities. The agreement provides
that the Company will charge a total rate that shall be less than the projected
rate to be charged by EPE and the cost of fuel EPE would bill to its customers.
The Company has the right to terminate the agreement if, in the Company's sole
discretion, it deems any proposed condemnation award to be excessive, or upon
the occurrence of certain other events. The agreement further provides, that if
the City abandons or dismisses condemnation proceedings as a consequence of the
Company's termination of the agreement, the Company will reimburse the City for
one-half of its reasonable litigation expenses and for any of EPE's damages and
litigation expenses that the City is obligated to pay by final court order. In
conjunction with the agreement, the NMPUC has initiated Case 2651 to investigate
whether the agreement constitutes a security, or the guarantee of a security,
under the New Mexico Public Utility Act. The Company has responded to the
Commission's Order to Show Cause and does not believe the agreement to be a
security or the guarantee of a security. A hearing is expected in 1997.
STATISTICAL SUMMARY
Electric Revenues
Operating revenues attributable to commercial and industrial sales of
electric energy accounted for 50% of total operating revenues in fiscal 1996.
Selected operating revenues and kwh sales follow:
Fiscal year ended August 31,
----------------------------
1996 1995 1994
---- ---- ----
Revenue Kwh Revenue Kwh Revenue Kwh
------- --- ------- --- ------- ---
(Dollars In Thousands - Kwh In Millions)
Commercial and Industrial:
Oil and gas related $140,076 4,225 $137,646 4,117 $146,251 4,217
Chemical, mineral and
other manufacturing 49,395 1,522 47,579 1,489 49,793 1,477
Petroleum refining 36,285 991 35,123 978 35,273 941
Agricultural 18,738 388 19,545 417 20,199 411
Feedlots and packing plants 10,247 284 9,592 263 9,589 258
Irrigation 13,240 205 12,118 190 11,370 174
The Company's largest system customer in fiscal 1996 was Amoco Corporation,
which purchased approximately 1.5 billion kwh resulting in approximately $30.4
million in revenues.
12
Electric Operating Statistics
Fiscal year ended August 31,
----------------------------
1996 1995 1994
---- ---- ----
Energy generated and purchased (kwh-000):
Generated _ net output 21,082,150 21,159,953 21,609,287
Purchased and other 1,226,856 350,183 253,314
Net interchange 120 469 53
---------- ---------- ----------
Total 22,309,126 21,510,605 21,862,654
Company use, lost and unaccounted for (1,420,687) (1,175,029) (1,459,717)
----------- ---------- ----------
Energy generated and
purchased, net 20,888,439 20,335,576 20,402,937
========== ========== ==========
Sales (kwh-000):
Retail:
Residential 2,868,982 2,709,089 2,684,365
Commercial 2,886,807 2,809,692 2,692,848
Industrial 7,813,433 7,685,938 7,635,066
Other 571,579 548,012 533,305
Wholesale:
Rural electric cooperatives 5,239,474 4,682,975 4,157,209
Other utilities _ firm 604,860 614,609 768,850
Other utilities _ non-firm 903,304 1,285,261 1,931,294
------- --------- ---------
Total sales 20,888,439 20,335,576 20,402,937
========== ========== ==========
Electric revenues (000):
Retail:
Residential $175,167 $60,908 $163,614
Commercial 157,629 147,764 146,901
Industrial 281,863 267,842 276,335
Other 29,813 27,331 27,531
Wholesale:
Rural electric cooperatives 189,480 165,930 147,010
Other utilities _ firm 27,839 29,494 31,644
Other utilities _ non-firm 33,720 31,351 47,150
Miscellaneous* 4,612 4,194 3,956
----- ----- -----
Total electric revenues* $900,123 $834,814 $844,141
======== ======== ========
*Includes intercompany revenues.
Customers (end of period):
Retail:
Residential 308,554 300,459 297,853
Commercial 57,204 54,330 53,489
Industrial 12,418 11,896 11,422
Other 750 665 656
Wholesale:
Rural electric cooperatives 17 17 17
Other utilities 180 157 128
------- ------- -------
Total customers 379,123 367,524 363,565
======= ======= =======
Cost per net kwh generated (in cents):
Operation 2.51 2.26 2.36
Maintenance .15 .14 .13
Average revenue per kwh sold (in cents):
Residential 6.11 5.94 6.10
Commercial 5.46 5.26 5.46
Industrial 3.61 3.48 3.62
Wholesale excluding non-firm sales to
other utilities 3.72 3.69 3.63
Total sales 4.31 4.11 4.14
13
EXECUTIVE OFFICERS OF THE REGISTRANT
Years
Continuous
Present office, date elected thereto, and Age at Service with
Name previous title if in current office less than 5 years 11-1-96 Company
- ---- ----------------------------------------------------- ------- -------
Bill D. Helton Chairman of the Board and Chief Executive Officer since 3-1-91; 58 32
President and Chief Executive Officer, 10-23-90 to 3-1-91
David M. Wilks President and Chief Operating Officer since 9-1-95; 49 19
Senior Vice President, 1-9-91 to 9-1-95;
Doyle R. Bunch II Executive Vice President, Accounting and Corporate Development 50 20
since 9-25-92;
Executive Vice President and Chief Financial Officer, 10-23-90 to 9-25-92
Kenneth L. Ladd, Jr. Senior Vice President since 1-9-91; 57 35
John L. Anderson Vice President, Personnel since 1-11-89 62 37
Robert D. Dickerson Secretary and Treasurer since 1-13-88 47 21
Gerald J. Diller Vice President, Rates and Regulation since 7-27-93; 62 30
Group Manager, Rates and Regulation, 2-1-89 to 7-27-93
Gary L. Gibson Vice President, Marketing since 1-1-85 54 32
Henry H. Hamilton Vice President, Production since 1-14-87 58 32
Carl E. Jeans Vice President, Management Systems since 1-9-85 55 30
John McAfee Vice President, Engineering and Operations since 9-1-95; 51 23
Vice President, Panhandle Division and Corporate Communication,
2-1-95 to 9-1-95;
Vice President, Corporate Services, 7-25-89 to 2-1-95
None of the above executive officers of the Company are family related.
Officers of the Registrant are elected by, and hold office at the will of, the
Board of Directors and do not serve a "term of office" as such.
There is no arrangement or understanding between any officer and any other
person pursuant to which the officer was selected.
14
ITEM 2. PROPERTIES.
ELECTRIC GENERATING STATIONS
at August 31, 1996
Maximum Station Totals
Generator Maximum Net
Name-plate Generator Net Generation
Rating Name-plate Capability (Mwh) Fiscal
Year (Kilowatts) Principal Rating (Kilowatts) Year Ended
Generating Station Location New (A) Fuel (Kilowatts) (B) August 31, 1996
- ------------------ -------- --- --- ---- ----------- --- ---------------
Steam
Harrington Near Amarillo, TX 1976 360,000 Coal
1978 360,000
1980 360,000 1,080,000 1,066,000 7,587,731
Tolk Near Muleshoe, TX 1982 568,000 Coal
1985 568,000 1,136,000 1,080,000 7,336,317
Jones Near Lubbock, TX 1971 247,500 Natural gas
1974 247,500 495,000 486,000 2,172,003
Plant X Near Earth, TX 1952 48,000 Natural gas
1953 98,000
1955 98,000
1964 190,400 434,400 442,000 901,672
Nichols Near Amarillo, TX 1960 113,635 Natural gas
1962 113,635
1968 247,500 474,770 457,000 1,062,550
Cunningham Near Hobbs, NM 1957 75,000 Natural gas
1965 190,400 265,400 267,000 1,099,466
Maddox Near Hobbs, NM 1967 113,636 Natural gas 113,636 118,000 499,587
CZ-2 Near Pampa, TX 1979 37,440 Purchased
steam 37,440 26,000 207,265
Moore County Near Sunray, TX 1954 49,000 Natural gas 49,000 48,000 60,384
--------- --------- ----------
Subtotal, steam 4,085,646 3,990,000 20,926,975
--------- --------- ----------
Other
Gas Turbine
Carlsbad Carlsbad, NM 1968 16,320 Natural gas 16,320 16,000 7,600
CZ-1 Near Pampa, TX 1964 13,281 Hot nitrogen 13,281 13,000 98,640
Maddox Near Hobbs, NM 1976 86,850 Natural gas
1963 11,500 98,350 76,000 40,220
Riverview Near Borger, TX 1916 25,000 Natural gas 25,000 25,000 7,681
Diesel Engines
Tucumcari Tucumcari, NM 1975 1,000 Diesel
1959 2,250
1963 1,000
1964 3,000
1968 4,100
1977 4,800 16,150 15,000 1,034
---- ----- ------ ------ -----
Subtotal, other 169,101 145,000 155,175
------- ------- -------
Total, all generating stations 4,254,747 4,135,000 21,082,150
========= ========= ==========
(A) Pursuant to FERC instructions, name-plate ratings show the manufacturer's
maximum generator rating of each unit.
(B) Capability as used herein represents the demonstrated dependable carrying
abilities of the respective stations during peak periods as proven under
actual operating conditions.
15
WATER SUPPLY
The Company has an adequate supply of water for condensing and other
purposes at its principal generating stations for the design life of the
stations. To ensure future flexibility in the use of these stations beyond their
original design lives, the Company is negotiating additional water supplies for
certain generating stations. In an effort to conserve the fresh, potable water
of the area, the Company purchases for its Harrington and Nichols Stations
located near Amarillo, Texas, and its Jones Station located near Lubbock, Texas,
an aggregate of approximately 15,000,000 gallons of water per day from sewage
treatment plants owned by the respective cities, which it processes to a point
which permits its use as cooling tower water. The water is subsequently used for
irrigation.
ITEM 3. LEGAL PROCEEDINGS.
The Company has been named as a defendant in a case entitled Thunder Basin
Coal Co. v. Southwestern Public Service Co., No. 93-CV-304B (D. Wyo.). The
action was served on the Company on February 14, 1994 and it involves a dispute
over the interpretation of a clause in a contract between Thunder Basin and TUCO
for the supply of coal for use by the Company. The suit sought a determination
that there has been a partial repudiation of the agreement by TUCO which has
damaged Thunder Basin, and that the Company is liable for that damage as a
result of its guarantee of TUCO's performance. Thunder Basin also claimed that
the Company interfered with the contract between Thunder Basin and TUCO, causing
Thunder Basin damage. The total alleged damages sought by Thunder Basin was in
excess of $20 million. The Company denied any liability, and asked the court to
determine that its interpretation of the contract was correct.
Thunder Basin's Wyoming lawsuit in federal court went to trial in late
October 1994. On November 1, 1994 the jury returned a verdict in favor of
Thunder Basin and against the Company finding that there had been a partial
repudiation of the contract and that the Company had interfered with Thunder
Basin's contract with TUCO. The jury awarded damages to Thunder Basin of
approximately $18.8 million. The Company has appealed the judgement to the Tenth
Circuit Court of Appeals and the appeal is progressing.
The Company, in conjunction with TUCO, has commenced a related case against
Thunder Basin and its parent ARCO in state court in Amarillo, Texas (No.
80,280-E, TUCO, Inc. v. Thunder Basin Coal Company). This suit involves some of
the same issues of contract interpretation raised in the Thunder Basin Wyoming
suit, as well as the Company's claims that it has been overcharged approximately
$40 million for coal during the course of the contract. This litigation is
proceeding.
TUCO requested an audit of Thunder Basin's and ARCO's costs and expenses
used to calculate the cost escalation under the contracts which supply coal for
the Company. Thunder Basin and ARCO filed suit in Wyoming state court (No.
20041, Thunder Basin Coal Company v. TUCO, Inc. and Southwestern Public Service
Company) on June 26, 1995, seeking a declaratory judgment of the extent of the
information which must be revealed to TUCO under the coal supply contracts. That
suit was amended in September 1995 to request a declaratory judgment of the
issues pending in the Texas state court litigation.
