UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2004
OR
o		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 001-03789

 

SOUTHWESTERN PUBLIC SERVICE COMPANY

(Exact name of registrant as specified in its charter)

 

New Mexico		75-0575400
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

Tyler at Sixth

Amarillo, Texas 79101

(Address of principal executive offices)

(Zip Code)

 

(303) 571-7511

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

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  ý      No  o

 

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.  ý

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  o      No  ý

 

As of Feb. 28, 2005, 100 shares of common stock, par value $1 per share, were outstanding, all of which were held by Xcel Energy Inc., a Minnesota corporation.

 

DOCUMENTS INCORPORATED BY REFERENCE: Xcel Energy Inc.’s 2005 Proxy Statement

 

Southwest Public Service Company meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format permitted by General Instruction I(2).

 

 

INDEX

 

PART I
Item 1 — Business
DEFINITIONS
COMPANY OVERVIEW
ELECTRIC UTILITY OPERATIONS
Overview
Summary of Recent Regulatory Developments
Ratemaking Principles
Capacity and Demand
Energy Sources
Fuel Supply and Costs
Electric Operating Statistics
ENVIRONMENTAL MATTERS
EMPLOYEES
Item 2 — Properties
Item 3 — Legal Proceedings
Item 4 — Submission of Matters to a Vote of Security Holders
PART II
Item 5 — Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6 — Selected Financial Data
Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A — Quantitative and Qualitative Disclosures About Market Risk
Item 8 — Financial Statements and Supplementary Data
Item 9 — Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A — Controls and Procedures
Item 9B — Other Information
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
Item 13 — Certain Relationships and Related Transactions
Item 14 — Principal Accounting Fees and Services
PART IV
Item 15 — Exhibits, Financial Statement Schedules
SIGNATURES

 

This Form 10-K is filed by Southwestern Public Service Co. (SPS).  SPS is a wholly owned subsidiaries of Xcel Energy Inc. Additional information on Xcel Energy is available in various filings with the U.S. Securities and Exchange Commission (SEC). This report should be read in its entirety.

 

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PART I

 

Item l — Business

 

DEFINITION OF ABBREVIATIONS AND INDUSTRY TERMS

 

Xcel Energy Subsidiaries and Affiliates
NSP-Minnesota		Northern States Power Co., a Minnesota corporation
NSP-Wisconsin		Northern States Power Co., a Wisconsin corporation
PSCo		Public Service Company of Colorado, a Colorado corporation
SPS		Southwestern Public Service Co., a New Mexico corporation
Utility Subsidiaries		NSP-Minnesota, NSP-Wisconsin, PSCo, SPS
Xcel Energy		Xcel Energy Inc., a Minnesota corporation
Federal and State Regulatory Agencies
DOE		United States Department of Energy
DOL		United States Department of Labor
EPA		United States Environmental Protection Agency
FERC		Federal Energy Regulatory Commission. The U.S. agency that regulates the rates and services for transportation of electricity and natural gas, and the sale of electricity at wholesale, in interstate commerce, including the sale of electricity at market-based rates.
IRS		Internal Revenue Service
NMPRC		New Mexico Public Regulatory Commission. The state agency that regulates the retail rates and services and construction of transmission or generation by SPS in New Mexico. The NMPRC also has jurisdiction over the issuance of securities by SPS.
PUCT		Public Utility Commission of Texas. The state agency that regulates the retail rates, services and other aspects of SPS’ operations in Texas.
SEC		Securities and Exchange Commission
Other Terms and Abbreviations
AFDC		Allowance for funds used during construction. Defined in regulatory accounts as a non-cash accounting convention that represents the estimated composite interest costs of debt and a return on equity funds used to finance construction. The allowance is capitalized in property accounts and included in income.
C20		Derivatives Implementation Group of FASB Implementation Issue No. C20. Clarified the terms clearly and closely related to normal purchases and sales contracts, as included in SFAS No. 133, as amended.
Deferred energy costs		The amount of fuel costs applicable to service rendered in one accounting period that will not be reflected in billings to customers until a subsequent accounting period.
Derivative instrument		A financial instrument or other contract with all three of the following characteristics: •                    An underlying and a notional amount or payment provision or both, •                    Requires no initial investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors, and •                    Terms require or permit a net settlement, can be readily settled net by means outside the contract or provides for delivery of an asset that puts the recipient in a position not substantially

 

 

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		different from net settlement
Distribution		The system of lines, transformers, switches and mains that connect electric and natural gas transmission systems to customers.
ERISA		Employee Retirement Income Security Act
FASB		Financial Accounting Standards Board
FTRs		Financial Transmission Rights
GAAP		Generally accepted accounting principles
Generation		The process of transforming other forms of energy, such as nuclear or fossil fuels, into electricity. Also, the amount of electric energy produced, expressed in megawatts (capacity) or megawatt hours (energy).
JOA		Joint operating agreement among the Utility Subsidiaries
LDC		Local distribution company. A company or division that obtains the major portion of its revenues from the operations of a retail distribution system for the delivery of electricity or natural gas for ultimate consumption.
LIBOR		London Interbank Offered Rate
Mark-to-market		The process whereby an asset or liability is recognized at fair value and the change in the fair value of that asset or liability is recognized in current earnings in the Consolidated Statements of Operations or in Other Comprehensive Income within equity during the current period.
MISO		Midwest Independent Transmission System Operator
Native load		The customer demand of retail and wholesale customers whereby a utility has an obligation to serve: e.g., an obligation to provide electric or natural gas service created by statute or long-term contract.
Nonutility		All items of revenue, expense and investment not associated, either by direct assignment or by allocation, with providing service to the utility customer.
OMOI		FERC Office of Market Oversight and Investigations
PUHCA		Public Utility Holding Company Act of 1935. Enacted to regulate the corporate structure and financial operations of utility holding companies. Applies to companies that own or control 10% or more of a utility.
QF		Qualifying facility. As defined under the Public Utility Regulatory Policies Act of 1978, a QF sells power to a regulated utility at a price equal to that which it would otherwise pay if it were to build its own power plant or buy power from another source.
Rate base		The investor-owned plant facilities for generation, transmission and distribution and other assets used in supplying utility service to the consumer.
ROE		Return on equity
RTO		Regional Transmission Organization. An independent entity, which is established to have “functional control” over a utilities’ electric transmission systems, in order to provide non-discriminatory access to transmission of electricity.
SFAS		Statement of Financial Accounting Standards
SMA		Supply margin assessment
SMD		Standard market design
SO2		Sulfur dioxide
SPP		Southwest Power Pool, Inc.
TEMT		Transmission and Energy Markets Tariff
Unbilled revenues		Amount of service rendered but not billed at the end of an accounting period. Cycle meter-reading practices result in unbilled consumption between the date of last meter reading and the end of the period.
Underlying		A specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable, including the occurrence or nonoccurrence of a specified event such as a scheduled payment under a contract.
VaR		Value-at-risk

