SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549



                                    FORM 8-K


                                 CURRENT REPORT
                     PURSUANT TO SECTION 13 or 15(d) of the
                         SECURITIES EXCHANGE ACT OF 1934


             Date of report (Date of earliest event reported) February 23, 1999

             Exact name of registrant as specified in its charter,
             State or other jurisdiction of incorporation or 
             organization, Address of principal executive offices and 
Commission   Registrant's Telephone Number,                         IRS Employer
File Number  including area code                              Identification No.
-----------  -------------------                              ------------------

1-12927      NEW CENTURY ENERGIES, INC.                            84-1334327
             (a Delaware Corporation)
             1225 17th Street
             Denver, Colorado  80202
             Telephone (303) 571-7511

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

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






<PAGE>



This combined Form 8-K is separately filed by New Century Energies Inc.,  Public
Service Company of Colorado and Southwestern Public Service Company. Information
contained herein relating to any individual  company is filed by such company on
its own behalf.  Each  registrant  makes  representations  only as to itself and
makes no other  representations  whatsoever  as to  information  relating to the
other registrants.

Item 5.  OTHER EVENTS

Reference  is made to the exhibits  filed in Item 7.  FINANCIAL  STATEMENTS  AND
EXHIBITS.

Item 7.  FINANCIAL STATEMENTS AND EXHIBITS

  (c) Exhibits

     Exhibit A.   Audited financial statements of New Century Energies, Inc. and
                  subsidiaries, Public Service Company of Colorado and
                  subsidiaries and Southwestern Public Service Company for the
                  year ended December 31, 1998.

     Exhibit B.   Consent of Arthur Andersen LLP

     Exhibit C.   Consent of Deloitte & Touche LLP

     Exhibit D.   Securities and Exchange Commission Form T-1 with The Chase
                  Manhattan Bank as trustee for Southwestern Public Service
                  Company

     Exhibit E.   Consent of LeBoeuf, Lamb, Greene and MacRae, LLP 

     Exhibit 27.1 NCE Financial Data Schedule

     Exhibit 27.2 PSCo Financial Data Schedule

     Exhibit 27.3 SPS Financial Data Schedule

                                       1
<PAGE>



                                         SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.



                                         NEW CENTURY ENERGIES, INC.


                                             /s/Richard C. Kelly
                                          -----------------------------
                                              Richard C. Kelly
                                          Executive Vice President and
                                           Chief Financial Officer



                                         PUBLIC SERVICE COMPANY OF COLORADO


                                             /s/Brian P. Jackson
                                          -----------------------------
                                              Brian P. Jackson
                                     Senior Vice President, Finance and
                                          Administrative Services,
                                          Chief Financial Officer and Treasurer



                                         SOUTHWESTERN PUBLIC SERVICE COMPANY


                                             /s/Brian P. Jackson
                                          -----------------------------
                                              Brian P. Jackson
                                     Senior Vice President, Finance and
                                          Administrative Services,
                                          Chief Financial Officer and Treasurer



Dated:   February 23, 1999


                                       2
<PAGE>


                                                                      Exhibit A

                         Audited Financial Statements of
                  New Century Energies, Inc. and Subsidiaries,
             Public Service Company of Colorado and Subsidiaries and
                       Southwestern Public Service Company

                                Table of Contents

                                                                         Page
                                                                        Number

Report of Independent Public Accountants - New Century Energies, Inc.      1

New Century Energies, Inc and Subsidiaries
   Consolidated Balance Sheets for the years ended 
     December 31, 1998 and 1997, Consolidated Statements of Income,
     Consolidated Statements of Shareholders' Equity and 
     Consolidated Statements of Cash Flows for the years ended 
     December 31, 1998, 1997 and 1996................................      2

Report of Independent Public Accountants - 
     Public Service Company of Colorado .............................      7

Public Service Company of Colorado and Subsidiaries
   Consolidated Balance Sheets and Consolidated Statements of
     Capitalization for the years ended December 31, 1998 and 1997,
     Consolidated Statements of Income, Consolidated Statements of
     Shareholder's Equity and Consolidated Statements of Cash Flows
     for the years ended December 31, 1998, 1997 and 1996 ............     8

Reports of Independent Public Accountants - Southwestern Public
 Service Company .....................................................     15

Southwestern Public Service Company
   Balance Sheets and Statements of Capitalization for the years ended
   December 31, 1998 and 1997, Statements of Income, Statements of
   Shareholder's Equity and Statements of Cash Flows for the years
   ended December 31, 1998 and 1997 and August 31, 1996 and for the
   four months ended December 31, 1996 and 1995.......................     17

Notes to Consolidated Financial Statements of New Century Energies, Inc.,
 and subsidiaries, Public Service Company of Colorado and subsidiaries
 and Southwestern Public Service Company as of December 31, 1998......     25

Definitions...........................................................     69




<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO NEW CENTURY ENERGIES, INC.:

We have audited the consolidated balance sheets of New Century Energies, Inc. (a
Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated  statements of income,  shareholders' equity and cash flows
for each of the  three  years in the  period  ended  December  31,  1998.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our  audits.  We  did  not  audit  the  consolidated   financial  statements  of
Southwestern  Public  Service  Company  for the year ended  December  31,  1996,
included in the consolidated financial statements of New Century Energies, Inc.,
which statements reflect total revenues constituting 31% in 1996, of the related
consolidated  totals.  Those  statements  were audited by other  auditors  whose
report  thereon  has been  furnished  to us, and our opinion  expressed  herein,
insofar as it relates to the amounts  included for  Southwestern  Public Service
Company, is based solely upon the report of the other auditors.

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 and the report of other auditors provide a reasonable
basis for our opinion.

In our  opinion,  based upon our audits  and the report of other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material respects, the financial position of New Century Energies,  Inc. and its
subsidiaries  as of  December  31,  1998  and  1997,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.



                                                        ARTHUR ANDERSEN LLP
Denver, Colorado
February 23, 1999


                                       1
<PAGE>


                        NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                                CONSOLIDATED BALANCE SHEETS
                                   (Thousands of Dollars)
                                 December 31, 1998 and 1997

                                           ASSETS

                                                             1998       1997 
                                                             ----       ---- 

Property, plant and equipment, at cost:
   Electric ..........................................   $7,097,070  $6,703,863
   Gas................................................    1,210,605   1,136,231
   Steam and other....................................      111,620     120,322
   Common to all departments..........................      423,287     437,636
   Construction in progress...........................      391,100     318,124
                                                            -------     -------
                                                          9,233,682   8,716,176
   Less: accumulated depreciation ....................    3,351,659   3,182,800
                                                          ---------   ---------
     Total property, plant and equipment..............    5,882,023   5,533,376
                                                          ---------   ---------



Investments, at cost:
   Investment in Yorkshire Power and other 
     unconsolidated subsidiaries (Note 2).............      340,874     299,458
   Other..............................................       64,562      71,411
                                                            -------      ------
    Total investments.................................      405,436     370,869
                                                            -------     -------


Current assets:
   Cash and temporary cash investments................       56,667      72,623
   Accounts receivable, less reserve for uncollectible
     accounts ($4,842 at December 31, 1998; $5,355 
     at December 31, 1997)............................      319,145     315,539
   Accrued unbilled revenues..........................      130,455     110,877
   Recoverable purchased gas and electric energy 
     costs - net .....................................       66,154     129,292
   Materials and supplies, at average cost............       69,298      68,411
   Fuel inventory, at average cost....................       24,653      23,162
   Gas in underground storage, at cost (LIFO).........       52,624      47,394
   Prepaid expenses and other.........................       83,561      56,868
                                                            -------      ------
    Total current assets..............................      802,557     824,166
                                                            -------     -------

Deferred charges:
   Regulatory assets (Note 1).........................      381,632     430,475
   Unamortized debt expense ..........................       27,408      20,833
   Other..............................................      172,908     141,947
                                                            -------     -------
    Total deferred charges............................      581,948     593,255
                                                            -------     -------
                                                         $7,671,964  $7,321,666
                                                         ==========  ==========


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

                                       2
<PAGE>


                   NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Thousands of Dollars)
                           December 31, 1998 and 1997

                             CAPITAL AND LIABILITIES

                                                           1998       1997 
                                                           ----       ---- 
                                                         

Common stock (Note 4)................................   $1,866,386  $1,694,195
Retained earnings....................................      740,677     659,050
Accumulated comprehensive income.....................        7,764       4,142
                                                           -------      ------
    Total common equity..............................    2,614,827   2,357,387