Management believes that if a payment must ultimately be made to Thunder
Basin it would be recoverable from ratepayers, although any such recovery would
be subject to regulatory review. The FERC has ruled that the portion of the
$18.8 million in potential damages attributable to rates regulated by it would
be recoverable from ratepayers to the extent of demonstrated benefits.
Management believes that ultimate resolution will not have a material adverse
effect on the Company's consolidated financial statements.
The Company is involved in ordinary routine litigation incidental to the
business which litigation is not considered material. See REGULATION,
ENVIRONMENTAL MATTERS and Notes (7), (9) and (10) of NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS for information on regulation, environmental and rate
matters. See also OTHER - City of Las Cruces.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the Company's 1996
fiscal year to a vote of its security holders.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The principal markets on which the Company's common stock is traded are the
New York, Chicago and Pacific Stock Exchanges. The common stock has unlisted
trading privileges on the Boston and Philadelphia Stock Exchanges. The table
below presents the high and low market prices as reported by the National
Quotations Bureau, Inc., and dividend information for the Company's common
stock.
Market Price Dividends
High Low Declared
1996 - Fiscal Quarter Ended:
November 30, 1995 $33-7/8 $30 $0.55
February 29, 1996 33-7/8 32-1/8 0.55
May 31, 1996 34-1/8 30-5/8 0.55
August 31, 1996 33-3/8 30-1/4 0.55
1995 - Fiscal Quarter Ended:
November 30, 1994 $27 $25-1/8 $0.55
February 28, 1995 29-3/8 25-7/8 0.55
May 31, 1995 29 27-1/4 0.55
August 31, 1995 30-3/4 28-5/8 0.55
The Company declared dividends on its common stock of $2.20 in 1996 and
1995. The Company has agreed with PSCo in the merger agreement that it will not
raise its common stock dividend rate without the consent of PSCo. The Company's
dividend payout on its common stock was 87% in 1996 and 79% in 1995. At August
31, 1996, the number of holders of record of the Company's common stock was
28,744.
The Company covenants, in the Mortgage pursuant to which First Mortgage
Bonds are issued, that it will not declare any dividends (other than dividends
payable in its stock) upon its common stock, or make any payment on account of
the purchase, redemption or other retirement of, or make any distribution in
respect of, any shares of its stock except to the extent that the sum of (1)
$1,278,243.59, (2) net income of the Company, as defined, since June 1, 1946,
and (3) net proceeds received by the Company from the issue since such date of
any shares of its stock (but only up to an amount equal to the aggregate amount
of all payments since such date on account of the acquisition of any shares of
its stock) shall be (after giving effect to such dividends or distributions)
greater than the aggregate amount of dividends declared on all classes of the
Company's stock and of all payments made on account of the acquisition of, or
distribution in respect of, any shares of its stock since such date. See Note
(5) of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
In 1991 the Company adopted a Shareholder Rights Plan, which has been
amended so that it is not applicable to the Merger. See Note (1) of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
17
ITEM 6. SELECTED FINANCIAL DATA.
Fiscal year ended August 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars In Thousands Except Per Share Amounts)
Operating revenues $899,397 $834,083 $843,448 $809,753 $749,154
Operating income $150,666 $154,211 $139,719 $140,684 $137,755
Net earnings $105,773 $119,477 $102,168 $105,254 $102,987
Earnings per weighted average common
share outstanding $2.52* $2.80** $2.38 $2.43 $2.34
Dividends per share $2.20 $2.20 $2.20 $2.20 $2.20
Ratio of earnings to fixed charges 4.21 5.10 4.76 4.82 4.53
Ratio of earnings to fixed charges and
preferred dividend requirements combined 3.91 4.37 4.04 4.01 3.63
Return on average common equity 14.2% 16.2% 14.1% 14.5% 14.2%
Operating income as a percent of
operating revenue 16.8% 18.5% 16.6% 17.4% 18.4%
Total assets $1,997,817 $1,909,005 $1,821,235 $1,718,546 $1,705,734
Long-term debt and redeemable
preferred stock*** $638,107 $582,552 $523,228 $548,772 $554,117
Weighted average common stock outstanding 40,917,908 40,917,908 40,917,908 40,917,908 40,917,908
Book value per common share $17.97 $17.61 $17.01 $16.84 $16.61
* Includes a $0.19 increase in earnings per share attributable to the sale of
water rights owned by Quixx.
** Includes a $0.13 increase in earnings per share attributable to a change in
the estimated delivered not billed kwh sales and an $0.11 increase in
earnings per share attributable to a one-time adjustment resulting from
settlement of the 1985 FERC rate case with New Mexico wholesale customers.
*** Includes current maturities of long-term debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
References to "years" in this discussion pertain to the Company's fiscal
years which begin September 1, and end August 31. References to "Notes" pertain
to the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
Operating Revenues and Kilowatt-Hour Sales
Substantially all of the Company's operating revenues result from the sale
of electric energy. The principal factors determining revenues are the amount
and price per unit of energy sold. The following table describes the principal
components of changes in revenues.
Increase (Decrease) From Prior Year
-----------------------------------
1996 1995
---- ----
(Dollars In Thousands)
Estimated effect on revenues of:
Variations in kilowatt-hour (kwh) sales* $40,001 $19,943
Variations in rates (7,321) 9,110
Variations in fuel and purchased power
cost recovery 31,191 (22,583)
------ -------
Subtotal 63,871 6,470
Variations in non-firm kwh sales 1,443 (15,835)
----- -------
Total revenue increase (decrease) $65,314 $(9,365)
======= =======
Increase in kwh sales* (in millions) 935 579
======= =======
Decrease in non-firm kwh sales (in millions) (382) (646)
======= =======
* Comprised of retail and wholesale sales excluding economy and interruptible
wholesale (non-firm) kwh sales.
Variations in Kwh Sales. The revenue increase in 1996 was due primarily to
increased kwh sales to all retail (ultimate) customers and to rural electric
cooperatives (RECs) due primarily to a hotter than normal late spring and early
18
summer. These conditions increased air conditioning load for the year. A dry
winter and early spring increased irrigation while oil-related industry activity
in some areas also contributed to increased REC sales. Sales to Cap Rock also
contributed to increased REC sales in 1996. Sales began in February 1994 and
increased to 100% of Cap Rock's West Texas requirements in February 1995.
Contributing to the 1996 increase was the acquisition of electric properties in
the Texas panhandle from Texas-New Mexico Power Company (TNP). The increase in
1995 was due primarily to increased kwh sales to RECs and retail (ultimate)
customers. This increase in REC sales was due primarily to Cap Rock. Accounting
adjustments to the estimate of delivered not billed kwh sales also increased kwh
revenues by approximately $8.3 million in 1995. These estimated kwh sales relate
to energy used by customers but not billed until the subsequent month. The
Company expects modest growth in kwh sales (excluding non-firm sales) in 1997,
given normal weather conditions. Current estimates of the compound annual growth
rates in kwh sales for the five-year period 1997-2001 are 4.6% for wholesale
sales (excluding non-firm sales) and 2.3% for retail sales. Last year the
Company estimated for the period 1996-2000 that its wholesale sales growth rate
would be 2.5% and the retail sales growth rate would be 2.0%. If Golden Spread
Electric Cooperative builds generating capacity (which may occur in 1998 and
1999), it is anticipated that the Company's wholesale sales will decline by
approximately 11% when this capacity is placed in service, but the overall
growth rate is expected to rise.
Actual kwh sales by class of customer are shown in the following table:
1996 1995 1994
---- ---- ----
(Kwh In Millions)
Retail Sales:
Residential 2,869 2,709 2,685
Commercial 2,887 2,810 2,693
Industrial 7,813 7,686 7,635
Other 572 548 533
------ ------ ------
Total Retail Sales 14,141 13,753 13,546
------ ------ ------
Wholesale Sales:
Rural electric
cooperatives 5,239 4,683 4,157
Other utilities:
Firm 605 615 769
Non-firm* 903 1,285 1,931
--- ----- -----
Total Whole-
sale Sales 6,747 6,583 6,857
----- ----- -----
Total Sales 20,888 20,336 20,403
====== ====== ======
* Comprised of economy and interruptible sales.
Variations in Rates. Decreased revenues for 1996 resulted primarily from
decreased demand charges per kwh received from certain wholesale customers.
Increased revenues for 1995 resulted primarily from additional demand charge
revenues paid by certain wholesale customers. Additionally for 1995, a
settlement of the 1985 Federal Energy Regulatory Commission (FERC) rate case
with the Company's New Mexico wholesale REC customers contributed increased
revenues of approximately $4.0 million (and interest of $3.0 million that is
included in other income) (see Note 10).
Variations in Fuel and Purchased Power Cost Recovery. Revenues increased in
1996 primarily due to increased gas costs with higher coal costs also
contributing to the increase. These revenues decreased in 1995 due to
substantially lower natural gas prices.
Fuel and purchased power costs are recoverable in Texas under a rule that
provides for a fixed factor (based on known or reasonably measurable fuel costs)
to be used for fuel cost collection with final approval of the amount of
recoverable fuel cost being determined at the time of a utility's fuel
reconciliation proceeding. If reasonably unforeseeable circumstances result in a
material underrecovery of fuel costs, the utility may file a petition with
Public Utility Commission of Texas (PUCT) requesting a surcharge and change in
its fuel factors. The Company's current fixed factor, set by the PUCT in May
1996, is based on then reasonably predictable fuel and purchased power costs. In
all other jurisdictions, the Company currently recovers substantially all
increases and refunds substantially all decreases in fuel and purchased power
costs pursuant to monthly adjustment clauses. At August 31, 1996, the Company
has $7.5 million in net underrecovered costs. These costs are comprised of
underrecovered fuel costs totaling $7.7 million, net of off-system sales margin
credits totaling $0.2 million. In connection with these costs, the Company is
filing with the PUCT for a change in the fuel factor. In April 1996, the Company
refunded to its Texas retail customers overrecovered fuel costs totaling $3.9
million, consisting of $2.1 million of overrecovered fuel costs and $1.8 million
of disallowed fuel costs. The Company also refunded to its Texas retail
customers margin credits on non-firm sales totaling $5.4 million during 1996
(see Note 10).
Variations in Non-Firm Kwh Sales. The amount of revenues arising from
non-firm sales is dependent, in large part, upon the amount and cost of power
available to the Company for sale, the demand for power, the availability of
competing hydroelectric power from the Northwest and generation from major
plants in the West. The declines in non-firm sales in 1996 and 1995 were due
primarily to available power from major western plants and excess hydroelectric
power in the Northwest. Additionally, Company load growth in 1996 contributed to
the decline for that year. In 1995 mild weather throughout the region,
particularly in the winter, also contributed to the decline for that year.
19
Operating Expenses and Non-Operating Items
Fuel and purchased power expense comprised 58.1% of total operating
expenses in 1996 and 55.2% in 1995. Such expenses, when compared to prior years,
increased 15.9% in 1996 and decreased 8.0% in 1995. The increase in 1996 is due
primarily to increased natural gas prices and a slight rise in coal costs. The
decrease in 1995 is due primarily to decreased natural gas prices and decreased
kwh generation. When the Company requires less generation, more efficient plants
that use less fuel are utilized. The fuel cost per net kwh generated was 1.98
cents, 1.75 cents and 1.87 cents in 1996, 1995 and 1994, respectively. The
increase in 1996 was due to the rise in natural gas prices and increased coal
costs. The decline in 1995 was due to decreased natural gas prices. Although
fuel costs are expected to rise marginally throughout 1997, the Company plans to
mitigate any such increases through the purchase of lower-priced gas on the open
market and under short-term contracts, as well as using low-priced coal
purchased on the spot market for generation of off-system sales.
Operating expenses, excluding fuel and purchased power, increased 3.0% in
1996 and 2.9% in 1995. The increase in 1996 was due primarily to increased steam
production maintenance expense and expenses associated with the acquisition of
the TNP electric properties. Maintenance expenses were higher due to the normal
recurring eighteen month repair cycle and expenses associated with additional
cooling tower and coal feeder maintenance. The increase in 1995 was due
primarily to increased federal income taxes as a result of larger taxable
income. The Company continues to have a hiring freeze in effect during the
merger process (see Note 2). The Company's expenses in 1996 and 1995 were not
significantly impacted by inflation.