 

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Wheeling or Transmission		An electric service wherein high voltage transmission facilities of one utility system are used to transmit power generated within or purchased from another system.
Working capital		Funds necessary to meet operating expenses
Measurements
Bcf		Billion cubic feet
KW		Kilowatts
Kwh		Kilowatt hours
MMBtu		One million BTUs
MW		Megawatts (one MW equals one thousand KW)
Mwh		Megawatt hour. One Mwh equals one thousand Kwh.
Watt		A measure of power production or usage equal to the kinetic energy of an object with a mass of 2 kilograms moving with a velocity of one meter per second for one second.

 

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COMPANY OVERVIEW

 

SPS was incorporated in 1921 under the laws of New Mexico. SPS is an operating utility engaged primarily in the generation, purchase, transmission, distribution and sale of electricity. SPS serves approximately 395,000 electric customers in portions of Texas, New Mexico, Oklahoma and Kansas. The wholesale customers served by SPS comprise approximately 35 percent of the total Kwh sales in 2004. A major portion of SPS’ retail electric operating revenues is derived from operations in Texas.  SPS owned a direct subsidiary, Southwestern Public Service Capital I, a special purpose financing trust, for which a certificate of cancellation was filed for dissolution on Jan. 5, 2004.  SPS is a wholly owned subsidiary of Xcel Energy.

 

Xcel Energy was incorporated under the laws of Minnesota in 1909 and is a registered holding company under the PUHCA. Xcel Energy is subject to the regulatory oversight of the SEC under PUHCA. The rules and regulations under PUHCA impose a number of restrictions on the operations of registered holding company systems. These restrictions include, subject to certain exceptions, a requirement that the SEC approve securities issuances, payments of dividends out of capital or unearned surplus, sales and acquisitions of utility assets or of securities of utility companies and acquisitions of other businesses. PUHCA also generally limits the operations of a registered holding company to a single integrated public utility system, plus additional energy-related businesses. PUHCA rules require that transactions between affiliated companies in a registered holding company system be performed at cost, with limited exceptions.

 

In 2004, Xcel Energy continuing operations included the activity of four wholly owned utility subsidiaries, including SPS, that serve electric and natural gas customers in 10 states. The other utility subsidiaries are NSP-Minnesota, NSP-Wisconsin and PSCo.  These utilities serve customers in portions of Colorado, Kansas, Michigan, Minnesota, New Mexico, North Dakota, Oklahoma, South Dakota, Texas and Wisconsin.

 

ELECTRIC UTILITY OPERATIONS

 

Overview

 

Utility Industry Growth — After a decade of cost cutting and efficiency gains in anticipation of industry restructuring and competition, areas of growth for the utility industry are limited.  The most significant areas for earnings growth include increasing regulated rates, increased investment in rate base, diversification, acquisition or modification of rate structures to implement performance-based rates.  SPS intends to focus on growing through investments in electric and rate base to meet growing customer demands and to maintain or increase reliability and quality of service to customers and rate case filings with state and federal regulators to increase rates congruent with increasing costs of operations associated with such investments.

 

Utility Restructuring and Retail Competition — The structure of the utility industry has been subject to change.  Merger and acquisition activity in the past had been significant as utilities combined to capture economies of scale or establish a strategic niche in preparing for the future, although such activity slowed substantially after 2001.  All investor-owned utilities were required to provide nondiscriminatory access to the use of their transmission systems in 1996.  Although much of Texas has implemented retail competition, it is presently limited to utilities within the Electric Reliability Council of Texas.  Under the current law, SPS can file a plan to implement competition, subject to regulatory approval, in Texas on or after Jan. 1, 2007.  However, SPS has no plan to implement retail competition in its service area.

 

The retail electric business does face some competition as industrial and large commercial customers have some ability to own or operate facilities to generate their own electricity. In addition, customers may have the option of substituting other fuels, such as natural gas or steam/chilled water for heating, cooling and manufacturing purposes, or the option of relocating their facilities to a lower cost region.  While SPS faces these challenges, it believes its rates are competitive with currently available alternatives.

 

Summary of Recent Federal Regulatory Developments

 

The FERC has jurisdiction over rates for electric transmission service in interstate commerce and electric energy sold at wholesale, hydro facility licensing, accounting practices and certain other activities of SPS.  State and local agencies have jurisdiction over many of SPS’ activities, including regulation of retail rates and environmental matters.

 

6

 

Market Based Rate Authority — The FERC regulates the wholesale sale of electricity.  In addition to FERC’s traditional cost of service methodology for determining the rates allowed to be charged for wholesale electric sales, in the 1990’s FERC began to allow utilities to make sales at market-based rates.  In order to obtain market-based rate authorization from the FERC, utilities such as SPS have been required to submit analyses demonstrating that they did not have market power in the relevant markets.  SPS has been authorized by FERC to make wholesale sales at market-based rates.

 

In November 2001, after the market disruptions in California and other regions, the FERC issued an order under Section 206 of the Federal Power Act initiating a generic investigation proceeding against all jurisdictional electric suppliers making sales in interstate commerce at market-based rates.  In November 2003, the FERC issued a final order requiring amendments to the market-based wholesale tariffs of all FERC jurisdictional electric utilities to impose new market behavior rules and requiring submission of compliance tariff amendments in December 2003.  SPS made a timely compliance filing.  Violations of the new tariffs could result in the loss of certain wholesale sales revenues or the loss of authority to make sales at market-based rates.

 

In 2004, FERC initiated a new proceeding on future market-based rate authorizations and issued interim requirements for FERC jurisdictional electric utilities that have been granted authority to make wholesale sales at market-based rates.  The FERC adopted a new interim methodology to assess generation market power and modified measures to mitigate market power where it is found.  The FERC upheld and clarified the interim requirements on rehearing in an order issued on July 8, 2004.  This methodology is to be applied to all initial market-based rate applications and triennial reviews.  Under this methodology, the FERC has adopted two indicative screens (an uncommitted pivotal supplier analysis and an uncommitted market share analysis) to assess market power.  Passage of the two screens creates a rebuttable presumption that an applicant does not have market power, while the failure creates a rebuttable presumption that the utility does have market power.  An applicant or intervenor can rebut the presumption by performing a more extensive delivered-price test analysis.  If an applicant is determined to have generation market power, the applicant has the opportunity to propose its own mitigation plan or may implement default mitigation established by the FERC.  The default mitigation limits prices for sales of power to cost-based rates within areas where an applicant is found to have market power.