Preferred stock of subsidiaries (Note 4):
   Not subject to mandatory redemption...............            -     140,002
   Subject to mandatory redemption at par............            -      39,253
PSCo and SPS obligated mandatorily redeemable
   preferred securities of subsidiary trusts holding
   solely subordinated debentures of SPS and PSCo
   (Note 5)..........................................      294,000     100,000
Long-term debt of subsidiaries (Note 6)..............    2,205,545   1,987,955
                                                         ---------   ---------
                                                         5,114,372   4,624,597

Noncurrent liabilities:
   Employees' postretirement benefits other than
   pensions (Note 12) ................................      61,732      62,716
   Employees' postemployment benefits (Note 12).......      31,326      27,953
                                                           -------      ------
    Total noncurrent liabilities......................      93,058      90,669
                                                           -------      ------

Current liabilities:
   Notes payable and commercial paper (Note 7)........      524,394    588,343
   Long-term debt due within one year.................      138,165    257,469
   Preferred stock subject to mandatory redemption 
     within one year .................................            -      2,576
   Accounts payable...................................      285,080    298,469
   Dividends payable..................................       69,271     68,296
   Recovered electric energy costs - net..............       18,760          -
   Customers' deposits................................       30,793     27,993
   Accrued taxes......................................       85,384     66,587
   Accrued interest...................................       50,229     52,615
   Current portion of accumulated deferred income 
     taxes (Note 13) .................................        2,031     27,391
   Other..............................................      120,716     94,623
                                                            -------     ------
    Total current liabilities.........................    1,324,823  1,484,362
                                                          ---------  ---------

Deferred credits:
   Customers' advances for construction...............       55,400     53,041
   Unamortized investment tax credits ................      100,925    106,147
   Accumulated deferred income taxes (Note 13)........      947,247    922,341
   Other..............................................       36,139     40,509
                                                            -------     ------
    Total deferred credits............................    1,139,711  1,122,038
                                                          ---------  ---------

Commitments and contingencies (Notes 9 and 10)........
                                                         $7,671,964 $7,321,666
                                                         ========== ==========


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


                                       3
<PAGE>


                   NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                  (Thousands of Dollars, Except per Share Data)
                  Years ended December 31, 1998, 1997 and 1996



                                                      1998     1997      1996 
                                                      ----     ----      ----

Operating revenues:
   Electric................................    $2,697,486 $2,473,359 $2,416,539
   Gas.....................................       841,276    816,596    640,497
   Other...................................        72,143     52,570     39,998
                                                  -------   -------      ------
                                                3,610,905  3,342,525  3,097,034

Operating expenses:
   Fuel used in generation...................     644,311    671,805    635,280
   Purchased power...........................     712,887    531,487    510,582
   Cost of gas sold..........................     562,583    543,291    393,163
   Other operating and maintenance expenses..     637,743    594,359    568,581
   Depreciation and amortization.............     268,743    243,078    224,865
   Taxes (other than income taxes) ..........     134,137    129,280    128,980
                                                  -------    -------    -------
                                                2,960,404  2,713,300  2,461,451
                                                ---------  ---------  ---------
Operating  income............................     650,501    629,225    635,583

Other income and deductions:
   Merger expenses...........................        (790)   (34,088)   (21,107)
   Write-off of investments in cogeneration 
     projects (Note 3) ......................           -    (16,052)   (15,546)
   Equity in earnings of Yorkshire Power and 
     other unconsolidated subsidiaries (Note 2)    36,101     34,166        389
   Miscellaneous income and deductions - net..     (3,460)   (11,215)     1,771
                                                   ------    -------     ------
                                                   31,851    (27,189)   (34,493)

Interest charges and preferred dividends 
  of subsidiaries:
   Interest on long-term debt.................    168,184    165,560    144,067
   Other interest.............................     31,069     32,389     23,479
   Allowance for borrowed funds used during 
     construction ............................    (17,347)   (10,921)    (5,945)
   Dividends on PSCo and SPS obligated 
     mandatorily redeemable preferred
     securities of subsidiary trusts holding
     solely subordinated debentures of PSCo
     and SPS .................................     17,561      7,850      1,526
   Dividend requirements and redemption premium
     on preferred stock of subsidiaries ......      5,332     11,752     11,969
                                                    -----     ------     ------
                                                  204,799    206,630    175,096
                                                  -------    -------    -------
Income before income taxes and 
  extraordinary item .........................    477,553    395,406    425,994

Income taxes (Note 13)........................    135,596    133,919    153,653
                                                  -------    -------    -------

Income before extraordinary item..............    341,957    261,487    272,341
Extraordinary item - U.K. windfall tax (Note 2).        -   (110,565)         -
                                                  -------    --------    ------
Net income....................................   $341,957   $150,922   $272,341
                                                 ========   ========   ========

Weighted average common shares outstanding:
   Basic......................................    111,859    104,805    103,059
   Diluted....................................    112,008    104,872    103,102

Earnings per share of common stock outstanding
  - Basic:
   Income before extraordinary item...........      $3.06     $2.50       $2.64
   Extraordinary item.........................          -     (1.06)          -
                                                     ----     -----       -----
   Net income.................................      $3.06     $1.44       $2.64
                                                    =====     =====       =====
Earnings per share of common stock outstanding
  - Diluted:
   Income before extraordinary item...........       $3.05    $2.50       $2.64
   Extraordinary item.........................           -    (1.06)          -
                                                     -----    -----       -----
   Net income.................................       $3.05    $1.44       $2.64
                                                     =====    =====       =====


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

                                       4
<PAGE>



                   NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                (Thousands of Dollars, Except Share Information)
                  Years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                                     Accumulated
                                                                                        Other
                              Common Stock, $1 par value       Paid       Retained    Comprehensive
                                   Shares         Amount     in Capital   Earnings      Income        Total 
                                   ------         ------     ----------   --------      ------        ----- 

<S>                              <C>            <C>          <C>            <C>         <C>         <C>
Balance at January 1, 1996..     102,230,141    $  102,230   $1,243,278     $ 726,065   $      -    $2,071,573
Net income/Comprehensive
  income ...................               -             -            -       272,341          -       272,341
Dividends declared on common
  stock ....................               -             -            -      (225,130)         -      (225,130)
Issuance of common stock:
  Employees' Savings Plan ..         274,934           275        9,519             -          -         9,794
  Dividend Reinvestment Plan         809,603           810       27,818             -          -        28,628
  Incentive Compensation Plans        58,346            58        1,661             -          -         1,719
  Acquisitions (Note 3) ....         317,748           318       10,882             -          -        11,200
Other.......................               -             -            -           (85)         -           (85)
                                     -------        ------      -------       -------    -------       -------

Balance at December 31, 1996     103,690,772       103,691    1,293,158        773,191         -     2,170,040
Comprehensive income:
  Net income................               -             -            -        150,922         -       150,922
  Foreign currency translation
    adjustment .............               -             -            -              -     4,142         4,142
                                                                                                         -----
      Comprehensive income
       (Note 1) ............                                                                           155,064
Dividends declared on common
   stock ...................               -             -            -       (264,957)        -      (264,957)
Issuance of common stock:
  Employees' Savings Plan ..         250,058           250        9,518              -         -         9,768
  Dividend Reinvestment Plan         818,783           819       32,512              -         -        33,331
  Incentive Compensation Plans        89,688            89        2,765              -         -         2,854
  Stock offering proceeds, net
   (Note 4) ..................     5,900,000         5,900      245,493              -         -       251,393
Other.........................             -             -            -           (106)        -          (106)
                                     -------        ------      -------        -------   -------       -------

Balance at December 31, 1997     110,749,301       110,749    1,583,446        659,050     4,142     2,357,387
Comprehensive income:
  Net income..........                     -             -            -        341,957         -       341,957
  Foreign currency translation 
    adjustment                             -             -            -              -     3,622         3,622
                                                                                                         -----
     Comprehensive income (Note 1)                                                                     345,579
Dividends declared on common stock         -             -            -       (260,330)        -      (260,330)
Issuance of common stock:
  Employees' Savings Plan            222,387           222       10,146              -         -        10,368
  Dividend Reinvestment Plan         825,005           825       37,198              -         -        38,023
  Incentive Compensation Plans       194,079           195        6,605              -         -         6,800
  Stock offering proceeds, net
   (Note 4)                        2,500,000         2,500      114,500              -         -       117,000
                                   ---------         -----      -------          -----     -----       -------
Balance at December 31, 1998     114,490,772    $  114,491   $1,751,895      $ 740,677    $7,764    $2,614,827
                                 ===========    ==========   ==========      =========    ======    ==========  

</TABLE>

Authorized  shares of common stock were 260 million at December  31, 1998,  1997
and 1996.