Other Income. Other income decreased 34.8% in 1996 and increased 150.7% in
1995. The decrease in 1996 was due to increased merger and business integration
expenses. Other income was favorably impacted by the approximate $7.7 million
after-tax gain on the sale of certain Texas Panhandle water rights by Quixx
Corporation. However, the effect of such gain was offset by merger-related
expenses that totaled approximately $5.7 million and business integration
expenses that totaled approximately $2.1 million. Also contributing to the
decrease was the non-deductibility of these merger-related expenses for federal
income tax purposes. The increase in 1995 was due primarily to approximately
$3.0 million of interest realized on the rate case settlement with New Mexico
wholesale customers and greater subsidiary earnings. The write-off in 1994 of
nonrecurring items caused a $3.4 million decline in such income that year.
Subsidiary operations contributed approximately 29 cents per share to earnings
in 1996 (19 cents per share from the Quixx water rights sale) and 13 cents in
1995.
Earnings
Operating income and earnings applicable to common stock decreased in 1996
due to the increased operating, merger-related and business integration
expenses. The operating expense increase was due to greater maintenance expenses
and costs associated with the acquisition of electric properties from TNP.
Additionally, greater interest expense contributed to the decline in income. The
increase in interest expense was the result of higher levels of debt throughout
the year caused by the retirement of preferred stock, the TNP electric property
acquisition and increased construction expenditures. Operating income and
earnings applicable to common stock increased in 1995 due primarily to greater
sales to RECs, the change in estimate of delivered not billed kwh sales ($5.4
million or 13 cents per share) and the rate settlement with wholesale customers
in New Mexico ($4.5 million or 11 cents per share). Assuming normal weather
conditions, 1997 operating income is expected to remain relatively flat, but net
earnings for 1997 will be negatively impacted by increased merger-related and
business integration expenses. A resolution of the 1985 FERC rate case with
Texas wholesale REC customers, by settlement or otherwise, would favorably
affect income and earnings in the year received.
20
The Company's average common equity for the years 1996, 1995 and 1994 was
$727,935,000, $708,462,000 and $692,537,000, respectively. The rate of return on
average common equity for these years was 14.2%, 16.2% and 14.1%, respectively.
The components of such return are presented as follows:
1996 1995 1994
---- ---- ----
Components of Return on Average Common Equity:
Rate-related income 13.3% 13.5% 13.5%
Subsidiary and other income .7 1.0 .4
Allowance for funds used during construction
(AFUDC) .2 .3 .2
New Mexico wholesale settlement - .6 -
Delivered not billed adjustment - .8 -
---- ---- ----
Total 14.2% 16.2% 14.1%
LIQUIDITY AND CAPITAL RESOURCES
The Company's demand for capital is normally related to the construction of
utility plant and equipment. Cash construction expenditures excluding AFUDC were
$112.0 million, $94.7 million and $91.8 million in 1996, 1995 and 1994,
respectively. During 1996 the Company generated approximately 75% of its capital
requirements for such purposes internally. Also in 1996, the Company received
regulatory approval to make investments in Quixx of up to $90 million at the
cumulative rate of $15 million per year for six years. Quixx's investment in
independent power projects is dependent upon suitable investment opportunities
and the availability of capital. Estimated construction expenditures excluding
AFUDC are $196.0 million for 1997 and $865 million for the five-year period
1997-2001. The portion of the Company's construction expenditures to be provided
by internally generated funds cannot be accurately forecast, but the Company
expects that it will be approximately 40% in 1997. To the extent the capital
required in 1997 is not supplied by internally generated funds, the Company will
obtain such capital from short-term borrowing or from the sale of long-term
debt, preferred stock and/or common stock. The Company's estimates of capital
needs, in particular those related to construction, and the generation of
internal funds are subject to review and revision, and may vary substantially
from the foregoing especially in a more competitive environment (see Note 9).
Due to the merger, Standard & Poor's is reviewing the Company's rated debt for
possible downgrade.
During the period 1997-2001, the Company will be required to retire $105
million of long-term debt, comprised of $15 million First Mortgage Bonds
(Bonds), 5.70% Series due 1997, and $90 million Bonds 6.875% Series due 1999.
The Company currently contemplates the sale of preferred stock, common stock and
long-term debt during the five-year period 1997-2001 in connection with the
financing of its construction program and retirement of Bonds.
In August 1994 the Company entered in a forward interest rate swap
agreement in anticipation of redeeming its $25 million principal amount of
13-1/2% Pollution Control Revenue Bonds (PCRBs) due 2001 with a new issuance of
variable rate PCRBs. Such bonds were redeemed October 1, 1996, and replaced with
a variable rate PCRB issue due July 1, 2016 that has been swapped for a fixed
rate of 6.435%. Additionally, the Company redeemed on September 26, 1996, the
$25 million 6-1/2% PCRBs due 2004 and the $32.3 million 6-5/8% PCRBs due 2009
and replaced these series on September 18, 1996, with $57.3 million 5-3/4% PCRBs
due September 1, 2016 (see Note 5).
In October 1996 the Company issued $100 million of 7.85% SPS Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trust holding solely
Subordinated Debentures. The funds from this financing were used to reduce
short-term debt.
The Company also has an effective shelf registration statement under which
$220 million of debt securities and/or preferred stock are available for
issuance.
OTHER MATTERS
Electric utilities have historically operated in a highly regulated
environment in which they have an obligation to provide electric service to
their customers in return for an exclusive franchise within their service
territory with an opportunity to earn a regulated rate of return. This
regulatory environment is changing. The generation sector has experienced
competition from nonutility power producers and the FERC is requiring utilities,
including the Company, to provide wholesale transmission service to others and
may order electric utilities to enlarge their transmission systems to facilitate
transmission services without impairing reliability. State regulatory
authorities are in the process of changing utility regulations in response to
federal and state statutory changes and evolving markets, including
consideration of providing open access to retail customers (see
21
Note 9). In part in response to these changing conditions, the Company has
entered into a definitive merger agreement with Public Service Company of
Colorado (the Merger). Consummation of the Merger is subject to customary
conditions including receiving regulatory authority approvals. The two utilities
are working toward a completion date in spring 1997. The foregoing discussions
of the Company's "Results of Operations" and "Liquidity and Capital Resources"
do not take into account any changes that could arise as a result of the Merger
(see Item 1 Business General and Note 2).
----------
The foregoing discussion and analysis by management is intended to provide
a summary of information relevant to an assessment of the financial condition
and results of operations of the Company and should be read together with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
in order to arrive at a more complete understanding of such matters.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Southwestern Public Service Company:
We have audited the accompanying consolidated balance sheets and statements of
capitalization of Southwestern Public Service Company and subsidiaries as of
August 31, 1996 and 1995, and the related consolidated statements of earnings,
common shareholders' equity and cash flows for each of the three years in the
period ended August 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Southwestern Public Service Company
and subsidiaries as of August 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 1996, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
October 10, 1996
23
SOUTHWESTERN PUBLIC SERVICE COMPANY
Consolidated Balance Sheets
August 31, 1996 and 1995
1996 1995
---- ----
(In Thousands)
Assets
Utility Plant:
Utility plant in service ............................. $ 2,484,025 $ 2,366,435
Accumulated depreciation ............................. (911,422) (854,015)
-------- --------
Net plant in service ................................. 1,572,603 1,512,420
Construction work in progress ........................ 49,143 31,026
------ ------
Net utility plant .................................... 1,621,746 1,543,446
--------- ---------
Nonutility Property and Investments .......................... 71,855 70,087
------ ------
Current Assets:
Cash and temporary investments ....................... 31,223 36,860
Accounts receivable, net ............................. 77,959 73,262
Undercollected fuel and purchased power cost, net .... 7,193 -
Accrual for unbilled revenues ........................ 23,152 28,626
Materials and supplies, at average cost .............. 21,513 21,647
Prepayments and other current assets ................. 7,452 10,734
----- ------
Total current assets ................................. 168,492 171,129
------- -------
Deferred Debits 135,724 124,343
------- -------
Total Assets ................................. $ 1,997,817 $ 1,909,005
=========== ===========
Capitalization and Liabilities
Capitalization (See Consolidated Statements of
Capitalization):
Common shareholders' equity .......................... $ 735,119 $ 720,752
Preferred stock ...................................... - 72,680
Long-term debt ....................................... 622,931 582,276
------- -------
Total capitalization ................................. 1,358,050 1,375,708
--------- ---------
Current Liabilities:
Short-term debt ...................................... 69,624 -
Current maturities of long-term debt ................. 15,176 276
Accounts payable ..................................... 15,979 12,187
Overcollected fuel and purchased power cost, net ..... - 5,969
Interest accrued ..................................... 10,962 9,067
Fuel and purchased power expense accrued ............. 46,396 40,164
Taxes accrued ........................................ 32,486 39,757
Dividends payable on common stock .................... 22,505 22,505
Other current liabilities ............................ 43,441 39,843
------ ------
Total current liabilities ............................ 256,569 169,768
------- -------
Deferred Credits:
Deferred income taxes ................................ 365,911 344,794
Unamortized investment tax credits ................... 5,803 6,053
Other ................................................ 11,484 12,682
------ ------
Total deferred credits ............................... 383,198 363,529
------- -------
Commitments and Contingencies
Total Capitalization and Liabilities ................. $ 1,997,817 $ 1,909,005
=========== ===========
See accompanying notes to consolidated financial statements
24
SOUTHWESTERN PUBLIC SERVICE COMPANY
Consolidated Statements of Capitalization
August 31, 1996 and 1995
1996 1995
---- ----
(In Thousands)
Common Shareholders' Equity:
Common stock, $1 par value, authorized
100,000,000 shares in 1996 and
1995; outstanding 40,917,908
shares in 1996 and 1995 .......................... $ 40,918 $ 40,918
Premium on capital stock ........................... 307,484 306,376
Retained earnings .................................. 386,717 373,458
------- -------
Total common shareholders' equity .......... 735,119 720,752
------- -------
Cumulative Preferred Stock:
Preferred stock, $25 par value,
authorized 3,000,000 shares; outstanding
920,000 shares in 1995; dividend rates
from 4.36% to 8.88% .............................. - 23,000
Preferred stock, $100 par value, authorized
2,000,000 shares; outstanding
496,800 shares in 1995; dividend rates
from 3.70% to 14.50% ............................. - 49,680
Preferred stock, $1 par value, authorized
10,000,000 shares; none outstanding .............. - -
------- -------
Total cumulative preferred stock ........... - 72,680
------- -------
Long-Term Debt:
First Mortgage Bonds:
Rate Maturity
5.70% February 1997 ........................ 15,000 15,000
7-1/4 July 2004 ............................ 135,000 135,000
8-1/4 July 2022 ............................ 40,000 40,000
6.875 December 1999 ........................ 90,000 90,000
8.20 December 2022 ........................ 100,000 100,000
8.50 February 2025 ........................ 70,000 70,000
6-1/2 March 2006 ........................... 60,000 -
Unamortized debt discount, net ....... (1,323) (1,418)
------ ------
Total first mortgage bonds ........... 508,677 448,582
------- -------
Pollution control obligations, securing
Red River Authority Pollution Control
Revenue Bonds, net:
Series Rate Maturity
Not collateralized by First Mortgage Bonds:
1991 adjustable July 2011 .......... 44,500 44,500
Collateralized by First Mortgage Bonds:
1979 6-1/2% March 2004 ................. 25,000 25,000
1979 6-5/8 March 2009 ................. 32,300 32,300
1981 13-1/2 October 2001 ............... 25,000 25,000
Funds held and invested by Trustee ........... (120) (55)
---- ---
Total pollution control
obligations, net ................... 126,680 126,745
------- -------
Other long-term debt ......................... 2,750 7,225
----- -----
Total long-term debt, including
current maturities ................. 638,107 582,552
Current maturities ........................... (15,176) (276)
------- ----
Total long-term debt ................. 622,931 582,276
------- -------
Total Capitalization ........................$1,358,050 $1,375,708
========== ==========
See accompanying notes to consolidated financial statements.