 

As required by the FERC, Xcel Energy filed the required analysis applying the FERC’s two indicative screens on behalf of itself and the Utility Subsidiaries with the FERC on Feb. 7, 2005.  This analysis demonstrated that SPS passed the pivotal supplier analysis in its own control area and all adjacent markets, but that it failed the market share analysis in its own control area.  It is accordingly expected that the FERC will set the market-rate authorizations for SPS for investigation and hearing under Section 206 of the Federal Power Act.  At that time, SPS expects to submit a delivered-price test analysis to support the continuance of market-based rate authority in its control areas.  SPS does not expect the mitigation measures imposed, if any, to have a significant financial impact on its commodity marketing operations.

 

In order to enable it and interested parties to monitor each individual utility’s market-based rate authority, the FERC on Feb. 10, 2005 issued a final rule requiring that a utility with market-based rate authority file reports notifying the FERC of changes in status (e.g., additions of certain generating resources) that reflect a departure from the characteristics that the FERC relied upon in granting that utility market-based rate authority within thirty days of the occurrence of a triggering event.

 

Electric Transmission Rate Regulation — The FERC also regulates the rates charged and terms and conditions for electric transmission services.  Since 1996, the FERC has required SPS to provide open access transmission service at rates and tariffs on file with the FERC.  In addition, FERC policy encourages utilities to turn over the functional control over their electric transmission assets and the related responsibility for the sale of electric transmission services to an RTO.  SPS is a member of the SPP, which proposes to begin RTO operations in October 2005.  SPS has been a member of SPP’s regional transmission tariff since 2001.  Each RTO separately files for regional transmission tariff rates for approval by FERC.  All members within that RTO are then subjected to those rates.

 

Generation Interconnection Rules — In August 2003, the FERC issued final rules requiring the standardization of generation interconnection procedures and agreements for interconnection of new electric generators of 20 MW or more to the transmission systems of all FERC-jurisdictional electric utilities, including SPS. The FERC also established pricing rules for interconnections and related transmission system upgrades, which allow the transmission-owning utility to require the interconnecting customer to fund the interconnection costs and network upgrades required by the new generator, but require the transmission utility to provide transmission service credits, with interest, for the full amount of prepayment. The FERC required compliance filings for detailing proposed changes to SPS’ tariff and the SPP regional tariff, which will govern most generation interconnections to the SPS transmission system.  In October 2004, the FERC accepted proposed tariff changes for SPS, subject to certain conditions.  In November 2004, SPS submitted a compliance filing.  In December 2004, the FERC issued further modifications to the interconnection rules on rehearing and required SPS to submit a further compliance filing by February 2005.  The required compliance filing was submitted on Feb. 18, 2005.

 

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Ratemaking Principles

 

Summary of Regulatory Agencies and Areas of Jurisdiction — The PUCT has jurisdiction over SPS’ Texas operations as an electric utility and over its retail rates and services. The municipalities in which SPS operates in Texas have original jurisdiction over SPS’ rates in those communities. The NMPRC has jurisdiction over the issuance of securities. The NMPRC, the Oklahoma Corporation Commission and the Kansas Corporation Commission have jurisdiction with respect to retail rates and services and construction of transmission or generation in their respective states.  SPS is subject to the jurisdiction of the FERC with respect to its wholesale electric operations, accounting practices, wholesale sales for resale and the transmission of electricity in interstate commerce.  SPS has received authorization from the FERC to make wholesale electricity sales at market-based prices.

 

Fuel, Purchased Energy and Conservation Cost Recovery Mechanisms — Fuel and purchased energy costs are recovered in Texas through a fixed fuel and purchased energy recovery factor, which is part of SPS’ retail electric rates.  In July 2003, a unanimous settlement was reached providing for the implementation of an expedited procedure for revising the fixed fuel factors on a semi-annual basis.  As a result, the Texas retail fuel factors change each November and May based on the projected cost of natural gas.

 

If it appears that SPS will materially over-recover or under-recover these costs, the factor may be revised upon application by SPS or action by the PUCT. The regulations require refunding or surcharging over- or under-recovery amounts, including interest, when they exceed 4 percent of the utility’s annual fuel and purchased energy costs, as allowed by the PUCT, if this condition is expected to continue.

 

PUCT regulations require periodic examination of SPS fuel and purchased energy costs, the efficiency of the use of such fuel and purchased energy, fuel acquisition and management policies and purchase energy commitments.  Under the PUCT’s regulations, SPS is required to file an application for the PUCT to retrospectively review at least every three years the operations of SPS’ electric generation and fuel management activities.

 

The NMPRC regulations provide for a fuel and purchased power cost adjustment clause for SPS’ New Mexico retail jurisdiction.  SPS files monthly and annual reports of its fuel and purchased power costs with the NMPRC.  The NMPRC authorized SPS to implement a monthly adjustment factor beginning with the February 2002 billing cycle.  In accordance with the NMPRC regulations, SPS must file its next New Mexico fuel factor continuation case no later than August 2005 for the period from October 2001 through April 2005.

 

SPS recovers fuel and purchased energy costs from its wholesale customers through a fuel cost adjustment clause accepted for filing by the FERC.

 

Performance-Based Regulation and Quality of Service Requirements — In Texas, SPS is subject to a quality of service plan requiring SPS to comply with electric service reliability, telephone response and abandoned call performance targets.  If these targets are not met, SPS is required to make refunds to its customers of up to $950,000 per year.  As of Dec. 31, 2004, SPS accrued  $800,000 to reflect the expected refund obligation for those measures.

 

Pending and Recently Concluded Regulatory Proceedings - FERC

 

SPS and PSCo FERC Transmission Rate Case — On Sept. 2, 2004, Xcel Energy filed on behalf of SPS and PSCo an application to increase wholesale transmission service and ancillary service rates within the Xcel Energy joint open access transmission tariff.  SPS and PSCo are seeking an increase in annual transmission service and ancillary services revenues of $6.1 million.  As a result of a settlement with certain PSCo wholesale power customers in 2003, their power sales rates would be reduced by $1.4 million. The net increase in annual revenues proposed is $4.7 million, of which $1.7 million is attributable to SPS.  In December 2004, the FERC suspended the filing and delayed the effective date of the proposed increase to May 20, 2005.  The FERC also initiated a complaint proceeding against SPS, which would allow the FERC to order reductions below SPS’ currently effective rates.  The rate increase application also includes SPS and PSCo adopting an annual formula rate for transmission service pricing as previously approved by the FERC for other transmission providers.  The case has been set for hearing and settlement procedures.