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


                                       5
<PAGE>


                   NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Thousands of Dollars)
                  Years ended December 31, 1998, 1997 and 1996

                                                      1998      1997      1996
                                                      ----      ----     -----

Operating activities:
   Net income...................................    $341,957  $150,922 $272,341
   Adjustments to reconcile net income to net
    cash provided by operating activities:
     Extraordinary item - U.K. windfall tax 
       (Note 2) ................................           -   110,565        -
     Depreciation and amortization..............     279,829   253,263  225,264
     Amortization of investment tax credits.....      (5,222)   (5,501)  (7,506)
     Deferred income taxes......................       6,248    52,211   78,962
     Write-off of investments in cogeneration 
       projects (Note 3) .......................           -    16,052   15,546
     Equity in earnings of Yorkshire Power and
       other unconsolidated subsidiaries, net        (34,199)  (31,168)    (389)
     Allowance for equity funds used during
      construction .............................           -         1     (936)
     Change in accounts receivable..............       2,026   (29,627) (92,600)
     Change in inventories......................      (7,485)   (2,334)  23,479
     Change in other current assets.............      16,965   (97,063) (47,226)
     Change in accounts payable.................     (13,704)  (18,791) 141,771
     Change in other current liabilities........      69,908   (15,356) (85,321)
     Change in deferred amounts.................         740   (46,134) (34,617)
     Change in noncurrent liabilities...........       2,389     4,567   (9,725)
     Other......................................          87     2,832    2,139
                                                     -------   -------  -------
       Net cash provided by operating activities     659,539   344,439  481,182

Investing activities:
   Construction expenditures....................    (608,972) (475,497)(454,968)
   Allowance for equity funds used during 
     construction ..............................           -        (1)     936
   Proceeds from disposition of property, plant
     and equipment .............................       9,369     2,117   24,292
   Payment for purchase of companies, net of 
     cash acquired (Note 3) ....................     (13,725)        -    3,649
   Investment in Yorkshire Power (Note 2).......           -  (362,342)       -
   Purchase of other investments................      (6,131)  (32,560) (17,790)
   Sale of other investments....................       5,466    11,844      664
                                                     -------   -------  -------
       Net cash used in investing activities....    (613,993) (856,439)(443,217)

Financing activities:
   Proceeds from sale of common stock (Note 4)..     161,823   286,869   30,115
   Proceeds from sale of long-term debt (Note 6)     250,497   419,819  359,715
   Proceeds from sale of PSCo and SPS obligated 
    mandatorily redeemable preferred securities
    of subsidiary trusts holding solely 
    subordinated debentures of PSCo 
    and SPS (Note 6)............................     187,700         -  100,000
   Redemption of long-term debt.................    (159,323) (227,577)(175,298)
   Short-term borrowings - net..................     (63,949)  289,782 (105,739)
   Redemption of preferred stock of subsidiaries    (181,824)    (665)   (1,636)
   Dividends on common stock....................    (256,426) (233,620)(223,413)
                                                    --------  --------   ------
       Net cash (used in) provided by financing
         activities ............................     (61,502)  534,608  (16,256)
                                                     -------   -------   ------

       Net (decrease) increase in cash and 
          temporary cash investments ...........     (15,956)   22,608   21,709
       Cash and temporary cash investments at
          beginning of year                           72,623    50,015   51,553
       Net decrease in cash and temporary cash 
          investments for SPS for the
          transition period (Note 1)...........            -         -  (23,247)
                                                       -----     -----  -------
       Cash and temporary cash investments at 
          end of year .........................     $ 56,667  $ 72,623  $50,015
                                                    ========  ========  =======



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


                                       6
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO PUBLIC SERVICE COMPANY OF COLORADO:

We have audited the accompanying  consolidated  balance sheets and statements of
capitalization  of Public Service  Company of Colorado (a Colorado  corporation)
and subsidiaries as of December 31, 1998 and 1997, and the related  consolidated
statements of income,  shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these 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,  the financial  statements  referred to above present fairly, in
all material  respects,  the  financial  position of Public  Service  Company of
Colorado and  subsidiaries  as of December 31, 1998 and 1997, and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 1998,  in  conformity  with  generally  accepted  accounting
principles.




                                                        ARTHUR ANDERSEN LLP
Denver, Colorado
February 23, 1999


                                       7
<PAGE>



                       PUBLIC SERVICE COMPANY OF COLORADO
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Thousands of Dollars)
                           December 31, 1998 and 1997

                                     ASSETS

                                                             1998      1997 
                                                             ----      ---- 

Property, plant and equipment, at cost:
   Electric ..........................................    $4,369,134 $4,088,447
   Gas................................................     1,171,198  1,100,003
   Steam and other....................................        71,986     78,740
   Common to all departments..........................       418,484    432,840
   Construction in progress...........................       264,752    170,503
                                                             -------    -------
                                                           6,295,554  5,870,533
   Less: accumulated depreciation ....................     2,241,165  2,145,673
                                                           ---------  ---------
     Total property, plant and equipment..............     4,054,389  3,724,860
                                                           ---------  ---------

Investments, at cost:
   Investment in Yorkshire Power (Note 2).............             -    290,845
   Note receivable from affiliate (Note 2)............       192,620          -
   Other..............................................        22,664     43,311
                                                             -------     ------
    Total investments.................................       215,284    334,156
                                                             -------    -------

Current assets:
   Cash and temporary cash investments................        19,926     18,909
   Accounts receivable, less reserve for uncollectible
     accounts ($2,254 at December 31, 1998;
     $2,272  at December 31, 1997) ...................       172,587    183,063
   Accrued unbilled revenues .........................       119,856     94,284
   Recoverable purchased gas and electric energy costs
    - net ............................................        62,761    103,197
   Materials and supplies, at average cost............        47,881     48,030
   Fuel inventory, at average cost....................        22,361     20,862
   Gas in underground storage, at cost (LIFO).........        51,779     46,576
   Prepaid expenses and other.........................        46,523     47,686
                                                             -------     ------
    Total current assets..............................       543,674    562,607
                                                             -------    -------

Deferred charges:
   Regulatory assets (Note 1).........................       269,112    310,658
   Unamortized debt expense ..........................        17,874     10,800
   Other..............................................        77,303     55,794
                                                             -------     ------
    Total deferred charges............................       364,289    377,252
                                                              -------   -------
                                                          $5,177,636 $4,998,875
                                                          ========== ========== 


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

                                       8
<PAGE>


                       PUBLIC SERVICE COMPANY OF COLORADO
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Thousands of Dollars)
                           December 31, 1998 and 1997

                             CAPITAL AND LIABILITIES

                                                               1998      1997 
                                                               ----      ---- 



Common stock......................................       $1,302,119  $1,302,119
Retained earnings.................................          325,213     319,280
Accumulated comprehensive income..................                -       4,142
                                                            -------     -------
    Total common equity...........................        1,627,332   1,625,541

Preferred stock (Note 4):
   Not subject to mandatory redemption............                -     140,002
   Subject to mandatory redemption at par.........                -      39,253
PSCo obligated mandatorily redeemable preferred 
  securities of subsidiary trust holding solely
  subordinated debentures of PSCo (Note 5) .......          194,000           -
Long-term debt (Note 6)...........................        1,643,130   1,338,138
                                                          ---------   ---------
                                                          3,464,462   3,142,934
                                                          ---------   ---------
Noncurrent liabilities:
   Employees' postretirement benefits other than
    pensions (Note 12) ...........................           55,537      58,695
   Employees' postemployment benefits (Note 12)...           27,195      25,031
                                                            -------     -------
    Total noncurrent liabilities..................           82,732      83,726
                                                            -------     -------

Current liabilities:
   Notes payable and commercial paper (Note 7).....         402,795     348,555
   Long-term debt due within one year..............          44,481     257,160
   Preferred stock subject to mandatory redemption 
     within one year ..............................               -       2,576
   Accounts payable................................         226,712     189,998
   Dividends payable...............................          46,461      40,975
   Customers' deposits.............................          23,902      21,888
   Accrued taxes...................................          57,848      42,549
   Accrued interest................................          36,729      39,177
   Current portion of accumulated deferred income 
     taxes (Note 13) .............................            8,142      19,872
   Other...........................................          68,729      88,655
                                                            -------     -------
    Total current liabilities......................         915,799   1,051,405
                                                            -------   ---------