25
SOUTHWESTERN PUBLIC SERVICE COMPANY
Consolidated Statements of Earnings
For the years ended August 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
(In Thousands, Except Per Share Amounts)
Operating Revenues .................. $899,397 $834,083 $843,448
-------- -------- --------
Operating Expenses:
Operation:
Fuel .............................. 417,023 370,052 403,207
Purchased power ................... 18,010 5,241 4,604
Other ............................. 111,255 107,467 107,295
Maintenance ....................... 32,534 29,039 28,276
Depreciation and amortization ..... 65,448 61,069 60,551
Taxes other than property and
income taxes .................... 21,109 19,122 19,471
Property taxes .................... 23,472 24,009 22,468
Income taxes ...................... 59,880 63,873 57,857
------ ------ ------
Total operating expenses .. 748,731 679,872 703,729
------- ------- -------
Operating Income .................... 150,666 154,211 139,719
------- ------- -------
Other Income, Net:
Allowance for equity funds used
during construction ............. 60 229 559
Income taxes ...................... (5,417) (3,775) (531)
Other, net ........................ 10,050 10,746 2,844
------ ------ -----
Total other income, net ... 4,693 7,200 2,872
----- ----- -----
Interest Charges:
Interest on long-term debt ........ 44,964 40,644 37,881
Allowance for borrowed funds used
during construction ............. (2,516) (2,463) (1,044)
Other interest .................... 7,138 3,753 3,586
----- ----- -----
Total interest charges .... 49,586 41,934 40,423
------ ------ ------
Net Earnings ........................ 105,773 119,477 102,168
Dividends and premiums on cumulative
preferred stock ................. 2,494 4,878 4,878
----- ----- -----
Earnings Applicable to Common Stock . $103,279 $114,599 $97,290
======== ======== =======
Weighted Average Shares Outstanding . 40,918 40,918 40,918
====== ====== ======
Earnings per Common Share ........... $2.52 $2.80 $2.38
===== ===== =====
Dividends Declared per Common Share $2.20 $2.20 $2.20
===== ===== =====
See accompanying notes to consolidated financial statements.
26
SOUTHWESTERN PUBLIC SERVICE COMPANY
Consolidated Statements of Common Shareholders' Equity For the years ended
August 31, 1996, 1995 and 1994
Shares of Amount of Premium
Common Common on Capital Retained
Stock Stock Stock Earnings Total
(In Thousands)
Balance at August 31, 1993 ........................................ 40,918 $40,918 $306,376 $ 341,608 $ 688,902
Net earnings ...................................................... - - - 102,168 102,168
Dividends declared:
Cumulative preferred stock ................................ - - - (4,878)
Common stock, $2.20 per share ............................. - - - (90,020) (90,020)
------ ------ ------- ------- -------
Balance at August 31, 1994 ........................................ 40,918 40,918 306,376 348,878 696,172
Net earnings ...................................................... - - - 119,477 119,477
Dividends declared:
Cumulative preferred stock ................................ - - - (4,878)
Common stock, $2.20 per share ............................. - - - (90,019) (90,019)
------ ------ ------- ------- -------
Balance at August 31, 1995 ........................................ 40,918 40,918 306,376 373,458 720,752
Net earnings ...................................................... - - - 105,773 105,773
Retirement of cumulative preferred stock and other ................ - - 1,108 (921) 187
Dividends declared:
Cumulative preferred stock ................................ - - - (1,573)
Common stock, $2.20 per share ............................. - - - (90,020) (90,020)
------ ------- -------- --------- ---------
Balance at August 31, 1996 ........................................ 40,918 $40,918 $307,484 $ 386,717 $ 735,119
====== ======= ======== ========= =========
See accompanying notes to consolidated financial statements .......
27
SOUTHWESTERN PUBLIC SERVICE COMPANY
Consolidated Statements of Cash Flows
For the years ended August 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
(In Thousands)
Operating Activities:
Cash received from customers ....................... $ 886,116 $ 824,103 $ 851,602
Cash paid to suppliers and employees ............... (564,122) (510,319) (536,618)
Interest paid ...................................... (48,126) (42,090) (39,569)
Income taxes paid .................................. (55,425) (50,088) (47,126)
Taxes other than income taxes paid ................. (45,600) (41,898) (41,388)
Other operating cash receipts and payments, net .... 7,243 9,819 12,751
----- ----- ------
Net cash provided by operating activities .. 180,086 189,527 199,652
------- ------- -------
Investing Activities:
Construction expenditures .......................... (111,986) (94,662) (91,788)
Nonutility property and investments ................ (1,768) (28,219) (12,763)
Acquisition of TNP properties ...................... (29,200) - -
------- ------- --------
Net cash used in investing activities ...... (142,954) (122,881) (104,551)
-------- -------- --------
Financing Activities:
Issuance of long-term debt ......................... 60,000 76,204 -
Retirement of long-term debt ....................... (4,445) (16,880) (25,544)
Change in short-term debt .......................... 69,624 (14,994) 14,994
Retirement of cumulative preferred stock ........... (75,434) - -
Dividends paid (common and preferred) .............. (92,514) (94,898) (94,898)
------- ------- -------
Net cash used in financing activities ...... (42,769) (50,568) (105,448)
------- ------- --------
Net Increase (Decrease) in Cash and Temporary Investments .. (5,637) 16,078 (10,347)
Cash and Temporary Investments at Beginning of Year ........ 36,860 20,782 31,129
------ ------ ------
Cash and Temporary Investments at End of Year .............. $31,223 $36,860 $20,782
======= ======= =======
Reconciliation of Net Earnings to Net Cash Provided by
Operating Activities:
Net earnings ....................................... $ 105,773 $ 119,477 $ 102,168
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization ...................... 65,448 61,069 60,551
Deferred income taxes and investment tax credits ... 16,173 9,467 11,314
Allowance for equity funds used during
construction ..................................... (60) (229) (559)
Cash flows impacted by changes in:
Accounts receivable ................................ (4,697) (3,905) 4,080
Accrual for unbilled revenues ...................... 5,474 (7,308) 2,304
Materials and supplies ............................. 134 (3,409) (1,495)
Accounts payable ................................... 3,792 (114) 1,071
Fuel and purchased power expense accrued ........... 6,232 (720) (306)
Taxes accrued ...................................... (7,271) 9,398 4,612
Over (under) collected fuel and purchased power
cost ............................................. (13,162) 2,165 2,768
Other, net ......................................... 2,250 3,636 13,144
----- ----- ------
Net cash provided by operating activities .. $ 180,086 $ 189,527 $ 199,652
========= ========= =========
See accompanying notes to consolidated financial statements
28
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements
August 31, 1996
(1) Nature of Operations and Summary of Significant Accounting Policies
GENERAL
Southwestern Public Service Company (the Company) was incorporated in New
Mexico in 1921. The Company's principal business is the generation,
transmission, distribution and sale of electric energy. Electric service is
provided through an interconnected system to a population of about one million
people in a 52,000-square-mile area of the Panhandle and south plains of Texas,
eastern and southeastern New Mexico, the Oklahoma Panhandle and southwestern
Kansas. Approximately 71% of the Company's operating revenues during fiscal
1996, excluding sales to other utilities, were derived from operations in Texas
and New Mexico. The Company maintains its accounts in accordance with the
Uniform System of Accounts prescribed by the Federal Energy Regulatory
Commission (FERC) and as adopted by the Public Utility Commission of Texas
(PUCT), the New Mexico Public Utility Commission (NMPUC), the Oklahoma
Corporation Commission (OCC) and the Kansas Corporation Commission (KCC).
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Utility Engineering Corporation and its
subsidiaries (UE) and Quixx Corporation and its subsidiaries (Quixx). UE is
primarily engaged in engineering, design and construction management. Quixx
invests in cogeneration projects and holds water rights and certain other
nonutility assets. The aggregate net earnings of UE and Quixx of $11,956,000,
$5,216,000 and $3,335,000 in 1996, 1995 and 1994, respectively, are included in
other income, net in the Consolidated Statements of Earnings. Net earnings in
1996 includes a $7,700,000 after-tax gain on the sale of water rights by Quixx.
All significant intercompany transactions and balances are eliminated in
consolidation.
UTILITY PLANT
Utility plant is stated at the historical cost of construction, which
includes labor, materials, an allowance for funds used during construction and
indirect charges for such items as engineering, supervision and general
administrative costs. Maintenance, repairs and minor replacements are charged to
operating expense; major replacements and betterments are capitalized.
The cost of depreciable units of utility plant retired or disposed of in
the normal course of business is eliminated from utility plant accounts and such
cost plus removal expenses and less salvage value is charged to accumulated
depreciation. When complete operating units are disposed of, appropriate
adjustments are made to accumulated depreciation, and the resulting gains or
losses, if any, are recognized.
The provision for depreciation is computed on a straight-line method at
rates based on the estimated service lives and salvage values of the several
classes of depreciable property as indicated by periodic depreciation studies.
Depreciation as a percentage of average depreciable cost was 2.91% in 1996,
2.86% in 1995 and 2.83% in 1994.
OPERATING REVENUES
Electric rates include estimates of fuel costs incurred by the Company in
the generation or purchase of electricity. Differences between amounts collected
and allowable costs are recorded as over/undercollected fuel and purchased power
costs in accordance with rate-making policies of regulatory authorities. Such
over/undercollected fuel and purchased power costs are reflected as a current
liability or current asset in the accompanying consolidated financial
statements.
Included in operating revenues is an estimate of revenues for electric
services provided but not billed. In 1995 the Company made accounting
adjustments to the estimate of delivered not billed kilowatt-hour (kwh) sales
which increased operating revenues by approximately $8,300,000 and net income by
approximately $5,400,000, or 13 cents per share.
DEFERRED DEBITS
Losses on Early Retirements of Debt
Losses on early retirements of debt refinanced by new lower interest rate
debt are amortized on a straight-line basis over the term of the new debt.
Losses on early debt retirements not refinanced by new debt are amortized on a
straight-line
29
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements (Continued)
August 31, 1996
(1) Nature of Operations and Summary of Significant Accounting Policies
basis over the remaining original term of the retired debt. Amortization of such
amounts is included in other interest charges in the Consolidated Statements of
Earnings. The unamortized balance of losses on early retirements of debt are
approximately $19,757,000 and $21,262,000 as of August 31, 1996 and 1995,
respectively (see Note 5).
Debt Premium, Discount and Expense
Expenses incurred in connection with the issuance of long-term debt, and
premiums and discounts relating to such debt, are being amortized or accreted on
a straight-line basis over the term of the respective debt issues.
Other Assets
Included in deferred debits are assets that are expected to benefit future
periods and certain other costs that, for rate-making purposes, are recorded as
deferred charges and amortized over periods allowed by regulatory authorities.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
The allowance for funds used during construction (AFUDC) is designed to
allow the Company to capitalize the net composite interest and equity costs of
capital funds used to finance plant additions during construction periods and
does not represent current cash income. Established regulatory rate practices
permit the Company to recover these costs in future periods by fixing rates to
include a fair return on, and a recovery of, these capital costs through their
inclusion in the rate base and cost of service. The composite rates used for
AFUDC were 6.0% in 1996, 6.5% in 1995 and 6.2% in 1994. Such rates reflect
semiannual compounding.
INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109).
Under Statement 109, the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted tax rates applicable to the differences between the financial statement
amounts and the tax bases of existing assets and liabilities. Certain provisions
of Statement 109 provide that regulated enterprises are permitted to recognize
adjustments resulting from the adoption of Statement 109 as regulatory assets or
liabilities if it is probable that such amounts will be recovered from or
returned to customers through future rates.
Investment tax credits have been deferred and are being amortized to income
over the life of the related property.
CASH FLOWS
The Company uses the direct method of presentation for cash flows from
operating activities. For purposes of the Consolidated Statements of Cash Flows,
the Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents ("temporary investments"). The
Company records such investments at cost which approximates market value.