 

Wholesale Rate Complaint – In November 2004, several wholesale cooperative customers of SPS filed a $3 million rate complaint at the FERC requesting that the FERC investigate SPS’ wholesale power base rates and fuel clause calculations.  In December 2004, the FERC accepted the complaint filing and ordered SPS base rates subject to refund, effective Jan. 1, 2005.  Also in November 2004, SPS filed revisions to its wholesale fuel cost adjustment clause.  The FERC set the proposed rate changes into effect on Jan. 1, 2005,

 

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subject to refund, and consolidated the proceeding with the wholesale cooperative customers’ complaint proceeding.  The FERC set the consolidated proceeding for hearing and settlement judge procedures.

 

Southwest Power Pool (SPP) Restructuring — SPS is a member of the SPP regional reliability council, and SPP acts as transmission tariff administrator for the SPS system. In October 2003, SPP filed for FERC authorization to transform its operation into an RTO under FERC Order No. 2000. In addition, SPP made unilateral changes to the existing SPP membership agreement, which increases the current costs of SPS membership in SPP by approximately $1.5 million per year, in order to fund the start of RTO operations. On Feb. 10, 2004, the FERC conditionally approved SPP’s proposed formation as an RTO, subject to SPP meeting certain requirements.  On Oct. 1, 2004, the FERC issued a further order granting the SPP status as an RTO.  SPP is expected to commence RTO operations on Oct. 1, 2005.  SPS is required to obtain NMPRC approval before it can transfer functional control of its electrical transmission system.  When SPP begins RTO operations and SPS obtains all required approvals, SPS will be required to transfer functional control of its electric transmission system to SPP and take all transmission services, including services required to serve retail native loads, under the SPP regional tariff.

 

Pending and Recently Concluded Regulatory Proceedings - PUCT

 

Texas Retail Fuel Cost Recovery — Fuel and purchased energy costs are recovered in Texas through a fixed fuel and purchased energy recovery factor.  In May 2004, SPS filed with the PUCT its periodic request for fuel and purchased power cost recovery for electric generation and fuel management activities for the period from January 2002 through December 2003.  SPS requested approval of approximately $580 million of Texas-jurisdictional fuel and purchased power costs for the two-year period.  Intervenor and PUCT staff testimony was filed in October 2004 and hearings were held in December 2004.  Intervenor testimony contained objections to SPS’ methodology for assigning average fuel costs to wholesale sales, among other things.  Recovery of $49 million to $86 million of the requested amount was contested by multiple intervenors.  SPS has recorded its best estimate of any potential liability related to the impact of this proceeding.  In January 2005, SPS filed its post-hearing briefs disputing the intervenor objections.  Reply briefs were filed on Feb. 15, 2005, the administrative law judge is expected to issue his recommended proposal for decision by the end of April 2005, and PUCT action is expected by the end of May 2005.  SPS is pursuing a settlement agreement with the parties involved.

 

In November 2003, SPS submitted a fuel cost surcharge factor application in Texas to recover an additional $25 million of fuel cost under-recoveries accrued during June through September 2003.  In February 2004, the parties in the proceeding submitted a unanimous settlement allowing SPS to collect net under-recoveries experienced through December 2003 of $22 million.  The surcharge, which was approved by the PUCT in March 2004, went into effect May 2004 and will continue for 12 months.

 

In May 2004, SPS filed another fuel cost surcharge factor application in Texas to recover an additional $32 million of fuel cost recoveries accrued during January through March 2004. In June 2004, the parties in the proceeding submitted a unanimous settlement allowing SPS to collect the $32 million fuel cost under-recoveries surcharge factors for a 12-month period beginning November 2004. The PUCT approved the settlement in September 2004.

 

On Nov. 5, 2004, SPS submitted another fuel cost surcharge application with the PUCT for $30 million of fuel cost under-recoveries accrued from April 2004 through September 2004.  These under-recoveries under the Texas retail fixed fuel collection process are primarily the result of higher than expected natural gas prices.  SPS is also proposing in its November 2004 filing to increase its semi-annual fuel factors to take into account the increased cost of natural gas at its gas-fueled power plants.  In January 2005, parties to the application reached a settlement agreement allowing SPS to collect the $30 million fuel cost under-recoveries through a surcharge during the 12-month period beginning May 2005.  The PUCT is expected to approve the settlement in March 2005.

 

Lamb County Electric Cooperative — On July 24, 1995, Lamb County Electric Cooperative, Inc. (LCEC) petitioned the PUCT for a cease and desist order against SPS. LCEC alleged that SPS had been unlawfully providing service to oil field customers and their facilities in LCEC’s singly-certificated area. The PUCT denied LCEC’s petition. See further discussion under Item 3 — Legal Proceedings.

 

Pending and Recently Concluded Regulatory Proceedings - NMPRC

 

Staff Petition for Review of SPS’s Fuel Clause - On Nov. 23, 2004, the staff of the NMPRC filed a petition requesting that the NMPRC docket a case to review the operation of SPS’ fuel and purchased power cost adjustment clause.  On Dec. 21, 2004, the NMPRC issued an order docketing an investigation into the fuel and purchased power cost adjustment clause calculations.  This matter is pending.

 

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Capacity and Demand

 

Assuming normal weather during 2005, system peak demand for the SPS’ electric utility for each of the last three years and the forecast for 2005 is listed below.

 

System Peak Demand (in Megawatts)
2002		2003		2004		2005 Forecast
4,018		4,338		4,679		4,356

 

The peak demand for the SPS system typically occurs in the summer.  The 2004 system peak demand for SPS occurred on Aug. 4, 2004.

 

Energy Sources and Related Transmission Initiatives

 

SPS expects to use existing electric generating stations; purchases from other utilities, independent power producers and power marketers and demand-side management options to meet its net dependable system capacity requirements.

 

Purchased Power — SPS has contractual arrangements to purchase power from other utilities and nonregulated energy suppliers. Capacity, typically measured in KW or MW, is the measure of the rate at which a particular generating source produces electricity. Energy, typically measured in Kwh or Mwh, is a measure of the amount of electricity produced from a particular generating source over a period of time. Long-term purchase power contracts typically require a periodic payment to secure the capacity from a particular generating source and a charge for the associated energy actually purchased from such generating source.