Deferred credits:
   Customers' advances for construction............          54,260      51,830
   Unamortized investment tax credits .............          94,459      99,355
   Accumulated deferred income taxes (Note 13).....         538,581     534,246
   Other...........................................          27,343      35,379
                                                            -------     -------
    Total deferred credits.........................         714,643     720,810
                                                            -------     -------

Commitments and contingencies (Notes 9 and 10).....      ----------  ---------- 
                                                         $5,177,636  $4,998,875
                                                         ==========  ==========



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

                                       9
<PAGE>


                       PUBLIC SERVICE COMPANY OF COLORADO
                                AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CAPTALIZATION
                (Thousands of Dollars, Except Share Information)
                           December 31, 1998 and 1997

                                                               1998      1997 
                                                               ----      ---- 
Common shareholder's equity:
   Common stock, $0.01 par value, authorized and
    outstanding 100 shares in 1998 and 1997                 $      -  $       -
   Paid in capital...................................      1,302,119  1,302,119
   Retained earnings.................................        325,213    319,280
   Accumulated comprehensive income..................              -      4,142
                                                             -------    -------
    Total common shareholder's equity................      1,627,332  1,625,541
                                                           ---------  ---------


Preferred stock (Note 4):
                         Shares Issued and Outstanding 
                         ----------------------------- 
                                   1998       1997 
                                   ----       ---- 
$100 Par Value, 
  Authorized 3,000,000 Shares
   Not subject to mandatory
    redemption
     4.20% series                    -      100,000                -     10,000
     4.25% series (includes
       $7,500 premium)               -      174,997                -     17,507
     4.50% series                    -       65,000                -      6,500
     4.64% series                    -      159,950                -     15,995
     4.90% series                    -      150,000                -     15,000
     4.90% 2nd series                -      150,000                -     15,000
     7.15% series                    -      250,000                -     25,000
                                ------      -------          -------     ------
                                     -    1,049,947                -    105,002
                                ------    ---------          -------    -------
   Subject to mandatory 
     redemption
     7.50% series                    -      216,000                -     21,600
     8.40% series                    -      202,294                -     20,229
                                ------      -------           ------     ------
                                     -      418,294                -     41,829
   Less:  Preferred stock 
     subject to mandatory
     redemption within
      one year                       -      (25,760)               -     (2,576)
                                ------      -------           ------     ------
                                     -      392,534                -     39,253
                                ------      -------           ------     ------
$25 Par Value, Authorized 
   4,000,000 Shares
   Not subject to mandatory
     redemption
     8.40% series                    -    1,400,000                -     35,000
                                ------    ---------          -------     ------

$0.01 Par Value, Authorized
   10,000,000 Shares                 -            -                -          -
                                ------       ------          -------     ------
   Total preferred stock             -    2,842,481                -    179,255
                                ------    ---------          -------    -------

PSCo obligated mandatorily redeemable preferred
 securities of subsidiary trust holding solely
 subordinated debentures of PSCo (Note 5) ...........        194,000          -

Long-term debt (Note 6):
Public Service Company of Colorado:
   First Mortgage Bonds
    6-3/4% retired July 1, 1998......................              -     25,000
    6% due January 1, 2001...........................        102,667    102,667
    6% due April 15, 2003............................        250,000          -
    8-1/8% due March 1, 2004.........................        100,000    100,000
    Pollution Control Series A and B, 5-7/8% due
      March 1, 2004 .................................         21,500     22,000
    6-3/8% due November 1, 2005......................        134,500    134,500
    7-1/8% due June 1, 2006..........................        125,000    125,000
    Pollution Control Series G, 5-5/8%
      due April 1, 2008 .............................         18,000     18,000
    Pollution Control Series F, 7-3/8% 
      due November 1, 2009 ..........................         27,250     27,250
    Pollution Control Series G, 5-1/2% 
      due June 1, 2012. .............................         50,000     50,000
    Pollution Control Series G, 5-7/8% 
      due April 1, 2014 .............................         61,500     61,500
    9-7/8% due July 1, 2020..........................         75,000     75,000
    8-3/4% due March 1, 2022.........................        150,000    150,000
    7-1/4% due January 1, 2024.......................        110,000    110,000
   Secured Medium-Term Notes, Series A and B, 
     6.02% - 9.25%, due March 4, 1998 - March 5, 2007        296,500    423,500
   Unamortized premium...............................              -          4
   Unamortized discount..............................         (4,616)    (4,670)
   Capital lease obligations, 6.68% -11.21% due in 
     installments through May 31, 2025 ..............         39,555     44,392
                                                              ------     ------
                                                          $1,556,856 $1,464,143
                                                          ---------- ----------
         The accompanying notes to consolidated financial statements are
                 an integral part of these financial statements.

                                       10
<PAGE>

                       PUBLIC SERVICE COMPANY OF COLORADO
                                AND SUBSIDIARIES
              CONSOLIDATED STATEMENTS OF CAPTALIZATION (continued)
                (Thousands of Dollars, Except Share Information)
                           December 31, 1998 and 1997


                                                               1998      1997 
                                                               ----      ---- 
Long-term debt (continued)

PS Colorado Credit Corporation, Inc.:
   Unsecured Medium-Term Notes, Series A,
    5.86% - 6.14%, due October 13, 1998 - May 30, 2000      $100,000   $100,000

1480 Welton, Inc.:
   13.25% secured promissory note, due in installments
   through October 1, 2016 ...........................        30,755     31,155
                                                              ------     ------
                                                           1,687,611  1,595,298
Less:  maturities due within one year.................        44,481    257,160
                                                              ------    -------
    Total long-term debt..............................     1,643,130  1,338,138
                                                           ---------  ---------

Total capitalization..................................    $3,464,462 $3,142,934
                                                          ========== ==========




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

                                       11
<PAGE>



                       PUBLIC SERVICE COMPANY OF COLORADO
                                AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                             (Thousands of Dollars)
                  Years ended December 31, 1998, 1997 and 1996



                                                  1998       1997        1996
                                                  ----       ----        ----

Operating revenues:
   Electric.................................  $1,635,573  $1,485,196 $1,488,990
   Gas......................................     640,064     733,091    640,497
   Other....................................       8,449      11,356      7,951
                                                 -------      ------      -----
                                               2,284,086   2,229,643  2,137,438

Operating expenses:
   Fuel used in generation..................     212,184      198,706   195,442
   Purchased power..........................     589,637      493,902   490,428
   Gas purchased for resale.................     380,554      467,745   393,163
   Other operating and maintenance expenses.     403,292      391,177   400,008
   Depreciation and amortization............     180,913      168,451   154,631
   Taxes (other than income taxes) .........      83,994       81,496    82,899
   Income taxes (Note 13) ..................     101,494       90,813    96,331
                                                 -------      -------   -------
                                               1,952,068    1,892,290 1,812,902
                                               ---------    --------- ---------
Operating income............................     332,018      337,353   324,536

Other income and deductions:
   Merger expenses..........................         418      (18,661)  (11,210)
   Equity in earnings of Yorkshire 
     Power (Note 2) ........................       3,446       34,926         -
   Miscellaneous income and deductions -
      net (Note 15) ........................       2,535      (13,374)  (13,260)
                                                   -----      -------   -------
                                                   6,399        2,891   (24,470)

Interest charges:
   Interest on long-term debt...............     120,082      118,438    95,826
   Other interest...........................      20,849       24,117    17,238
   Allowance for borrowed funds used during
     construction ..........................     (12,328)      (6,353)   (3,344)
   Dividends on PSCo obligated mandatorily
     redeemable  preferred securities of
     subsidiary trust holding solely
     subordinated debentures of PSCo (Note 5)      9,711            -         -
                                                   -----        -----      ----
                                                 138,314      136,202   109,720
                                                 -------      -------   -------

Income before extraordinary item............     200,103      204,042   190,346
Extraordinary item - U.K. windfall tax (Note 2)        -     (110,565)        -
                                                   -----     --------   -------
Net income...................................    200,103       93,477   190,346
Dividend requirements and redemption premium
 on preferred stock .........................      5,332       11,752    11,848
                                                   -----       ------    ------
Earnings available for common stock.........    $194,771      $81,725  $178,498
                                                ========      =======  ========