EARNINGS PER COMMON SHARE
Earnings per share of common stock is computed for each year based upon the
weighted average number of common shares outstanding. The effect of stock awards
and options outstanding under the Company's 1989 Stock Incentive Plan is not
significant (see Note 8).
SHAREHOLDER RIGHTS PLAN
The Company has a Shareholder Rights Plan (the Rights Plan) designed to
ensure that all shareholders receive fair and equal treatment in the event of
any proposal to acquire control of the Company. Under the Rights Plan, each
shareholder holds one right for each share of the Company's common stock held of
record. Each right entitles the holder
30
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements (Continued)
August 31, 1996
(1) Nature of Operations and Summary of Significant Accounting Policies
to purchase one share of the Company's common stock for $70 in the event a
person or group acquires 10% or more of the Company's common stock. Under
certain circumstances, the holders of the rights will be entitled to purchase
common shares of the Company at one half of the current market price. In
addition, any time after a person or group acquires 10% or more of the Company's
outstanding common shares, the board of directors may, at its option, exchange
part or all of the rights for shares of common stock of the Company. The Company
will be entitled to redeem the rights for $0.01 per right at any time until the
tenth day following a public announcement of the acquisition of 10% of its
common shares. The rights expire in 2001, unless earlier redeemed or exchanged
by the Company, and have no effect on operating results or earnings per share.
The Rights Plan has been amended to provide that the merger agreement with
Public Service Company of Colorado (PSCo) will not trigger the provisions of the
Rights Plan.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value amounts of certain financial instruments included in the
accompanying Consolidated Balance Sheets as of August 31, 1996 and 1995 are as
follows:
The fair values of cash and temporary investments approximate the carrying
amount because of the short maturity and market rates of those instruments.
The estimated fair values of long-term debt and preferred stock are based
on quoted market prices of the same or similar issues. The estimated fair values
of long-term debt and preferred stock are as follows:
1996 1995
Carrying Amount Fair Value Carrying Amount Fair Value
-------------------------- --------------------------
(In Thousands)
Long-term debt $622,931 $624,232 $582,276 $579,924
Preferred stock - - $ 72,680 $ 61,382
The fair values of other financial instruments for which estimated fair
values have not been presented are not materially different than the related
book values.
The fair value estimates presented herein are based on pertinent
information available to management as of August 31, 1996 and 1995. These fair
value estimates have not been comprehensively revalued for purposes of these
financial statements since that date, and current estimates of fair values may
differ significantly from the amounts presented herein.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(Statement 121). Statement 121 requires that long lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The statement also requires
that rate-regulated enterprises recognize an impairment for the amount of costs
excluded when a regulator excludes all or part of a cost from the enterprise's
rate base. The adoption of Statement 121, which will be required in fiscal 1997,
is not expected to have a material effect on the Company's consolidated
financial position or results of operations.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (Statement 123).
This statement establishes financial accounting and reporting standards for
stock-based employee compensation plans. The adoption of Statement 123, which
will be required in 1997, is not expected to have a material effect on the
Company's consolidated financial position or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures
31
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements (Continued)
August 31, 1996
of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. In
the event estimates and/or assumptions prove to be different from actual
amounts, adjustments are made to reflect more current information in subsequent
periods. No material adjustments were made to estimates during the current
period.
(2) Merger and Acquisitions
MERGER WITH PUBLIC SERVICE COMPANY OF COLORADO
The Company and Denver-based PSCo entered into a definitive merger
agreement (the Merger) on August 22, 1995, to form a registered public utility
holding company, New Century Energies, Inc. (NCE), which will be the parent
company for the Company and PSCo. The transaction, which was approved by the
shareholders of the Company and PSCo on January 31, 1996, is subject to approval
by various regulators and the taking of other action by the Securities and
Exchange Commission, the Federal Trade Commission, the Department of Justice,
the Nuclear Regulatory Commission, the Federal Energy Regulatory Commission, and
the state public utility commissions in Texas, Colorado, New Mexico, Wyoming,
and Kansas.
The Merger, with a targeted completion date in spring 1997, is conditioned
on qualifying as a tax-free reorganization and being accounted for as a pooling
of interests.
Upon completion of the Merger, holders of the Company and PSCo common stock
will receive 0.95 of one share and one share of the new holding company common
stock, respectively, for each share of stock held. As of August 31, 1996, the
Company and PSCo had 40,917,908 and 64,276,318 shares, respectively, of common
stock outstanding. Based on that number of shares outstanding and the conversion
ratios, the Company and PSCo shareholders would own 37.7 percent and 62.3
percent, respectively, of the common equity of the new holding company. The debt
(including mortgage bonds) and any preferred stock outstanding at the time of
the effectiveness of the Merger will remain outstanding debt and preferred stock
of the Company.
The board of directors of NCE will consist of 14 directors; six and eight
current directors of the Company and PSCo, respectively.
ACQUISITION OF TNP PROPERTIES
In September 1995, the Company purchased properties of Texas-New Mexico
Power Company (TNP) located in the Texas Panhandle area for $29,200,000. The
purchase added approximately 8,000 customers. The purchase amount in excess of
book value was approximately $15,000,000. Cost recovery of this amount was
allowed by the PUCT through a rate surcharge over a ten-year period. This
purchase did not have a significant impact on results of operations of the
Company.
TUCO INC.
In August 1995, the Company agreed to purchase TUCO, a wholly owned
subsidiary of Cabot Corporation, for $77 million subject to regulatory approval
and other conditions. TUCO owns the coal inventory maintained at the Company's
Harrington and Tolk generating stations. The PUCT declined to grant a needed
waiver in fuel-cost rules and the Company did not complete the purchase.
(3) Pro Forma Information (Unaudited)
The following unaudited pro forma condensed balance sheet information at
September 30, 1996, gives effect to the Merger as if it had occurred at
September 30, 1996. The unaudited pro forma condensed operating information for
the twelve-months ended September 30, 1996, and each of the two years ended
December 31, 1995, give effect to the Merger as if it had occurred on January 1,
1994. These statements are prepared on the basis of accounting as required under
a pooling of interests and do not reflect any cost savings or other synergies
anticipated by management as a result of the
32
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements (Continued)
August 31, 1996
(3) Pro Forma Information (Unaudited), continued
Merger. Accordingly, the pro forma information is not necessarily indicative of
the financial position or results of operations that would have occurred had the
Merger been consummated for the periods for which it is given effect, nor is it
necessarily indicative of future operating results or financial condition.
NEW CENTURY ENERGIES, INC.
Unaudited
SPS PSCo Pro Forma
(Historical) (Historical) Combined
------------ ------------ --------
(In thousands, except per share amounts)
As of September 30, 1996:
Property, plant and equipment - net ................................. $1,656,261 $3,538,939 $5,195,200
Current assets 155,037 445,922 594,200
Other assets ........................................................ 191,561 420,768 612,329
------- ------- -------
Total assets ................................................ $2,002,859 $4,405,629 $6,401,729
========== ========== ==========
Common shareholders' equity ......................................... $ 743,314 $1,415,521 $2,149,299
Preferred stock and premium ......................................... -- 179,921 179,921
Long-term debt ...................................................... 620,467 1,270,716 1,891,183
------- --------- ---------
Total capitalization ........................................ 1,363,781 2,866,158 4,220,403
Current liabilities ................................................. 249,638 731,619 984,034
Other liabilities ................................................... 389,440 807,852 1,197,292
------- ------- ---------
Total equity and liabilities ................................ $2,002,859 $4,405,629 $6,401,729
========== ========== ==========
For the Twelve Months Ended September 30, 1996:
Operating revenues .................................................. $ 899,938 $2,107,417 $3,007,355
Operating income .................................................... $ 147,033 $ 355,008 $ 502,041
Net income, after preferred dividend requirements ................... $ 103,805 $ 177,483 $ 281,288
Earnings per common share:
As reported ................................................. $ 2.54 $ 2.78 -
New Century Energies ........................................ - - $ 2.74
For the Twelve Months Ended December 31, 1995:
Operating revenues .................................................. $ 852,510 $2,110,601 $2,963,111
Operating income .................................................... $ 157,768 $ 325,818 $ 483,586
Net income, after preferred dividend requirements ................... $ 117,109 $ 166,893 $ 284,002
Earnings per common share:
As reported ................................................. $ 2.86 $ 2.65 -
New Century Energies ........................................ - - $ 2.79
For the Twelve Months Ended December 31, 1994:
Operating revenues .................................................. $ 824,008 $2,057,384 $2,881,392
Operating income .................................................... $ 136,041 $ 270,792 $ 406,833
Net income, after preferred dividend requirements ................... $ 92,754 $ 158,255 $ 251,009
Earnings per common share:
As reported ................................................. $ 2.27 $ 2.57 -
New Century Energies ........................................ - - $ 2.50
33
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements (Continued)
August 31, 1996
(4) Short-Term Debt
Weighted Weighted
Category of Balance at Average Maximum Amount Average Amount Average
Short-term End of Interest Outstanding Outstanding Interest Rate
Borrowings Year Rate During the Year (A) During the Year (B) For the Year (C)
- ---------- ---- ---- ------------------- ------------------- ----------------
(Dollars In Thousands)
1996:
Notes payable to banks - - - - -
Commercial paper $69,624 5.31% $138,834 $72,418 5.54%
1995:
Notes payable to banks - - $ 8,000 $ 679 6.25%
Commercial paper - - 66,826 16,548 5.78
(A) Maximum amount outstanding at any month-end for the year.
(B) The average amount outstanding for the period was computed by dividing
the total of daily outstanding principal balances by 365.
(C) The weighted average interest rate during the period was computed by
dividing actual interest expense by the average short-term debt
outstanding for the period.
Unsecured borrowings permitted under bank lines of credit were $180,000,000 in
1996 and $128,000,000 in 1995.
(5) Capitalization
PREFERRED STOCK
The Company redeemed on December 27, 1995, all of its outstanding preferred
stock that was redeemable by its terms. The Company also purchased on January 9,
1996, all of the outstanding 2,600 shares of its 14.50% cumulative preferred
stock that was not redeemable by its terms. The aggregate cost to retire the
preferred stock was approximately $76,000,000, including accrued dividends.
On January 31, 1996, the shareholders approved an amendment to the Restated
Articles of Incorporation to delete the designations, preferences, limitations,
and relative rights of authorized shares of existing authorized preferred stock
and to provide for a class of 10,000,000 authorized shares of preferred stock,
$1.00 par value, issuable from time to time in such series and having such
designations, preferences, limitations, and relative rights as the Board of
Directors may determine.
LONG-TERM DEBT
First Mortgage Bonds (Bonds) issued under the Indenture of Mortgage and
Deed of Trust, dated August 1, 1946, as supplemented and amended (Mortgage) are
secured by substantially all of the Company's utility plant. The Mortgage limits
the maximum principal amount of Bonds that may be outstanding thereunder to
$3,000,000,000 and contains provisions relating to the restriction of the
payment of dividends on common stock. At August 31, 1996, approximately $948,000
of total retained earnings of $386,717,000 was so restricted.
The Company is limited in the amount of Bonds that it can issue by certain
restrictions contained in the Mortgage. The Mortgage permits the issuance of
Bonds against 60% of certain property additions, against certain retired Bonds
or against deposited cash. Property additions and retired Bonds available for
the issuance of Bonds were approximately $398,200,000 and $55,300,000,
respectively, at August 31, 1996, which would permit issuance of $294,210,000 of
additional Bonds. Substantial amounts of property additions are used by the
Company to satisfy a maintenance fund covenant and improvement fund obligations
under the Mortgage. The Mortgage also provides that, with certain exceptions,
additional Bonds may not be issued unless net earnings, as defined, are at least
twice the annual interest requirements on all Bonds outstanding and then to be
issued and on all prior lien indebtedness. Such ratio for the year ended August
31, 1996, was 4.92.
The Red River Authority of Texas has issued certain obligations, based on
long-term installment sale agreements executed by the Company, that relate to
the pollution control facilities installed at the Company's coal-fueled
generating units. The Company's payments under the pollution control obligations
are pledged to secure the Red River Authority Pollution Control Revenue Bonds.