 

SPS also makes short-term firm and non-firm purchases to replace generation from company-owned units that are unavailable due to maintenance and unplanned outages, to provide each utility’s reserve obligation, to obtain energy at a lower cost than that which could be produced by other resource options, including company-owned generation and/or long-term purchase power contracts, and for various other operating requirements.

 

Purchased Transmission Services — SPS has contractual arrangements with regional transmission service providers to deliver power and energy to the subsidiaries’ native load customers, which are retail and wholesale load obligations with terms of more than one year.  Point-to-point transmission services typically include a charge for the specific amount of transmission capacity being reserved, although some agreements may base charges on the amount of metered energy delivered.  Network transmission services include a charge for the metered demand at the delivery point at the time of the provider’s monthly transmission system peak, usually calculated as a 12-month rolling average.

 

Fuel Supply and Costs

 

The following table shows the delivered cost per MMBtu of each significant category of fuel consumed for electric generation, the percentage of total fuel requirements represented by each category of fuel and the total weighted average cost of all fuels during such years.

 

		Coal					Natural Gas					Average Fuel
		Cost			Percent		Cost			Percent		Cost
2004		$	1.20		69	%	$	5.74		31	%	$	2.60
2003*		$	0.93		73	%	$	5.24		27	%	$	2.10
2002		$	1.33		74	%	$	3.27		26	%	$	1.84

 

*  The lower 2003 coal costs reflect a prior period fuel credit adjustment. The normalized cost per MMBtu was approximately $1.14.

 

Fuel Sources — SPS purchases all of its coal requirements for Harrington and Tolk electric generating stations from TUCO, Inc. in the form of crushed, ready-to-burn coal delivered to the plant bunkers. TUCO, in turn, arranges for the purchase, receiving, transporting, unloading, handling, crushing, weighing, and delivery of coal to the plant bunkers to meet SPS’s requirements. TUCO is responsible for negotiating and administering contracts with coal suppliers, transporters, and handlers. For the Harrington station, the

 

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coal supply contract with TUCO expires Dec. 31, 2016. For the Tolk station, the coal supply contract with TUCO expires Dec. 31, 2017.  At Dec. 31, 2004, coal supplies at the Harrington and Tolk sites were approximately 25 and 24 days supply, respectively. TUCO has coal supply agreements to supply 100 percent of the projected 2005 requirements for Harrington and Tolk stations. TUCO has long-term contracts for supply of coal in sufficient quantities to meet the primary needs of the Harrington and Tolk stations.

 

SPS uses both firm and interruptible natural gas and standby oil in combustion turbines and certain boilers. Natural gas suppliers for SPS’ power plants are procured under short- and intermediate-term contracts to provide an adequate supply of fuel.

 

Commodity Marketing Operations

 

SPS conducts various wholesale marketing operations, including the purchase and sale of electric capacity, energy and energy related products. Participation in short-term wholesale energy markets provides market intelligence and information that supports the energy management of SPS.  SPS uses physical and financial instruments to minimize commodity price and credit risk and hedge supplies and purchases. Engaging in short-term sales and purchase commitments results in an efficient use of our plants and the capturing of additional margins from non-traditional customers.  SPS also uses these marketing operations to capture arbitrage opportunities created by regional pricing differentials, supply and demand imbalances and changes in fuel prices.  See additional discussion under Item 7A — Quantitative and Qualitative Disclosures About Market Risk.

 

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SPS Electric Operating Statistics

 

		Year Ended Dec. 31,
		2004			2003			2002
Electric sales (Millions of Kwh):
Residential		3,361			3,294			3,300
Commercial and industrial		12,429			12,245			12,044
Public authorities and other		557			556			549
Total retail		16,347			16,095			15,893
Sales for resale		8,949			10,071			9,045
Total energy sold		25,296			26,166			24,938
Number of customers at end of period:
Residential		311,473			311,223			304,971
Commercial and industrial		77,538			77,377			75,676
Public authorities and other		5,868			5,829			5,615
Total retail		394,879			394,429			386,262
Wholesale		58			72			70
Total customers		394,937			394,501			386,332
Electric revenues (Thousands of dollars):
Residential		$	232,271		$	209,227		$	192,030
Commercial and industrial		603,303			519,194			462,556
Public authorities and other		33,724			32,267			29,104
Total retail		869,298			760,688			683,690
Wholesale		440,303			378,344			287,768
Other electric revenues		24,174			62,305			53,720
Total electric revenues		$	1,333,775		$	1,201,337		$	1,025,178
Kwh sales per retail customer		41,397			40,806			41,146
Revenue per retail customer		$	2,201.43		$	1,928.58		$	1,770.02
Residential revenue per Kwh		6.91		¢	6.35		¢	5.82		¢
Commercial and industrial revenue per Kwh		4.85		¢	4.24		¢	3.84		¢
Wholesale revenue per Kwh		4.92		¢	3.76		¢	3.18		¢

 

12

 

ENVIRONMENTAL MATTERS

 

SPS is 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.  SPS 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 applicable environmental standards.

 

SPS strives to comply with all environmental regulations applicable to its operations. However, it is not possible at this time to determine when or to what extent additional facilities or modifications of existing or planned facilities will be required as a result of changes to environmental regulations, interpretations or enforcement policies or, generally, what effect future laws or regulations may have upon its operations. For more information on environmental contingencies, see Note 11 to the Consolidated Financial Statements and the matter discussed below.

 

EMPLOYEES

 

The number of full-time SPS employees on Dec. 31, 2004 was 1,049. Of these full-time employees, 739, or 70 percent, are covered under collective bargaining agreements. See Note 7 to the Consolidated Financial Statements for further discussion. Xcel Energy Services Inc., a subsidiary of Xcel Energy, employees provide services to SPS.