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

                                       12
<PAGE>


                       PUBLIC SERVICE COMPANY OF COLORADO
                                AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
                (Thousands of Dollars, Except Share Information)
                  Years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                                     Accumulated
                                                                                        Other
                              Common Stock, $1 par value       Paid       Retained   Comprehensive
                                   Shares         Amount     in Capital   Earnings      Income        Total 
                                   ------         ------     ----------   --------      ------        ----- 

<S>                              <C>              <C>        <C>          <C>         <C>           <C>

Balance at January 1, 1996       63,358,128     $316,791     $680,315       $346,539   $       -    $ 1,343,645
Net income/Comprehensive income           -            -            -        190,346           -        190,346
Dividends declared:
  Common stock........                    -            -            -       (135,111)          -       (135,111)
  Preferred stock, $100 par value         -            -            -         (8,889)          -         (8,889)
  Preferred stock $25 par value           -            -            -         (2,940)          -         (2,940)
Issuance of common stock:
  Employees' Savings Plan           274,934        1,374        8,420              -           -          9,794
  Dividend Reinvestment Plan        809,603        4,048       24,580              -           -         28,628
  Management Incentive Plan          58,346          292        1,427              -           -          1,719
  Acquisitions (Note 4)             317,748        1,589        9,611              -           -         11,200
Other.................                    -            -            -           (104)          -           (104)
                                    -------       ------        -----         ------     -------         ------

Balance at December 31, 1996     64,818,759      324,094      724,353        389,841           -      1,438,288
Comprehensive income:
  Net income..........                    -            -            -         93,477           -         93,477
  Foreign currency translation
    adjustment                            -            -            -              -       4,142          4,142
                                                                                                          -----
    Comprehensive income (Note 1)                                                                        97,619
Dividends declared:
  Common stock, prior to
    August 1, 1997 Merger                 -            -            -        (76,202)          -       (76,202)
  Common stock, to NCE                    -            -            -        (76,093)          -       (76,093)   
  Preferred stock, $100 par value         -            -            -         (8,803)                   (8,803)
  Preferred stock, $25 par value          -            -            -         (2,940)                   (2,940)
Issuance of common stock:
  Employees' Savings Plan           250,058         1,250       8,518              -           -         9,768
  Dividend Reinvestment Plan        488,224         2,441      16,899              -           -        19,340
  Management Incentive Plan          40,404           202         993              -           -         1,195
Merger with SPS:
  Exchange of common stock for
    NCE stock.........          (65,597,345)     (327,987)    327,987              -           -             -
  Dividend of subsidiaries'
    stock to NCE............              -             -     (49,912)             -           -       (49,912)
Contribution of capital by 
    NCE (Note 4)                          -             -     273,300              -           -       273,300
Other.................                    -             -         (19)             -           -           (19)
                                     ------        ------        ----        -------     -------          ----

Balance at December 31, 1997            100             -   1,302,119        319,280       4,142     1,625,541
Comprehensive income:
  Net income..........                    -             -           -        200,103           -       200,103
  Foreign currency translation
    adjustment                            -             -           -              -       5,260         5,260
  Sale of NCI to NC Enterprises           -                                               (9,402)       (9,402)
                                                                                                        ------
      Comprehensive income (Note 1)                                                                    195,961
Dividends declared
  Common stock, to NCE                    -             -           -       (188,845)          -      (188,845)
  Preferred stock, $100 par value         -             -           -         (4,166)          -        (4,166)
  Preferred stock, $25 par value          -             -           -         (1,166)          -        (1,166)
  Other...............                    -             -           -              7           -             7
                                    -------        ------     -------         ------     -------         -----

Balance at December 31, 1998            100       $     -  $1,302,119      $ 325,213     $     -    $1,627,332    
                                        ===       =======  ==========      =========     =======    ==========
</TABLE>


(1)Authorized  shares of common stock were 100 at December 31, 1998 and 1997 and
160  million  at  December  31,  1996.  Common  stock,  par value was $5 through
September 18, 1997.  Effective  September 19, 1997,  common stock, par value was
changed to $0.01.
         The accompanying notes to consolidated financial statements are
                 an integral part of these financial statements.

                                       13
<PAGE>

                       PUBLIC SERVICE COMPANY OF COLORADO
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Thousands of Dollars)
                  Years ended December 31, 1998, 1997 and 1996


                                                     1998       1997     1996
                                                    -----       ----     ----
Operating activities:
   Net income...................................    $200,103  $ 93,477 $190,346
   Adjustments to reconcile net income to net
    cash provided by operating activities:
     Extraordinary item - U.K. windfall tax
      (Note 2) .................................           -   110,565        -
     Depreciation and amortization..............     186,620   173,047  159,400
     Amortization of investment tax credits.....      (4,896)   (5,219)  (7,256)
     Deferred income taxes......................       7,092    37,390   60,899
     Equity in earnings of Yorkshire Power......      (3,446)  (34,926)       -
     Allowance for equity funds used during
      construction .............................           -         6     (757)
     Change in accounts receivable..............      21,540   (15,378) (88,680)
     Change in inventories......................      (6,553)   (2,163)  20,542
     Change in other current assets.............       7,937   (52,914) (31,169)
     Change in accounts payable.................       9,148    (5,413)  88,473
     Change in other current liabilities........      22,957   (15,870) (36,615)
     Change in deferred amounts.................     (18,289)  (21,913) (19,550)
     Change in noncurrent liabilities...........        (995)    3,367   (9,779)
     Other......................................           -      (144)   1,760
                                                     -------   -------  -------
       Net cash provided by operating activities     421,218   263,912  327,614

Investing activities:
   Construction expenditures....................    (504,727) (352,273)(321,162)
   Allowance for equity funds used during
     construction ..............................           -        (6)     757
   Proceeds from disposition of property, plant 
     and equipment .............................       9,102     3,187   20,454
   Investment in Yorkshire Power (Note 2).......           -  (362,342)       -
   Payment received on note receivable from NC 
     Enterprises (Note 2) ......................     100,000         -        -
   Payment for purchase of companies, net of 
     cash acquired (Note 3) ....................           -         -    3,649
   Transfer of subsidiaries to NCE (Note 1).....           -    (2,229)       -
   Purchase of other investments................      (1,345)  (19,224) (11,485)
   Sale of other investments....................       4,101    11,162      664
                                                     -------   -------  -------
       Net cash used in investing activities....    (392,869) (721,725)(307,123)

Financing activities:
   Proceeds from sale of common stock (Note 4)..           -    20,517   30,115
   Contribution of capital by NCE...............           -   273,300        -
Proceeds from sale of PSCo obligated mandatorily
   redeemable preferred securities (Note 5).....     187,700         -        -
   Proceeds from sale of long-term debt (Note 6)     247,025   412,220  217,415
   Redemption of long-term debt.................    (157,737) (205,550) (83,356)
   Short-term borrowings - net..................      66,195   127,530  (43,325)
   Redemption of preferred stock................    (181,824)     (665)  (1,376)
   Dividends on common stock (Notes 4 and 15)...    (180,430) (148,279)(133,394)
   Dividends and redemption premium on preferred
     stock .....................................      (8,261)  (11,757) (11,857)
                                                      ------   -------  ------- 

       Net cash (used in) provided by financing
        activities .............................     (27,332)   467,316 (25,778)
                                                     -------    ------- -------

       Net increase (decrease) in cash and 
         temporary cash investments ............       1,017      9,503  (5,287)
       Cash and temporary cash investments at
         beginning of year .....................      18,909      9,406  14,693
                                                      ------      -----  ------
       Cash and temporary cash investments at
           end of year .........................     $19,926    $18,909 $ 9,406
                                                     =======    ======= =======



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



                                       14
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO SOUTHWESTERN PUBLIC SERVICE COMPANY:

We have audited the accompanying balance sheets and statements of capitalization
of Southwestern Public Service Company (a New Mexico corporation) as of December
31, 1998 and 1997, and the related  statements of income,  shareholder's  equity
and cash flows for each of the two years in the period ended  December 31, 1998.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these 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,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Southwestern  Public Service
Company as of December 31, 1998 and 1997,  and the results of its operations and
its cash flows for each of the two years in the period ended  December 31, 1998,
in conformity with generally accepted accounting principles.