34
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements (Continued)
August 31, 1996
(5) Capitalization, continued
In October 1996, the Company called its $25,000,000 principal amount of
13-1/2% pollution control revenue bonds (PCRBs) and issued $25,000,000 of new
variable rate PCRBs. In connection with the new issuance of variable rate PCRBs,
the Company has an interest rate swap agreement, which, in effect, fixes the
interest rate on a $25,000,000 notional amount at 6.435%. Amounts paid or
received under this agreement are accrued as interest rates change and are
recognized over the life of the agreement as an adjustment to interest expense.
The Company is exposed to interest rate risk in the event of nonperformance by
counterparties; however, the Company does not anticipate such nonperformance.
The trust indenture for the 1991 Series of pollution control obligations
permits the Company to choose between various interest rate options, including
the option to convert to a fixed rate. Currently, the interest rate is adjusted
weekly and as of August 31, 1996 and 1995, the interest rate was 3.35% and
3.45%, respectively.
The 1991 Series may be subject to tender for purchase at the option of the
holder and will be subject to mandatory tender at certain times. The Company
entered into a credit agreement with a bank to provide liquidity support in
connection with the optional and mandatory tenders. The Company has also entered
into a remarketing agreement to provide for the remarketing of any tendered
bonds. The credit agreement is scheduled to expire on July 1, 1998. Based upon
the Company's intent and ability to remarket such obligations, the 1991 Series
obligations have been classified as long-term debt.
The Company redeemed in September 1996, the $25,000,000 6-1/2% PCRBs due
2004 and the $32,300,000 6-5/8% PCRBs due 2009 and replaced these series in
September 1996, with $57,300,000 5-3/4% PCRBs due 2016.
In October 1996, the Company issued $100,000,000 of 7.85% SPS Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trust holding solely
Subordinated Debentures. The funds from this financing were used to reduce
short-term debt.
At August 31, 1996, aggregate maturities of long-term debt for each of the
years in the five-year period are as follows: 1997, $15,176,000; 1998,
$2,444,000; 1999, $113,000; 2000, $90,000,000; and 2001, $0. Sinking fund and
improvement fund requirements are not significant.
The Company has an effective shelf registration statement under which
$220,000,000 of debt securities and/or preferred stock are available for
issuance.
(6) Income Taxes
The components of income tax expense (benefit) for the years ended
August 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994
---- ---- ----
(In Thousands)
Taxes on operating income:
Federal - current ............ $40,191 $51,594 $43,878
Federal - deferred ........... 17,297 10,671 12,387
Investment tax credits ....... (250) (250) (250)
State - current 2,642 1,858 1,842
----- ----- -----
59,880 63,873 57,857
------ ------ ------
Taxes on other income:
Federal - current ............ 6,244 4,703 1,354
Federal - deferred ........... (874) (954) (823)
State - current 47 26 -
----- ----- ------
5,417 3,775 531
----- ----- ---
Total income taxes ... $65,297 $67,648 $58,388
======= ======= =======
35
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements (Continued)
August 31, 1996
(6) Income Taxes, continued
The provisions (credits) for deferred income taxes that arise from
temporary differences between financial and tax reporting for the years ended
August 31, 1996, 1995 and 1994, are as follows:
1996 1995 1994
---- ---- ----
(In Thousands)
Deferred income taxes on operating income:
Depreciation differences .................. $10,797 $12,205 $10,856
Under/(over)collected fuel and
purchased power cost ...................... 5,138 (1,848) (186)
Losses on reacquisition of long-term debt . (439) (439) (439)
Postretirement benefits other than pensions 832 (2) (761)
Other ..................................... 969 755 2,917
--- --- -----
Subtotal .......................... 17,297 10,671 2,387
Deferred taxes on other income ............ (874) (954) (823)
---- ---- ----
Total deferred income taxes ....... $16,423 $9,717 $ 11,564
======= ====== ========
Total income tax expense for the years ended August 31, 1996, 1995, and
1994 differs from the amounts computed by applying the statutory federal tax
rate to earnings before income taxes for the following reasons:
1996 1995 1994
---- ---- ----
(In Thousands)
Statutory federal income tax expense at 35% 59,874 $65,494 $56,194
Increase (decrease) due to:
State income taxes ......................... 1,748 1,225 1,197
Tax exempt interest and dividends .......... (29) (93) (83)
Non-deductible merger costs ................ 2,006 -- --
Amortization of investment tax credits ..... (250) (250) (250)
Property-related differences ............... 2,628 2,602 2,562
Dividends paid on EIP shares ............... (1,662) (1,118) (640)
Other ...................................... 982 (212) (592)
--- ---- ----
Actual income tax expense .......... $65,297 $67,648 $58,388
======= ======= =======
Effective tax rate ................. 38.2% 36.2% 36.4%
==== ==== ====
Property-related differences increase income tax expense due primarily to
the reversal of depreciation and basis differences.
36
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements (Continued)
August 31, 1996
(6) Income Taxes, continued
The significant components of the Company's deferred tax assets and
liabilities, which are reflected net in the accompanying Consolidated Balance
Sheets at August 31, 1996 and 1995, are as follows:
1996 1995
---- ----
(In Thousands)
Deferred Tax Assets:
Current (included in prepayments and other current assets):
Over (under) recovered fuel revenue ............... $ (2,773) $ 2,365
--------- ---------
Total current assets ............................ (2,773) 2,365
------ -----
Noncurrent:
Employee benefit plans ............................ 1,794 3,068
Interest on pollution control obligations ......... 1,802 1,812
Avoided cost method of capitalized interest ....... 1,942 1,942
Contributions in aid of construction .............. 2,172 2,172
Deferred compensation ............................. 4,201 3,578
Unamortized investment tax credits ................ 3,253 3,398
Deferred promotional cost ......................... 3,746 4,624
Other ............................................. 2,609 2,880
----- -----
Total noncurrent assets ......................... 21,519 23,474
------ ------
Total deferred tax assets ....................... $18,746 $25,839
======= =======
Deferred Tax Liabilities:
Noncurrent:
Differences related to depreciation ............... $ 271,520 $ 260,744
Capitalized construction costs .................... 31,679 28,954
Previously unrecognized temporary differences
net of the tax rate adjustment of previously
normalized temporary differences .................. 56,517 51,581
Losses on reacquisition of long-term debt ......... 5,906 6,345
Other ............................................. 21,808 20,644
------ ------
Total noncurrent deferred tax liabilities ......... $ 387,430 $ 368,268
========= =========
(7) Commitments, Contingencies and Financial Guarantees
SYSTEM PURCHASE OPTION
The Company and the City of Las Cruces, New Mexico (the City) entered into
a System Purchase Option and Rate Agreement in August 1994, which grants the
City the option to sell to the Company the electric utility system serving the
City (including distribution, subtransmission, and transmission facilities),
which the City plans to acquire from El Paso Electric Company (EPE) by purchase
or through condemnation proceedings. The agreement has a three-year term
beginning at the time the City acquires the facilities and ending no later than
January 1, 2002. The purchase price which would be paid by the Company would be
equal to the amount required to retire all outstanding debt incurred by the City
in acquiring the facilities plus the City's reasonable costs in acquiring the
facilities. The Company has the right to terminate the agreement if, in the
Company's sole discretion, it determines that any proposed condemnation award is
excessive or upon the occurrence of certain other events. The agreement also
provides that, if the City abandons or dismisses condemnation proceedings as a
consequence of the Company's termination of the agreement, the Company will
reimburse the City for one-half of its reasonable litigation expenses and for
any of EPE's damages and litigation expenses that the City is obligated to pay
by final court order.
37
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements (Continued)
August 31, 1996
(7) Commitments, Contingencies and Financial Guarantees, continued
FUEL PURCHASE COMMITMENTS
In the ordinary course of business, the Company has made substantial
commitments with respect to the purchase of coal and natural gas for use as fuel
in its generating units. To provide fuel for its coal-fueled generating units,
the Company has various long-term commitments with TUCO for the purchasing and
processing of coal which is delivered to the Company's coal bunkers in the form
of crushed, ready-to-burn coal. The commitments include the use of rail coal
cars, unloading facilities and related services. Such commitments in 1996
dollars for the remaining term of the contract are approximately $1,540,000,000.
The contracts for coal supply, transportation and other services expire in 2001,
2002 and 2017, respectively.
FINANCIAL GUARANTEES
In connection with an agreement for the sale of electric power, the Company
guaranteed certain obligations of a customer totaling $48,000,000. These
obligations related to the construction of certain utility property that, in the
event of default by the customer, would revert to the Company.
ENVIRONMENTAL MATTERS
The Company's facilities are regulated by federal and state environmental
agencies. These agencies have jurisdiction over air emissions, water quality,
wastewater discharges, solid wastes and hazardous substances. The Company has
received all necessary authorizations for the construction and continued
operation of its generation, transmission and distribution systems. Company
facilities have been designed and constructed to operate in compliance with
environmental standards.
Beginning in the year 2000, the Clean Air Act Amendments of 1990 (CAAA)
Phase II will require more stringent limits on sulfur dioxide (SO2) emissions at
the Company's existing fossil-fueled plants. However, current regulations permit
compliance with sulfur emissions limitations in the year 2000 by using SO2
allowances allocated to plants by the Environmental Protection Agency (EPA),
using allowances generated by reducing emissions at existing plants and by using
allowances purchased from other companies. Based upon information from the
Company's fuel suppliers, the SO2 allowances issued by the EPA approximate the
Company's projected SO2 emissions. The Company monitors options to ensure that
allowances will be sufficient to economically operate the Company's existing
plants without significant emission reductions. The CAAA also requires the EPA
to develop new oxides of nitrogen (NOx) emission standards for existing and new
plants which may be more stringent than the current standards. The Company
anticipates being able to comply with Phase II NOx emission standards with no
additional material capital cost. The Company continues to monitor the impact
that the CAAA may have on the Company.
Capital expenditures for environmental protection facilities aggregated
approximately $2,800,000, $4,100,000, and $11,600,000 for 1996, 1995 and 1994,
respectively. Estimates of future capital expenditures for environmental
protection facilities are subject to change but the Company has included
approximately $9,700,000 in its construction program for these expenditures
during the five years ending August 31, 2001, of which approximately $4,200,000
is for 1997.
The Company has not developed any specific site removal and exit plans for
its fossil fuel plants or substation sites. Plant removal and exit plans are
under development, and when such plans are developed in the future, the Company
intends to treat removal and exit costs as a cost of retirement in utility plant
and include them in depreciation accruals. An estimated removal cost (based on
historical experience) is currently included in depreciation expense.
38
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements (Continued)
August 31, 1996
(7) Commitments, Contingencies and Financial Guarantees, continued
THUNDER BASIN LAWSUIT
The Company was named as a defendant in a case entitled Thunder Basin Coal
Co. v. Southwestern Public Service Co., No. 93-CV-304B (D. Wyo.). Thunder
Basin's Wyoming lawsuit in federal court went to trial in late October 1994. On
November 1, 1994 the jury returned a verdict in favor of Thunder Basin and
against the Company finding that there had been a partial repudiation of the
contract and that the Company had interfered with Thunder Basin's contract with
TUCO. The jury awarded damages to Thunder Basin of approximately $18,800,000.
The Company has appealed the judgment to the Tenth Circuit Court of Appeals and
the appeal is progressing.
Management believes that in the event a payment is ultimately required to
be made to Thunder Basin it would be recoverable from ratepayers, although any
such recovery would be subject to regulatory review. Management believes that
the ultimate resolution will not have a material adverse effect on the Company's
consolidated financial statements.
OTHER
The Company is a defendant in various claims and legal actions, primarily
workers' compensation, contractual matters and general liability lawsuits, all
arising in the normal course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
the Company's consolidated financial statements.
(8) Employee Benefit Plans
DEFINED BENEFIT PLANS
The Company has a noncontributory defined benefit retirement plan
(Retirement Plan) which provides retirement and certain other benefits to its
officers and employees. The Company's policy is to fund the accrued costs of the
Retirement Plan. Assets of the Retirement Plan consist primarily of U.S.
government and agency obligations, bonds and common stocks (including 586,236
shares of common stock of the Company with an estimated fair market value of
$19,126,000 as of August 31, 1996).