 

Item 2 — Properties

 

Station, City and Unit		Fuel		Installed		Summer 2004 Net Dependable Capability (MW)
Steam:
Harrington — Amarillo, Texas
3 Units		Coal		1976 - 1980		1,066
Tolk — Muleshoe, Texas
2 Units		Coal		1982 - 1985		1,080
Jones — Lubbock, Texas
2 Units		Natural Gas		1971 - 1974		486
Plant X — Earth, Texas
4 Units		Natural Gas		1952 - 1964		442
Nichols — Amarillo, Texas
3 Units		Natural Gas		1960 - 1968		457
Cunningham — Hobbs, N.M.
2 Units		Natural Gas		1957 - 1965		267
Maddox — Hobbs, N.M.		Natural Gas		1983		118
CZ-2-Pampa, Texas		Purchased Steam		1979		26
Moore County — Amarillo, Texas		Natural Gas		1954		48
Gas Turbine:
Carlsbad — Carlsbad, N.M.		Natural Gas		1977		13
CZ-1-Pampa, Texas		Hot Nitrogen		1965		13
Maddox — Hobbs, N.M.		Natural Gas		1983		65
Riverview — Electric City, Texas.		Natural Gas		1973		23
Cunningham — Hobbs, N.M.		Natural Gas		1998		220
Diesel:
Tucumcari — N.M.
6 Units				1941 - 1968		—
Total						4,324

 

Electric utility overhead and underground transmission and distribution lines (measured in conductor miles) at Dec. 31, 2004:

 

13

 

Conductor Miles
345 KV		2,754
230 KV		9,224
115 KV		10,831
Less than 115 KV		22,021

 

SPS had 497 electric utility transmission and distribution substations at Dec. 31, 2004.

 

Item 3 — Legal Proceedings

 

In the normal course of business, various lawsuits and claims have arisen against SPS. Management, after consultation with legal counsel, has recorded an estimate of the probable cost of settlement or other disposition for such matters.

 

Other Matters

 

For more discussion of legal claims and environmental proceedings, see Note 11 to the Consolidated Financial Statements under Item 8, incorporated by reference. For a discussion of proceedings involving utility rates, see Pending and Recently Concluded Regulatory Proceedings under Item 1, incorporated by reference.

 

Item 4 — Submission of Matters to a Vote of Security Holders

 

This is omitted per conditions set forth in general instructions I(1)(a) and (b) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).

 

PART II

 

Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

SPS is a wholly owned subsidiary and there is no market for its common equity securities.

 

SPS has dividend restrictions imposed by state regulatory commissions, debt agreements and the SEC under the PUHCA limiting the amount of dividends SPS can pay to Xcel Energy. These restrictions include, but may not be limited to, the following:

 

•            maintenance of a minimum equity ratio of 30 percent;

•            payment of dividends only from retained earnings; and

•            debt covenant restriction under the credit agreement for debt ratio.

 

The dividends declared during 2004 and 2003 were as follows (thousands of dollars):

 

Quarter Ended
March 31, 2004			June 30, 2004			Sept. 30, 2004			Dec. 31, 2004
$	23,547		$	23,072		$	23,044		$	22,442

 

March 31, 2003			June 30, 2003			Sept. 30, 2003			Dec. 31, 2003
$	24,649		$	24,242		$	23,759		$	23,987

 

Item 6 — Selected Financial Data

 

This is omitted per conditions set forth in general instructions I(1)(a) and (b) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).

 

Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Discussion of financial condition and liquidity for SPS is omitted per conditions set forth in general instructions I (1)(a) and (b) of Form 10-K for wholly owned subsidiaries. It is replaced with management’s narrative analysis and the results of operations for the

 

14

 

current year as set forth in general instructions I(2)(a) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).

 

Forward Looking Information

 

The following discussion and analysis by management focuses on those factors that had a material effect on the financial condition and results of operations of SPS during the periods presented, or are expected to have a material impact in the future. It should be read in conjunction with the respective accompanying Consolidated Financial Statements and Notes to the Consolidated Financial Statements.

 

Except for the historical statements contained in this report, the matters discussed in the following discussion and analysis are forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements are intended to be identified in this document by the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should,” and similar expressions. Actual results may vary materially. Factors that could cause actual results to differ materially include, but are not limited to:

 

•             general economic conditions, including the availability of credit and its impact on capital expenditures and the ability to obtain financing on favorable terms;

•             rating agency actions;

•             business conditions in the energy industry;

•             competitive factors including the extent and timing of the entry of additional competition;

•             unusual weather;

•             changes in federal or state legislation;

•             geopolitical events, including war and acts of terrorism;

•             regulation; and

•             the other risk factors listed from time to time by SPS in reports filed with the SEC, including Exhibit 99.01 to this Annual Report on Form 10-K for the year ended Dec. 31, 2004.

 

15

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Results of Operations

 

SPS’ net income was approximately $54.9 million for 2004, compared with approximately $82.3 million for 2003.

 

Electric Utility, Short-Term Wholesale and Commodity Trading Margin

 

Electric fuel and purchased power expenses tend to vary with changing retail and wholesale sales requirements and unit cost changes in fuel and purchased power. Due to fuel cost recovery mechanisms for retail customers, most fluctuations in energy costs do not significantly affect electric margin.

 

SPS has two distinct forms of wholesale marketing activities:  short-term wholesale and commodity trading.  Short-term wholesale refers to energy related purchase and sales activity and the use of certain financial instruments associated with the fuel required for and energy produced from SPS’ generation assets and energy and capacity purchased to serve native load.  Commodity trading is not associated with SPS’ generation assets or the energy and capacity purchased to serve native load.

 

SPS conducts an inconsequential amount of commodity trading.  Margins from commodity trading activity are partially redistributed to NSP-Minnesota and PSCo pursuant to the JOA approved by the FERC.  Margins received pursuant to the JOA are reflected as part of Base Electric Utility Revenues.  Short-term wholesale and commodity trading margins reflect the impact of regulatory sharing, if applicable.  Trading revenues, as discussed in Note 1 to the Consolidated Financial Statements, are reported net of trading costs (i.e., on a margin basis) in the Consolidated Statements of Income.  Commodity trading costs include fuel, purchased power, transmission and other related costs.  The following table details base electric utility and short-term wholesale activities:

 

		Electric Utility			Short-Term Wholesale			Consolidated Totals
		(Millions of dollars)
2004
Electric utility revenue		$	1,330		$	3		$	1,333
Electric fuel and purchased power		(874		)	(3		)	(877		)
Gross margin before operating expenses		$	456		$	—		$	456
Margin as a percentage of revenue		34.3		%	—		%	34.2		%
2003
Electric utility revenue		$	1,195		$	6		$	1,201
Electric fuel and purchased power		(705		)	(5		)	(710		)
Gross margin before operating expenses		$	490		$	1		$	491
Margin as a percentage of revenue		41.0		%	16.7		%	40.9		%

 

The following summarizes the components of the changes in base electric revenue and base electric margin for the year ended Dec. 31:

 

Base Electric Revenue

 

(Millions of dollars)		2004 vs 2003
Fuel cost recovery		$	156
Sales growth (excluding weather impact)		13
Capacity sales		(10		)
Estimated impact of weather		(5		)
Regulatory accruals and other		(19		)
Total base electric revenue increase		$	135

 

Base Electric Margin

 

(Millions of dollars)		2004 vs 2003
Transmission revenues		$	(11	)
Sales growth (excluding weather impact)		10
Capacity sales		(10		)
Estimated impact of weather		(4		)
Regulatory accruals and other		(19		)
Total base electric margin decrease		$	(34	)

 

Fuel and purchased energy costs are recovered in Texas through a fixed fuel and purchased energy recovery factor, which are subject to periodic approval by the PUCT.  Intervenor testimony in the regulatory proceedings to consider recovery for the period from January 2002 through December 2003 contested recovery of $49 to $86 million.  SPS cannot predict what financial impact, if any, this proceeding will have on current or future operations.  However, it could be material.