                                                        ARTHUR ANDERSEN LLP
Denver, Colorado
February 23, 1999

                                       15
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Southwestern Public Service Company:

We have audited the consolidated statements of income,  shareholder's equity and
cash flows for the four months ended December 31, 1996 and the year ended August
31,  1996  of  Southwestern  Public  Service  Company  and  subsidiaries.  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 results of  operations  and cash flows of  Southwestern
Public  Service  Company  and  subsidiaries  for the above  stated  periods,  in
conformity with generally accepted accounting principles.


                                                  DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 1997
(June 19, 1997, as to the Carolina
 Energy Limited Partnership in Note 3)


                                       16
<PAGE>



                       SOUTHWESTERN PUBLIC SERVICE COMPANY
                                 BALANCE SHEETS
                             (Thousands of Dollars)
                           December 31, 1998 and 1997

                                     ASSETS

                                                         1998          1997 
                                                         ----          ---- 

Property, plant and equipment, at cost:
   Electric .......................................   $2,665,115     $2,557,579
   Construction in progress........................      121,407        144,452
                                                         -------        -------
                                                       2,786,522      2,702,031
   Less: accumulated depreciation .................    1,057,183        987,487
                                                       ---------        -------
    Total property, plant and equipment............    1,729,339      1,714,544
                                                       ---------      ---------


Investments, at cost:
   Notes receivable from affiliate (Note 4)........      119,036        119,036
   Other...........................................        5,591          5,832
                                                           -----        -------
    Total investments..............................      124,627        124,868
                                                         -------        -------

Current assets:
   Cash and temporary cash investments.............        1,350            986
   Accounts receivable, less reserve for 
     uncollectible accounts ($1,695 at
     December 31, 1998; $2,442 at December 31, 1997)      76,190         96,548
   Accrued unbilled revenues ......................        9,373         15,468
   Recoverable electric energy costs - net.........            -         23,086
   Materials and supplies, at average cost.........       16,970         16,337
   Fuel inventory, at average cost.................        2,293          2,301
   Current portion of accumulated deferred income
      taxes (Note 13) .............................        6,113              -
   Prepaid expenses and other......................        5,248          3,367
                                                           -----        -------
    Total current assets...........................      117,537        158,093
                                                         -------        -------

Deferred charges:
   Regulatory assets (Note 1)......................      111,971        119,244
   Unamortized debt expense .......................        8,767          9,395
   Other...........................................       37,623         62,592
                                                          ------        -------
    Total deferred charges.........................      158,361        191,231
                                                         -------        -------
                                                      $2,129,864     $2,188,736
                                                      ==========     ==========



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

                                       17
<PAGE>

                       SOUTHWESTERN PUBLIC SERVICE COMPANY
                                 BALANCE SHEETS
                             (Thousands of Dollars)
                           December 31, 1998 and 1997

                             CAPITAL AND LIABILITIES

                                                         1998          1997 
                                                         ----          ---- 


Common stock.......................................   $  348,402     $  348,402
Retained earnings..................................      389,818        349,988
                                                         -------        -------
    Total common equity............................      738,220        698,390

SPS obligated mandatorily redeemable preferred 
 securities of subsidiary trust holding solely
 subordinated debentures of SPS (Note 5) ..........      100,000        100,000
Long-term debt (Note 6)............................      530,618        620,598
                                                         -------        -------
                                                       1,368,838      1,418,988
                                                       ---------      ---------

Noncurrent liabilities:
   Employees' postretirement benefits other than 
     pensions (Note 12) ...........................        5,941          3,800
   Employees' postemployment benefits (Note 12)....        3,571          2,446
                                                           -----          -----
    Total noncurrent liabilities...................        9,512          6,246
                                                           -----          -----

Current liabilities:
   Notes payable and commercial paper (Note 7).....       85,162        154,244
   Notes payable to affiliates (Note 7)............        9,000         25,160
   Long-term debt due within one year..............       90,113            173
   Accounts payable................................       64,275        107,465
   Dividends payable...............................       20,007         22,546
   Recovered electric energy costs - net...........       18,760              -
   Customers' deposits.............................        5,904          5,471
   Accrued taxes...................................       37,646         28,051
   Accrued interest................................       12,273         12,715
   Current portion of accumulated deferred income
      taxes (Note 13) .............................            -         10,740
   Other...........................................       18,011         14,658
                                                          ------        -------
    Total current liabilities......................      361,151        381,223
                                                         -------        -------

Deferred credits:
   Unamortized investment tax credits .............        5,219          5,469
   Accumulated deferred income taxes (Note 13).....      380,655        372,447
   Other...........................................        4,489          4,363
                                                           -----        -------
    Total deferred credits.........................      390,363        382,279
                                                         -------        -------

Commitments and contingencies (Notes 9 and 10).....   ----------     ----------
                                                      $2,129,864     $2,188,736
                                                      ==========     ==========



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

                                       18
<PAGE>


                       SOUTHWESTERN PUBLIC SERVICE COMPANY
                          STATEMENTS OF CAPITALIZATION
              (Thousands of Dollars, Except Per Share Information)
                           December 31, 1998 and 1997


                                                               1998      1997 
                                                               ----      ---- 

Common shareholder's equity:
   Common stock, $1 par value, authorized 200 shares 
     in 1998 and in 1997, outstanding 100 shares in
     1998 and in 1997........ ........................       $      -  $      -
   Paid in capital....................................        348,402   348,402
   Retained earnings..................................        389,818   349,988
                                                              -------   -------
    Total common shareholder's equity.................        738,220   698,390
                                                              -------   -------

Preferred stock (Note 4):
   $1 par value, 10 million shares authorized; no
    shares outstanding ...............................              -         -
                                                              -------   -------

SPS obligated mandatorily redeemable preferred securities
 of subsidiary trust holding solely subordinated 
 debentures of SPS, 4 million shares outstanding,
 7.85% (Note 5) ......................................        100,000   100,000
                                                              -------   -------
Long-term debt (Note 6):
First Mortgage Bonds:
   6-7/8% due December 1, 1999........................         90,000    90,000
   7-1/4% due July 15, 2004...........................        135,000   135,000
   6-1/2% due March 1, 2006...........................         60,000    60,000
   8-1/4% due July 15, 2022...........................         40,000    40,000
   8-1/5% due December 1, 2022........................        100,000   100,000
   8-1/2% due February 15, 2025.......................         70,000    70,000
Pollution control obligations, securing pollution 
   control revenue bonds:
   Not collateralized by First Mortgage Bonds:
    variable rate (4.30% at December 31, 1998 and 1997)
    due July 1, 2011 .................................         44,500    44,500
    variable rate (6.435% effective December 31, 1998
    and 1997) due July 1, 2016 .......................         25,000    25,000
    5-3/4% series, due September 1, 2016..............         57,300    57,300
   Less: funds held by Trustee........................           (168)     (161)
Other.................................................            112       286
Unamortized discount and premium-net..................         (1,013)   (1,154)
                                                              -------   -------
                                                              620,731   620,771
Less: maturities due within one year..................         90,113       173
                                                              -------   -------
    Total long-term debt..............................        530,618   620,598
                                                              -------   -------

Total capitalization..................................     $1,368,838 $1,418,988
                                                           ========== ==========


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


                                       19
<PAGE>


                       SOUTHWESTERN PUBLIC SERVICE COMPANY
                              STATEMENTS OF INCOME
                             (Thousands of Dollars)
        Years ended December 31, 1998, 1997 and August 31, 1996 (Note 1)



                                                      1998     1997      1996 
                                                    -------   -------  -------

Operating revenues:
   Electric.....................................    $951,187  $960,355 $899,397
   Other........................................           -    18,928   32,403
                                                     -------   -------  -------
                                                     951,187   979,283  931,800

Operating expenses:
   Fuel used in generation......................     432,127   473,099  417,023
   Purchased power..............................      23,155    14,501   18,010
   Other operating & maintenance expenses.......     138,679   166,761  165,129
   Depreciation and amortization................      78,592    70,331   69,781
   Taxes (other than income taxes) .............      47,259    46,515   45,518
   Income taxes (Note 13) ......................      65,696    48,795   65,297
                                                     -------   -------  -------
                                                     785,508   820,002  780,758
                                                     -------   -------  -------
Operating income................................     165,679   159,281  151,042

Other income and deductions:
   Merger expenses..............................      (1,208)  (15,427)  (7,878)
   Write-off of investment in Carolina Energy
     Project (Note 3) ..........................           -   (16,052)       -
   Miscellaneous income and deductions - net
     (Notes 3 and 15) ..........................       8,819     4,877   13,226
                                                       -----     -----   ------
                                                       7,611   (26,602)   5,348