Additionally, the Company has a noncontributory defined benefit
supplemental retirement income plan(Supplemental Plan) for qualifying executive
personnel. The Supplemental Plan is unfunded, and benefits due under the plan
are paid out of the Company's general funds.
Net periodic pension cost for the Retirement and Supplemental Plans, as
determined using the projected unit credit actuarial cost method for the years
ended August 31, 1996, 1995 and 1994, is presented below:
1996 1995 1994
---- ---- ----
(In Thousands)
Net periodic pension cost:
Service cost for benefits earned
during the period ............ $ 6,846 $ 6,606 $ 6,394
Interest cost on projected
benefit obligation ........... 20,266 19,563 18,444
Actual return on plan assets ... (53,666) (37,912) 2,729
Net amortization and deferral .. 27,409 12,840 (26,806)
------ ------ -------
Net periodic pension cost $ 855 $ 1,097 $ 761
======== ======== ========
39
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements (Continued)
August 31, 1996
(8) Employee Benefit Plans, continued
The funded status of the Retirement and Supplemental Plans and amounts
recognized in the Company's Consolidated Balance Sheets as of August 31, 1996
and 1995 is presented below:
1996 1995
-------------------------- -------------------------
Supplemental Supplemental
Retirement Retirement Retirement Retirement
Plan Plan Plan Plan
---- ---- ---- ----
(In Thousands)
Actuarial present value of benefit obligations:
Vested benefit obligation ....................................... $ 198,196 $ 5,774 $ 190,848 $ 5,749
Nonvested benefit obligation .................................... 14,458 1,505 13,139 1,255
------ ----- ------- -------
Accumulated benefit obligation .......................... $ 212,654 $ 7,279 $ 203,987 $ 7,004
========= ========= ========= =========
Plan assets at fair value ....................................... $ 345,699 -- $ 306,783 --
Projected benefit obligation .................................... (265,317) $ (7,647) (253,793) $ (7,421)
-------- --------- -------- ---------
Plan assets in excess of (less than) projected benefit obligation 80,382 (7,647) 52,990 (7,421)
Unrecognized prior service costs ................................ 1,184 288 1,320 330
Unrecognized net loss (gain) from past experience ............... (67,527) 1,682 (36,847) 1,520
Additional minimum liability .................................... -- (2,023) - (2,112)
Unrecognized transition obligation (asset) ...................... (20,944) 421 (24,508) 679
------- --- ------- ---
Accrued pension liability ............................... $ (6,905) $ (7,279) $ (7,045) $ (7,004)
========= ========= ========= =========
The current and noncurrent portions of the accrued pension liability are
included in other current liabilities and other deferred credits, respectively,
in the accompanying Consolidated Balance Sheets.
The assumed discount rate and the rate of increase in compensation levels
used in determining the actuarial present value of the projected benefit
obligations were 8% and 6%, respectively. The expected long-term rate of return
on plan assets was 8%. Plan assets and liabilities are valued each year using a
measurement date of June 30.
HEALTH AND WELFARE BENEFIT PLANS
The Company provides health care and life insurance benefits to its active
and retired employees (primarily group term life insurance, medical and dental
benefits provided to retired employees) through various health and welfare
benefit plans. Postretirement costs are comprised of: (1) the portion of the
expected postretirement benefit obligation attributable to employee service
during the year, (2) amortization of the transition obligation and (3) interest
costs associated with the unfunded accumulated obligation for future benefits.
An assumed discount rate of 8% was used to develop the associated interest
costs. The assumed health care cost trend rate used to measure the expected cost
of benefits was 11% for 1996 and was assumed to diminish to a level of 5.5% in
2007 and thereafter. The transition obligation of approximately $58,000,000 is
being amortized over a 20-year period. A one percentage point increase in the
assumed health care cost trend rate in each future year would increase the
accumulated postretirement benefit obligation (APBO) at August 31, 1996, by
approximately $10,000,000 and other postretirement benefits cost for 1996 by
approximately $300,000.
Postretirement costs have historically been included in rates when paid.
Federal and state agencies that regulate the Company have issued guidelines
permitting recovery of such additional costs on an accrual basis. In Texas and
New Mexico, which represent approximately 71% of the Company's revenues, the
Company was permitted in its rate settlements to recover the additional costs.
The Company is required to deposit the amounts included in Texas and New Mexico
rates in an irrevocable external trust dedicated to the payment of these
postretirement benefits. In remaining jurisdictions, the Company is permitted to
recognize regulatory assets for the difference between any amounts paid
currently and those accrued. At August 31, 1996 and 1995, deferred debits in the
Consolidated Balance Sheets include $3,300,000 and $2,500,000, respectively,
that represent the future revenues expected to be realized at the time the
additional postretirement benefits are included in the Company's rates.
40
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements (Continued)
August 31, 1996
(8) Employee Benefit Plans, continued
The Company's net periodic postretirement benefits cost other than pensions
for the years ended August 31, 1996, 1995 and 1994, including amounts
capitalized, were comprised of the following components:
1996 1995 1994
---- ---- ----
(In Thousands)
Service cost for benefits earned
during the period .................... $ 1,266 $ 1,213 $ 1,280
Interest cost on the APBO .............. 5,109 4,843 4,715
Actual return on plan assets ........... (1,964) (723) (134)
Net amortization and deferral .......... 3,049 2,476 2,138
----- ----- -----
Net postretirement benefits cost ..... $ 7,460 $ 7,809 $ 7,999
======= ======= =======
The funded status for other postretirement benefits and amounts recognized
by the Company at August 31, 1996 and 1995, is presented below:
1996 1995
---- ----
(In Thousands)
APBO:
Retirees ........................................... $36,240 $40,210
Fully eligible active employees .................... 2,529 2,307
Other active employees ............................. 22,929 22,753
------ ------
Total APBO ................................. $61,698 $65,270
======= =======
Plan assets at fair value .......................... $23,400 $17,129
APBO ............................................... (61,698) (65,270)
------- -------
APBO in excess of plan assets ...................... (38,298) (48,141)
Unrecognized net loss .............................. (10,238) (2,671)
Unrecognized transition obligation ................. 45,464 48,138
------ ------
Accrued postretirement benefits cost ....... $ (3,072) $ (2,674)
======== ========
DEFINED CONTRIBUTION PLANS
The Company has an Employee Stock Ownership Plan and a 401(k) plan. Total
contributions to the plans by the Company for the years ended August 31, 1996,
1995 and 1994 were approximately $1,909,000, $1,469,000 and $983,000,
respectively. Effective March 1, 1995, the plan assets of the Employee Stock
Ownership Plan and 401(k) plan were combined into one plan called the Employee
Investment Plan.
OTHER BENEFIT PLANS
The Company's 1989 Stock Incentive Plan provides for awards of share
options and restricted shares, and delivery of shares in certain cases. The
number of shares of common stock of the Company registered in connection with
this plan is 800,000, the maximum amount that may be awarded prior to July 25,
1998.
41
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements (Continued)
August 31, 1996
(8) Employee Benefit Plans, continued
Stock options have been awarded to key employees under the 1989 Stock
Incentive Plan. Options granted under the plan have an exercise price equal to
the fair market value of the common stock on its award date. At August 31, 1996,
there were 19 participants that had share options. Options generally become
exercisable evenly over nine years and expire ten years after the date of the
grant.
Number of Options
-----------------
1996 Price Range 1996 1995 1994
---------------- ---- ---- ----
Summary of stock option activity:
Outstanding - beginning of year $28.63-$33.31 67,759 70,724 74,816
Granted - .......................... - - - - 5,645
Exercised* ......................... $28.63-$33.31 (21,647) (245) (6,581)
Canceled or expired ................ - - - - (2,720)
------ ------ ------
Outstanding - end of year .......... $28.63-$33.31 46,112 67,759 70,724
====== ====== ====== ====== ======
Exercisable ........................ - - - 9,345 1,348
===== =====
*The prices of options exercised in 1995 and 1994 are $33.31 and $30.81.
At August 31, 1996, approximately 132,017 restricted shares of common stock
have been awarded to employees, generally subject to a ten-year vesting
requirement. Previously, the cost of shares awarded were charged to expense over
a ten-year period based on the fair market value at date of the award. However,
because there is a provision in the 1989 Stock Incentive Plan which provides
that the restricted shares fully vest upon shareholder approval of a change in
control of the Company, these shares vested late in fiscal 1996. Consequently,
the Company has recognized an expense of approximately $1,400,000 in the current
year.
The Company has a Directors' Deferred Compensation Plan under which
directors of the Company or its subsidiaries may elect to defer the distribution
of all or a percentage of the annual retainer or meeting fees, or both,
otherwise currently payable to such directors.
(9) Competitive Environment and Regulatory Assets and Liabilities
Electric utilities have historically been recognized as natural monopolies
and have operated in a highly regulated environment in which they have an
obligation to provide electric service to their customers in return for an
exclusive franchise within their service territory with an opportunity to earn a
regulated rate of return. This regulatory environment is changing. The
generation sector has experienced competition from nonutility power producers,
and the FERC is requiring utilities, including the Company, to provide wholesale
open-access transmission service to others and may order electric utilities to
enlarge their transmission systems to facilitate transmission services.
The changing regulatory environment has stimulated competition in the
wholesale electric markets by creating a new class of independent power
producers. Revisions to the Public Utility Holding Company Act of 1935 (PUHCA)
have allowed both utilities and non-utilities to form independent power
production companies called exempt wholesale generators (EWGs), which operate
without the restrictions of the PUHCA. EWGs offer alternative sources of power
supply to electric utilities across the country. Utilities are often required by
state regulation to solicit to purchase power from nonutility power producers
and other utilities before seeking approval to construct new generation of their
own.
Some state regulatory authorities are in the process of changing utility
regulations in response to federal and state statutory changes and evolving
competitive markets. Texas legislation enacted in 1995 recognizes the movement
to a more competitive marketplace by requiring the PUCT to issue new regulations
including: allowance of less than fully costed rates in wholesale and retail
markets; recognition of and essentially waiving all Texas utility regulation of
EWGs and power marketers; and implementation of transmission access comparable
to the owning utility's use of its transmission system for non-FERC regulated
utilities (the Company is FERC regulated). The Company believes that these
statutory and conforming regulations may result in increased wholesale
competition. However, due to the Company's low cost structure, increased
wholesale competition is not expected to adversely affect it in the near term
and may favorably impact it in the long term. The Company also anticipates that
opening access to retail customers ("retail wheeling") will be considered by
Texas legislators in 1997. The Company is unable to predict what financial
impact or effect the adoption of any such legislation would have on its
operations.
42
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements (Continued)
August 31, 1996
(9) Competitive Environment and Regulatory Assets and Liabilities, continued
The New Mexico legislature in 1996 rejected retail wheeling proposals;
however, it continued post-session committee investigation of the matter. All of
the Company's jurisdictions continue to evaluate utility regulations with
respect to competition, and legislative proposals to effect retail wheeling are
expected to be introduced in 1997. The Company is unable to predict what
financial impact or effect the adoption of these proposals would have on its
operations.
The Company currently applies accounting standards that recognize the
economic effects of rate regulation. Regulatory assets represent probable future
revenue associated with certain costs which will be recovered from customers
through the ratemaking process. Regulatory liabilities represent costs
previously collected that are refundable in future rates. If rate recovery of
generation-related and other costs becomes unlikely or uncertain, whether due to
competition or regulatory action, these accounting standards may no longer apply
to the Company.