 

16

 

Non-Fuel Operating Expense and Other Costs — The following summarizes the components of the changes in other utility operating and maintenance expense for the year ended Dec. 31:

 

(Millions of dollars)		2004 vs 2003
Lower compensation costs		$	(6.7	)
Higher employee benefit costs		5.1
Higher plant outage related costs		3.9
Unfavorable inventory adjustments in 2003		(3.1		)
Higher power plant related costs		2.4
Higher legal settlement costs		1.9
Higher customer billing system conversion related call center costs		1.6
Higher costs related to Sarbanes-Oxley and audit fees		0.7
Other		1.1
Total other utility operating and maintenance expense increase		$	6.9

 

Depreciation and amortization expense increased by approximately $4.5 million, or 5.1 percent, for 2004 compared with 2003, primarily due to 2004 plant additions and increased software amortization.

 

Taxes (other than income taxes) increased by approximately $0.8 million, or 1.8 percent, for 2004 compared with 2003, primarily due to higher franchise taxes.

 

Other income decreased by $1.6 million, or 34.9 percent, for 2004 compared with 2003, primarily due to a lower allowance for funds used during construction.

 

Interest charges and financing costs decreased by approximately $1.2 million, or 2.3 percent, for 2004 compared with 2003. The decrease is primarily the result of the 2003 refinancing of the subordinated debt.

 

Income taxes decreased by approximately $20.1 million in 2004, compared with 2003. The decrease was primarily due to lower income levels.  The effective tax rate was 36.3 percent for the year ended Dec. 31, 2004, compared with 38.4 percent for the same period in 2003. The decrease in the effective tax rate was primarily due to lower income levels and income tax benefits of $2.8 million recorded in 2004 related to successful resolution of audit issues and other adjustments to current and deferred taxes.

 

Item 7A — Quantitative and Qualitative Disclosures About Market Risk

 

Derivatives, Risk Management and Market Risk

 

In the normal course of business, SPS is exposed to a variety of market risks.  Market risk is the potential loss that may occur as a result of changes in the market or fair value of a particular instrument or commodity.  All financial and commodity related instruments, including derivatives, are subject to market risk.  These risks, as applicable to SPS, are discussed in further detail below.

 

Commodity Price Risk — SPS is exposed to commodity price risk in its generation and retail distribution operations.  Commodity price risk is managed by entering into both long- and short-term physical purchase and sales contracts for electric power, coal and fuel oil.  Commodity price risk is also managed through the use of financial derivative instruments.  SPS’ risk management policy allows it to manage commodity price risk within each rate-regulated operation to the extent such exposure exists.

 

Short-Term Wholesale and Commodity Trading Risk — SPS conducts an immaterial amount of commodity-marketing activities, including the purchase and sale of capacity, energy and energy related instruments. These marketing activities are primarily focused on specific regions where market knowledge and experience have been obtained. SPS’ risk management policy allows management to conduct the marketing activities within approved guidelines and limitations as approved by the company’s risk management committee, which is made up of management personnel not directly involved in the activities governed by the policy.

 

17

 

Certain contracts within the scope of these activities qualify for hedge accounting treatment under SFAS No. 133 – “Accounting for Derivative Instruments and Hedging Activities,” as amended, while others are subject to the fair value requirements of this pronouncement.

 

SPS did conduct limited commodity trading activities during 2004.  However, the quantity and duration of activity had no material impact on the reported Value-at-Risk.

 

Interest Rate Risk — SPS is subject to the risk of fluctuating interest rates in the normal course of business.  SPS’ risk management policy allows interest rate risk to be managed through the use of fixed rate debt, floating rate debt and interest rate derivatives such as swaps, caps, collars and put or call options, subject to regulatory approval when required.

 

SPS may engage in hedges of cash flow exposure.  The fair value of interest rate swaps designated as cash flow hedges is initially recorded in Other Comprehensive Income.  Reclassification of unrealized gains or losses on cash flow hedges of variable rate debt instruments from Other Comprehensive Income into earnings occurs as interest payments are accrued on the debt instrument and generally offsets the change in the interest accrued on the underlying variable rate debt.  The fair value of interest rate swaps is determined through counterparty valuations, internal valuations and broker quotes.  There have been no material changes in the techniques or models used in the valuation of interest rate swaps during the periods presented.

 

At Dec. 31, 2004 and 2003, a 100-basis-point change in the benchmark rate on SPS’ variable rate debt would impact pretax interest expense by approximately $0.2 million and $0.6 million, respectively.  See Note 9 to the Consolidated Financial Statements for a discussion of SPS’ interest rate swaps.

 

Credit Risk — In addition to the risks discussed previously, SPS is exposed to credit risk. Credit risk relates to the risk of loss resulting from the nonperformance by a counterparty of its contractual obligations. SPS maintains credit policies intended to minimize overall credit risk and actively monitors these policies to reflect changes and scope of operations.

 

SPS conducts standard credit reviews for all counterparties. SPS employs additional credit risk control mechanisms when appropriate, such as letters of credit, parental guarantees, standardized master netting agreements and termination provisions that allow for offsetting of positive and negative exposures. The credit exposure is monitored and, when necessary, the activity with a specific counterparty is limited until credit enhancement is provided.

 

18

 

Item 8 — Financial Statements and Supplementary Data

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholder

Southwestern Public Service Company

 

We have audited the accompanying consolidated balance sheets of and consolidated statements of capitalization of Southwestern Public Service Company (a New Mexico corporation) and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity and comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2004. Our audit also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

 

 

 

/S/ DELOITTE & TOUCHE LLP

Minneapolis, Minnesota

March 3, 2005

19

 

SOUTHWESTERN PUBLIC SERVICE CO.