Interest charges:
   Interest on long-term debt...................      46,471    46,356   47,045
   Other interest...............................       8,925     7,444    6,088
   Allowance for borrowed funds used during 
     construction ..............................      (4,943)   (4,546)  (2,516)
   Dividends on SPS obligated  mandatorily
    redeemable  preferred  securities of
    subsidiary trust holding solely subordinated
    debentures of SPS ..........................       7,850     7,850        -
                                                       -----     -----   ------
                                                      58,303    57,104   50,617
                                                     -------   -------  -------

Net income......................................     114,987    75,575  105,773
Dividend requirements on preferred stock........           -         -    2,494
                                                     -------   -------  -------
Earnings available for common stock.............    $114,987   $75,575 $103,279
                                                    ========   ======= ========


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

                                       20
<PAGE>


                       SOUTHWESTERN PUBLIC SERVICE COMPANY
                              STATEMENTS OF INCOME
                             (Thousands of Dollars)
          For the four months ended December 31, 1996 and 1995 (Note 1)



                                                           1996          1995
                                                           ----          ----
                                                                     (Unaudited)
Operating revenues:
   Electric..........................................    $295,579      $267,427
   Other.............................................      10,701        11,055
                                                         --------       -------
                                                          306,280       278,482

Operating expenses:
   Fuel used in generation...........................     141,896       119,081
   Purchased power...................................       4,900         2,756
   Other operating & maintenance expenses............      55,582        52,134
   Depreciation and amortization.....................      23,782        23,329
   Taxes (other than income taxes)...................      15,152        14,590
   Income taxes (Note 13)............................      10,987        18,963
                                                         --------       -------
                                                          252,299       230,853
                                                          -------       -------
Operating income.....................................      53,981        47,629

Other income and deductions, net:
   Merger expenses...................................      (2,019)       (2,171)
   Write-off of investment in BCH project (Note 3)...     (15,546)            -
   Miscellaneous income and deductions - net.........         759           737
                                                         --------       -------
                                                          (16,806)       (1,434)
Interest charges:
   Interest on long-term debt........................      16,302        15,106
   Other interest....................................       1,102           950
   Allowance for borrowed funds used during 
     construction ...................................        (892)         (807)
   Dividends on SPS obligated mandatorily redeemable
     preferred securities of subsidiary trust holding
     solely subordinated debentures of SPS ..........       1,526             -
                                                            -----              
                                                           18,038        15,249
                                                           ------        ------

Net income...........................................      19,137        30,946
Dividend requirements on preferred stock.............           -         2,373
                                                         --------       -------
Earnings available for common stock..................    $ 19,137      $ 28,573
                                                         ========      ========




                 The accompanying notes to financial statements
               are an integral part of these financial statements
                                       21
<PAGE>


                       SOUTHWESTERN PUBLIC SERVICE COMPANY
                       STATEMENTS OF SHAREHOLDER'S EQUITY
              (Thousands of Dollars, Except Share Information)
   Year ended December 31, 1998, 1997, four months ended December 31, 1996 and
                       year ended August 31, 1996 (Note 1)

<TABLE>
<CAPTION>

                               Common Stock, $1 par value                         Retained
                               Shares        Amount          Paid in Capital      Earnings      Total
                               ------        ------          ---------------      --------      -----

<S>                           <C>            <C>                <C>               <C>          <C> 
Balance at August 31, 1995..  40,917,908     40,918             306,376           373,458      720,752
Net income..................           -          -                   -           105,773      105,773
Retirements of cumulative
 preferred stock ...........           -          -               1,108              (921)         187
Dividends declared
  Common stock..............           -          -                   -           (90,020)     (90,020)
  Cumulative preferred stock           -          -                   -            (1,573)      (1,573)
                                --------     ------             -------            ------      -------

Balance at August 31, 1996..  40,917,908     40,918             307,484           386,717      735,119
Net income .................           -          -                   -            19,137       19,137
Dividends declared on 
 common stock ..............           -          -                   -           (22,504)     (22,504)
                                  ------    -------              ------           -------      -------

Balance at December 31, 1996  40,917,908     40,918             307,484           383,350      731,752
Net income..................           -          -                   -            75,575       75,575
Dividends declared
  Common stock, prior to 
   August 1, 1997 Merger ...           -          -                   -           (63,845)     (63,845)
  Common stock, to NCE......           -          -                   -           (45,092)     (45,092)
Merger with PSCo
  Exchange of common shares
  for NCE stock ............ (40,917,808)   (40,918)             40,918                 -            -    
                             -----------    -------              ------           -------      -------

Balance at December 31, 1997         100          -             348,402           349,988      698,390
Net income..................           -          -                   -           114,987      114,987
Dividends declared
  Common stock, to NCE......           -          -                   -           (75,157)     (75,157)
                                --------     ------             -------           -------      -------

Balance at December 31, 1998         100   $      -          $  348,402         $ 389,818   $  738,220
                                  ======    =======          ==========         =========   ==========

</TABLE>

Authorized shares of common stock were 200 at December 31, 1998 and 1997 and 100
million at December 31, 1996 and August 31, 1996.

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

                                       22
<PAGE>


                       SOUTHWESTERN PUBLIC SERVICE COMPANY
                            STATEMENTS OF CASH FLOWS
             (Thousands of Dollars, Except Share Information) Years
           ended December 31, 1998, 1997, and August 31, 1996 (Note 1)


                                                      1998      1997     1996
                                                      ----      -----    ----



Operating activities:
   Net income...................................    $114,987  $75,575  $105,773
   Adjustments to reconcile net income to net
    cash provided by operating activities
     (Note 1):
     Depreciation and amortization..............      83,103    76,929   65,448
     Write-off of investment in Carolina Energy
       Project (Note 3).........................           -    16,052        -
     Amortization of investment tax credits.....        (250)     (250)    (250)
     Deferred income taxes......................      (8,600)    3,587   16,423
     Allowance for equity funds used during
      construction .............................           -       (5)      (60)
     Change in accounts receivable..............      20,358   (39,842)  (4,697)
     Change in inventories......................        (625)      301      134
     Change in other current assets.............      27,300    (3,061)  (7,688)
     Change in accounts payable.................     (43,190)   45,683   10,024
     Change in other current liabilities........      31,699   (10,000)  (7,271)
     Change in deferred amounts.................      30,309   (48,934) (11,381)
     Other......................................       3,358       276   13,571
                                                     -------   -------  -------
       Net cash provided by operating activities     258,449   116,311  180,026

Investing activities:
   Construction expenditures....................     (92,218) (118,550)(111,986)
   Allowance for equity funds used during
     construction ..............................           -         5       60
   Cost of disposition of property, plant and
     equipment .................................      (2,897)   (2,371)       -
   Proceeds from the sale of Quixx and UE, net
     of cash disposed (Note 1) .................           -   (29,567)       -
   Purchase of other investments................        (673)   (4,639)  (1,768)
   Sale of other investments....................         820         -        -
   Acquisition of TNP properties (Note 3).......           -         -  (29,200)
                                                     -------   -------  -------
       Net cash used in investing activities....     (94,968) (155,122)(142,894)

Financing activities:
   Proceeds from sale of long-term debt.........           -         -   60,000
   Redemption of long-term debt.................        (179)  (14,986)  (4,445)
   Short-term borrowings - net..................     (85,242)  100,564   69,624
   Retirement of preferred stock................           -         -  (75,434)
   Dividends on common stock (Notes 4 and 15)...     (77,696)  (86,391) (90,020)
   Dividends on preferred stock.................           -         -   (2,494)
                                                     -------   -------  -------
       Net cash used in financing activities....    (163,117)     (813) (42,769)
                                                    --------   -------  -------
       Net increase (decrease) in cash and 
          temporary cash investments ...........         364   (39,624)  (5,637)
       Cash and temporary cash investments at
          beginning of year ....................         986    40,610   36,860
                                                         ---    ------   ------
       Cash and temporary cash investments at
          end of year                                $ 1,350   $   986  $31,223
                                                     =======   =======  =======



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

                                       23
<PAGE>


                       SOUTHWESTERN PUBLIC SERVICE COMPANY
                            STATEMENTS OF CASH FLOWS
                             (Thousands of Dollars)
              Four months ended December 31, 1996 and 1995 (Note 1)


                                                               1996     1995   
                                                               ----     ----
                                                                     (Unaudited)