Regulatory assets and liabilities reflected as deferred debits and deferred
credits, respectively, in the Consolidated Balance Sheets as of August 31, 1996
and 1995, are as follows:
1996 1995
---- ----
(In Thousands)
Regulatory assets:
Income taxes ...................................... $89,763 $83,286
Deferred refinancing costs ........................ 19,757 21,262
Deferred costs related to a development project 4,256 4,921
Deferred employee benefit costs ................... 5,310 4,310
Other ............................................. 7,120 4,110
----- -----
Total ..................................... $126,206 $117,889
======== ========
Regulatory liabilities:
Deferred investment tax credits ................... $ 5,803 $ 6,053
Deferred fuel revenue ............................. 6,759 5,969
----- -----
Total ..................................... $ 12,562 $ 12,022
======== ========
As of August 31, 1996, the Company's regulatory assets are being recovered
through rates charged to customers over periods ranging from ten to thirty
years. Under current rates, the Company is recovering approximately $8,000,000
of regulatory costs per year. Based on prior and current rate treatment of such
costs, management believes it is probable that the Company will continue to
recover from ratepayers the regulatory assets described above.
In July 1995, the Company negotiated a settlement with the PUCT and various
intervenors. As part of this agreement, the Company is required to perform
certain demand side management activities and is allowed to defer the costs of
these activities and include them in rate base and cost of service in future
PUCT proceedings.
(10) Rate Matters
The Company may effect changes in its rates only as approved by the
regulatory authorities governing its jurisdictions. Amounts ultimately realized
will differ from amounts approved because kilowatt-hour sales and other factors
will vary from those approved in the rate proceedings.
A PUCT substantive rule requires periodic examination of the Company's fuel
and purchased power costs, the efficiency of the use of such fuel and purchased
power, fuel acquisition and management policies and purchase power commitments.
On May 1, 1995, the Company filed with the PUCT a petition for a fuel
reconciliation for the months of January 1992 through December 1994. A hearing
was held in September 1995, and in January 1996 an order was issued which
required the Company to make a $3.9 million fuel refund consisting of $2.1
million of overrecovered fuel costs and $1.8 million of disallowed fuel costs
for the period. This refund was made in April 1996. Additionally, the order
required the Company to flow through to customers 100% of margins from non-firm
off-system opportunity sales as of January 1995. Prior PUCT rulings had allowed
the Company to retain 25% of these margins. The 100% flow through is required by
PUCT rules, absent rule waiver. The Company filed a motion for rehearing on
January 25, 1996. The PUCT issued an order
43
SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes To Consolidated Financial Statements (Continued)
August 31, 1996
(10)Rate Matters, continued
on March 14 denying rehearing on the fuel disallowance (which was adjusted to
$1.9 million), and ordered the flow through of 100% of the margin effective with
the first billing cycle after the date of the order. The Company filed a motion
for rehearing of the March 14 order on April 3, which was also denied. On May
24, 1996, the Company filed an appeal in the Travis County District Court on the
PUCT's decision with respect to the $1.9 million of disallowed fuel costs in
which the hearing of merits will be held on November 1, 1996. The ultimate
outcome of this matter will not significantly affect consolidated financial
results. Currently the Company has approximately $7 million in underrecovered
fuel costs and is filing with the PUCT for a change in the fuel factor.
On December 19, 1989, the FERC issued its final order regarding the 1985
rate case. The Company appealed certain portions of the order that related to
recognition in rates of the reduction of the federal income tax rate from 46% to
34%. The United States Court of Appeals for the District of Columbia Circuit
remanded the case, directing the FERC to reconsider the Company's claim of an
offsetting cost and limiting the FERC's actions. The FERC issued its Order on
Remand in July 1992, required filings were made and a hearing was completed in
February 1994. In October 1994, the administrative law judge issued a favorable
initial decision that, if approved by the FERC, would result in a substantial
recovery by the Company. Negotiated settlements with the Company's partial
requirements customers and TNP were approved by the FERC in July 1993 and
September 1993, respectively, and the Company received approximately $2,800,000,
including interest. In a settlement with the Company's New Mexico cooperative
customers the Company received approximately $7,000,000, including interest. The
FERC approved this settlement in July 1995. Resolutions of these matters with
the remaining wholesale customers, Golden Spread member cooperatives and
Lyntegar Electric Cooperative, have not been reached. The Company cannot
reasonably estimate the remaining amount recoverable from these proceedings;
however, a favorable resolution could materially improve consolidated earnings
in the year in which it is resolved.
(11) Quarterly Operating Results (Unaudited)
The following quarterly operating results are unaudited, but, in the
opinion of management, include all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the Company's operating results
for the periods indicated.
Quarter Ended
11-30-95 2-29-96 5-31-96 8-31-96
-------- ------- ------- -------
(In Thousands, Except Per Share Amounts)
1996
Total kilowatt hours sold .... 4,709,152 4,809,272 5,344,286 6,025,729
Operating revenues ........... $ 200,957 $ 203,785 $ 225,029 $ 269,626
Operating income ............. 33,238 28,801 31,980 56,647
Net earnings ................. 23,168 18,081 19,878 44,645
Earnings applicable to
common stock ............... 21,949 16,806 19,878 44,645
Earnings per common share .... .54 .41 .49 1.08*
11-30-94 2-28-95 5-31-95 8-31-95
-------- ------- ------- -------
(In Thousands, Except Per Share Amounts)
1995
Total kilowatt hours sold .... 4,732,246 4,467,149 5,035,896 6,100,285
Operating revenues ........... $ 187,216 $ 181,848 $ 205,187 $ 259,832
Operating income ............. 30,088 27,785 36,037 60,301
Net earnings ................. 21,169 18,677 26,429 53,202
Earnings applicable to
common stock 19,950 17,457 25,210 51,982
Earnings per common share .... .49 .43 .62 1.26**
* Includes an increase of $0.19 attributable to the sale of water rights by
Quixx.
** Includes an increase of $0.13 attributable to a change in the estimated
delivered not billed kwh sales (see Note 1) and an increase of $0.11
attributable to a one-time adjustment resulting from the 1985 FERC rate
case (see Note 10).
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.*
ITEM 11. EXECUTIVE COMPENSATION.*
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.*
The following table contains certain information regarding persons who
the Company has been advised are beneficial owners of more than 5 percent of the
Common Stock as of the date indicated in the footnote to the table.
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Class
Franklin Resources, Inc. 3,380,250(1) 8.3
777 Mariners Island Boulevard
San Mateo, California 94403-7777
- ----------
(1) According to Schedule 13G filed as of December 31, 1995, with the
Securities and Exchange Commission by Franklin Resources, Inc.
("Franklin"), Franklin had (i) sole voting power with respect to 3,367,000
shares; (ii) sole dispositive power with respect to 1,100 shares; and (iii)
shared dispositive power with respect to 3,379,150 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.*
*The information required by Items 10, 11, 12 and 13 with respect to
directors and officers to the extent not set forth under Item 1 of Part I in
this Form 10-K (pursuant to instruction 3 of paragraph (b) of Item 401 of
Regulation S-K) under "Executive Officers of the Registrant," is set forth in
the Company's proxy statement for its Annual Meeting of Shareholders to be held
January 8, 1997, which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report .................................... 23
Consolidated Balance Sheets as of August 31, 1996
and 1995
Consolidated Statements of Capitalization as of August 31, 1996.. 24
and 1995....................................................... 25
Consolidated Statements of Earnings for the years ended
August 31, 1996, 1995 and 1994 ................................ 26
Consolidated Statements of Common Shareholders'
Equity for the years ended August 31, 1996,
1995 and 1994 ................................................. 27
Consolidated Statements of Cash Flows for the
years ended August 31, 1996, 1995 and 1994 .................... 28
Notes to Consolidated Financial Statements ...................... 29-44
FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because of the absence of conditions under
which they are required or because the required information is included in the
Consolidated Financial Statements or notes thereto.
REPORTS ON FORM 8-K
Item reported - Item 5. Other Events
Financial Statements filed - None
Date of report filed - July 1, 1996
45
EXHIBITS
Filed with this Form 10-K:
10(a) Incentive Compensation Plan (an Executive Management Plan) as amended
July 23, 1996.
(b) 1989 Stock Incentive Plan as amended April 23, 1991.
(c) Directors' Deferred Compensation Plan as amended January 10, 1990.
(d) Supplemental Retirement Income Plan as amended July 23, 1991.
(e) EPS Performance Unit Plan dated October 27, 1992.
12 Statements re computation of ratio of earnings
21 Subsidiaries of the registrant
23 Consent of DELOITTE & TOUCHE LLP
24 Power of attorney
27 Financial Data Schedule
99 Unaudited Pro Forma Financial Information
Incorporated in this Form 10-K by reference:
2 Agreement and Plan of Reorganization dated as of August 22, 1995, among
Southwestern Public Service Company, M-P New Co. and Public Service
Company of Colorado, filed as exhibit 2, Form 8-K dated August 22, 1995.
3(a) Restated Articles of Incorporation as amended through February 1, 1996,
filed as exhibit 3(i), Form 8-K dated February 1, 1996.
(b) Restated Bylaws as amended through July 23, 1991, filed as exhibit 3,
Form 10-K for the fiscal year ended August 31, 1991.
4(a) First Mortgage Indenture dated August 1, 1946, filed as exhibit 7-A,
Registration No. 2-6910.
(b) Supplemental Indentures to the First Mortgage Indenture:
Dated File Reference Exhibit
February 1, 1967 2-25983 2-S
October 1, 1970 2-38566 2-T
February 9, 1977 2-58209 2-Y
March 1, 1979 2-64022 b(28)
April 1, 1983 (two) Form 10-Q, May 1983 4(a)
February 1, 1985 Form 10-K, August 1985 4(c)
July 15, 1992 (two) Form 10-K, August 1992 4(a)
December 1, 1992 (two) Form 10-Q, February 1993 4
February 15, 1995 Form 10-Q, May 1995 4
March 1, 1996 333-05199 4(c)
(c) Standby Credit Agreement with Union Bank of Switzerland (Houston Agency)
dated July 1, 1991, filed as exhibit 4(a), Form 10-K for the fiscal year
ended August 31, 1991.
(d) Red River Authority for Texas Indenture of Trust dated July 1, 1991,
filed as exhibit 4(b), Form 10-K for the fiscal year ended August 31,
1991.
(e) Rights Agreement between the Company and Society National Bank, dated
July 23, 1991, filed as exhibit 2, Form 8-A dated July 23, 1991.
(f) Amendment No. 1 dated August 22, 1995, to the Rights Agreement between
the Company and Society National Bank, filed as exhibit 4, Form 8-K
dated August 30, 1995.
10(f) Coal Supply Agreement (Harrington Station) between Southwestern Public
Service Company and TUCO, dated May 1, 1979, filed as exhibit 3, Form
8-K dated May 14, 1979.
(g) Master Coal Service Agreement between Swindell-Dressler Energy Supply
Company and TUCO, dated July 1, 1978, filed as exhibit 5A, Form 8-K
dated May 14, 1979.
(h) Guaranty of Master Coal Service Agreement between Swindell-Dressler
Energy Supply Company and TUCO, filed as exhibit 5B, Form 8-K dated May
14, 1979.
(i) Coal Supply Agreement (Tolk Station) between Southwestern Public Service
Company and TUCO, dated April 30, 1979, as amended November 1, 1979 and
December 30, 1981, filed as exhibit 10(b), Form 10-Q for the quarter
ended February 28, 1982.
(j) Master Coal Service Agreement between Wheelabrator Coal Services Co. and
TUCO, dated December 30, 1981, filed as exhibit 10(c), Form 10-Q for the
quarter ended February 28, 1982.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOUTHWESTERN PUBLIC SERVICE COMPANY
By/s/ Bill D. Helton
----------------------------------
(Bill D. Helton, Chairman
and Chief Executive Officer)
DATE: November 22, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the date indicated:
Signature Title Date
/s/ Bill D. Helton Chairman and Chief
Executive Officer November 22, 1996
(Principal Executive & Financial
Officer & Director)
/s/ Doyle R. Bunch II Executive Vice President,
Accounting and Corporate Development
(Principal Accounting Officer)
C. Coney Burgess* Directors
J. C. Chambers*
Danny H. Conklin*
Don Maddox*
Shirley Bird Perry*
David M. Wilks*
By/s/ Doyle R. Bunch II*
------------------------------
(Doyle R. Bunch II,
Attorney-in-fact)
47