CONSOLIDATED STATEMENTS OF INCOME

 

		Year Ended Dec. 31,
		2004			2003			2002
		(Thousands of dollars)
Operating revenues		$	1,333,775		$	1,201,337		$	1,025,178
Operating expenses:
Electric fuel and purchased power		877,273			709,951			554,874
Operating and maintenance expenses		181,812			174,876			161,994
Depreciation and amortization		91,919			87,468			89,087
Taxes (other than income taxes)		47,848			46,999			54,105
Total operating expenses		1,198,852			1,019,294			860,060
Operating income		134,923			182,043			165,118
Other income:
Interest and other income, net of nonoperating expenses (see Note 8)		1,919			1,707			4,339
Allowance for funds used during construction – equity		1,086			2,910			1,686
Total other income		3,005			4,617			6,025
Interest charges and financing costs:
Interest charges — including financing costs of $6,518, $6,987 and $6,138, respectively		53,528			48,304			47,062
Allowance for funds used during construction – debt		(1,736		)	(1,450		)	(1,014		)
Distributions on redeemable preferred securities of subsidiary trust		—			6,172			7,850
Total interest charges and financing costs		51,792			53,026			53,898
Income before income taxes		86,136			133,634			117,245
Income taxes		31,233			51,341			43,363
Net income		$	54,903		$	82,293		$	73,882

 

See Notes to Consolidated Financial Statements

 

20

 

SOUTHWESTERN PUBLIC SERVICE CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Year Ended Dec. 31,
		2004			2003			2002
		(Thousands of dollars)
Operating activities:
Net income		$	54,903		$	82,293		$	73,882
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		100,445			95,291			97,595
Deferred income taxes		27,469			13,620			29,885
Amortization of investment tax credits		(250		)	(250		)	(250		)
Allowance for equity funds used during construction		(1,086		)	(2,910		)	(1,686		)
Change in recoverable electric energy costs		(30,614		)	(32,987		)	(56,322		)
Change in accounts receivable		(369		)	4,924			(10,559		)
Change in unbilled revenues		984			(10,254		)	22,925
Change in inventories		(1,020		)	2,173			(4,575		)
Change in other current assets		(1,511		)	(2,211		)	9,104
Change in accounts payable		52,753			17,533			9,045
Change in other current liabilities		(40,530		)	278			(18,983		)
Change in other noncurrent assets		(17,617		)	(19,581		)	(22,435		)
Change in other noncurrent liabilities		20,558			(944		)	8,221
Net cash provided by operating activities		164,115			146,975			135,847
Investing activities:
Capital/construction expenditures		(122,879		)	(106,138		)	(51,723		)
Allowance for equity funds used during construction		1,086			2,910			1,686
Other investments		3,751			728			(3,037		)
Net cash used in investing activities		(118,042		)	(102,500		)	(53,074		)
Financing activities:
Short-term borrowings — net		36,000			—			—
Proceeds from issuance of long-term debt		—			98,983			—
Repayment of trust preferred securities		—			(100,000		)	—
Capital contribution from parent		1,712			2,789			5,793
Dividends paid to parent		(93,649		)	(97,078		)	(93,365		)
Net cash used in financing activities		(55,937		)	(95,306		)	(87,572		)
Net decrease in cash and cash equivalents		(9,864		)	(50,831		)	(4,799		)
Cash and cash equivalents at beginning of year		9,869			60,700			65,499
Cash and cash equivalents at end of year		$	5		$	9,869		$	60,700
Supplemental disclosure of cash flow information
Cash paid for interest (net of amounts capitalized)		$	46,450		$	37,688		$	37,870
Cash paid for income taxes (net of refunds received)		$	29,692		$	36,043		$	37,112

 

See Notes to Consolidated Financial Statements

 

21

 

SOUTHWESTERN PUBLIC SERVICE CO.

CONSOLIDATED BALANCE SHEETS

 

		Dec. 31, 2004			Dec. 31, 2003
		(Thousands of dollars)
ASSETS
Current assets:
Cash and cash equivalents		$	5		$	9,869
Accounts receivable — net of allowance for bad debts: $2,844 and $1,722, respectively		66,445			50,636
Accounts receivable from affiliates		2,273			16,687
Accrued unbilled revenues		62,269			63,253
Recoverable electric energy costs		80,040			49,426
Materials and supplies inventories — at average cost.		14,403			14,405
Fuel inventory — at average cost		2,997			1,975
Derivative instruments valuation-at market		8,381			5,502
Prepayments and other		6,902			8,270
Total current assets		243,715			220,023
Property, plant and equipment, at cost:
Electric utility plant		3,291,086			3,146,315
Construction work in progress		65,848			92,239
Total property, plant and equipment		3,356,934			3,238,554
Less accumulated depreciation		(1,398,497		)	(1,314,272		)
Net property, plant and equipment		1,958,437			1,924,282
Other assets:
Other investments		9,902			13,654
Regulatory assets		93,067			108,587
Prepaid pension asset		132,757			121,580
Derivative instruments valuation-at market		52,431			50,960
Deferred charges and other		4,819			5,034
Total other assets		292,976			299,815
Total assets		$	2,495,128		$	2,444,120
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt		$	36,000		$	—
Accounts payable		139,311			81,780
Accounts payable to affiliates		14,105			18,893
Taxes accrued		901			25,219
Accrued interest		10,098			10,645
Dividends payable to parent		22,442			23,987
Deferred income taxes		7,878			13,088
Derivative instruments valuation-at market		14,772			29,957
Other		18,109			18,624
Total current liabilities		263,616			222,193
Deferred credits and other liabilities:
Deferred income taxes		438,276			415,039
Deferred investment tax credits		3,716			3,967
Regulatory liabilities		135,881			113,492
Derivative instruments valuation-at market		22,449			26,237
Benefit obligations and other		24,817			23,550
Total deferred credits and other liabilities		625,139			582,285
Long-term debt		825,462			825,147
Common stock — authorized 200 shares of $1.00 par value; outstanding 100 shares		—			—
Premium on common stock		415,830			414,118
Retained earnings		370,430			407,632
Accumulated comprehensive loss		(5,349		)	(7,255		)
Total common stockholder’s equity		780,911			814,495
Commitments and contingencies (see Note 11)
Total liabilities and equity		$	2,495,128		$	2,444,120

 

See Notes to Consolidated Financial Statements

 

22