Operating activities:
   Net income.........................................        $19,137   $30,946
   Adjustments to reconcile net income to net
    cash provided by operating activities (Note 1):
     Depreciation and amortization....................         22,289    21,873
     Write-off of investment in BCH Project (Note 3)..         15,546         -
     Deferred income taxes and  investment tax credits          4,806     3,166
     Allowance for equity funds used during construction         (179)      (60)
     Change in accounts receivable....................         10,180     9,402
     Change in inventories............................          1,417       928
     Change in other current assets...................         (5,674)    9,977
     Change in accounts payable.......................            628   (10,673)
     Change in other current liabilities..............        (12,487)  (11,021)
     Other............................................        (14,674)    7,627
                                                              -------   -------
       Net cash provided by operating activities......         40,989    62,165

Investing activities:
   Construction expenditures..........................        (66,031)  (44,950)
   Purchase of other investments......................         (2,297)   (3,741)
   Acquisition of TNP properties (Note 3).............              -   (29,200)
                                                              -------   -------
       Net cash used in investing activities..........        (68,328)  (77,891)

Financing activities:
   Proceeds from sale of long-term notes and bonds (Note 6)    82,300         -
   Proceeds from sale of SPS obligated mandatorily 
    redeemable preferred securities of subsidiary trust
    holding solely subordinated debentures of SPS             100,000         -
   Retirement of long-term notes and bonds............        (84,776)   (1,717)
   Short-term borrowings - net........................        (15,788)  116,250
   Retirement of preferred stock......................              -   (74,672)
   Dividends on common stock..........................        (45,010)  (45,010)
   Dividends on preferred stock.......................              -    (2,373)
                                                              -------   -------
       Net cash provided by (used in) financing activities     36,726    (7,522)
                                                               ------    ------ 
       Net increase (decrease) in cash and temporary
          cash investments ...........................          9,387   (23,248)
       Cash and temporary cash investments at beginning
          of period ..................................         31,223    36,860
                                                               ------    ------
       Cash and temporary cash investments at end of period   $40,610   $13,612
                                                              =======   =======


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

                                       24
<PAGE>


                   NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
               PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES
                       SOUTHWESTERN PUBLIC SERVICE COMPANY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1998

1.  Summary of Significant Accounting Policies (NCE, PSCo and SPS)

Business, Utility Operations and Regulation

      NCE is a registered  holding company under PUHCA and its domestic  utility
subsidiaries (PSCo, SPS and Cheyenne) are engaged principally in the generation,
purchase,  transmission,  distribution  and  sale  of  electricity  and  in  the
purchase, transportation, distribution and sale of natural gas. Both the Company
and its subsidiaries are subject to the regulatory  provisions of the PUHCA. The
utility  subsidiaries  are subject to  regulation  by the FERC and state utility
commissions in Colorado,  Texas, New Mexico,  Wyoming, Kansas and Oklahoma. Over
90% of the Company's revenues are derived from its regulated utility operations.

      Regulatory Assets and Liabilities

      The Company's regulated subsidiaries prepare their financial statements in
accordance  with the provisions of Statement of Financial  Accounting  Standards
("SFAS 71"), as amended.  SFAS 71 recognizes  that accounting for rate regulated
enterprises should reflect the relationship of costs and revenues  introduced by
rate  regulation.  A  regulated  utility  may  defer  recognition  of a cost  (a
regulatory  asset) or recognize an obligation (a regulatory  liability) if it is
probable that,  through the ratemaking  process,  there will be a  corresponding
increase or decrease in revenues.  The Company believes its utility subsidiaries
will continue to be subject to rate regulation. In the event that a portion of a
subsidiaries' operations is no longer subject to the provisions of SFAS 71, as a
result of a change in  regulation or the effects of  competition,  the Company's
subsidiaries could be required to write-off their regulatory  assets,  determine
any impairment to other assets  resulting from  deregulation  and write-down any
impaired  assets to their  estimated  fair  value,  which  could have a material
adverse  effect on  NCE's,  PSCo's  and SPS's  financial  position,  results  of
operations or cash flows.

      The   following   regulatory   assets  are   reflected  in  the  Company's
consolidated balance sheets (in thousands):

1998                                        NCE           PSCo            SPS 
                                          ------         ------         ------

Income taxes (Note 13)..............      $148,499       $ 69,868      $ 79,116
Nuclear decommissioning costs.......        69,490         69,490             -
Employees' postretirement benefits
  other than pensions (Note 12).....        57,350         54,461         2,889
Employees' postemployment benefits
 (Note 12) .........................        24,888         24,416             -
Demand-side management costs........        37,160         31,984         5,176
Unamortized debt reacquisition costs        33,138         15,769        16,808
Early retirement costs..............         1,000              -         1,000
Thunder Basin judgment (Note 9).....           548              -           548
Other...............................         9,559          3,124         6,434
                                            ------         ------        ------
  Total.............................      $381,632       $269,112      $111,971
                                          ========       ========      ========


                                       25
<PAGE>


1997                                        NCE           PSCo            SPS 
                                          ------         ------         ------

Income taxes (Note 13)..............      $162,985       $ 84,356      $ 79,161
Nuclear decommissioning costs.......        76,881         76,881             -
Employees' postretirement benefits
  other than pensions (Note 12).....        63,023         59,995         3,028
Employees' postemployment benefits
 (Note 12) .........................        24,455         23,932             -
Demand-side management costs........        42,503         38,518         3,985
Unamortized debt reacquisition costs        36,717         17,791        18,344
Early retirement costs..............         8,008          6,645         1,363
Thunder Basin judgment (Note 9).....         5,912              -         5,912
Other...............................         9,991          2,540         7,451
                                            ------         ------        ------
  Total.............................      $430,475       $310,658      $119,244
                                          ========       ========      ========

      The regulatory  assets of the Company's  regulated  subsidiaries  that are
currently  being  recovered  as of December  31, 1998 and 1997 are  reflected in
rates charged to customers  over periods  ranging from two to thirty years.  The
recovery of  regulatory  assets over the next five years is  estimated to exceed
$200  million.  Refer  to the  discussion  below or the  Notes  to  Consolidated
Financial  Statements  as  identified  in the above  table  for a more  detailed
discussion regarding recovery periods.

      Effective  July 1, 1993,  PSCo began  collecting  from customers the costs
approved by the CPUC for the decommissioning of Fort St. Vrain. This recoverable
amount  totaled  approximately  $124.4 million (plus a 9% carrying  cost).  Such
amount,  which is being  collected over a twelve-year  period,  represented  the
inflation-adjusted  estimated  remaining cost of decommissioning  activities not
previously  recognized  as  expense  at the  time  of  CPUC  approval.  PSCo  is
recovering  approximately  $13.9 million per year from its customers,  including
carrying costs.

      On January  27,  1997,  the CPUC  issued its order on PSCo's 1996 gas rate
case. The CPUC allowed  recovery of  postemployment  benefit costs on an accrual
basis under SFAS 112 and denied  amortization of the approximately  $8.9 million
regulatory asset recognized upon the adoption of SFAS 112 (see Note 12. Employee
Benefits -  Postemployment  Benefits).  PSCo has appealed in the Denver District
Court  the  decision  related  to  this  issue.  PSCo  believes  that it will be
successful on appeal and that the associated regulatory asset is realizable.  On
April 1, 1998, in connection  with PSCo's annual  electric  department  earnings
test filing,  PSCo  requested  approval to recover its  electric  jurisdictional
portion  of  the   postemployment   benefits  cost  regulatory   asset  totaling
approximately  $15 million over three years. In December 1998, the CPUC approved
a settlement  agreement on this matter which deferred the final determination of
the  regulatory  treatment  of these  costs  pending  the outcome of the current
appeal of the decision on PSCo's gas rate case.  PSCo  believes  that it will be
allowed  recovery of SFAS 112 costs on an accrual  basis.  If PSCo is ultimately
unsuccessful  in its appeal of the gas rate case decision  and/or in its request
to recover its  electric  jurisdictional  regulatory  asset,  all  unrecoverable
amounts will be written off (see Note 9. Regulatory Matters).

      Certain  costs  associated  with  PSCo's DSM  programs  are  deferred  and
recovered in rates over five to seven-year periods through the DSMCA.  Non-labor
incremental  expenses,  carrying  costs  associated  with deferred DSM costs and
incentives  associated  with  approved DSM  programs are  recovered on an annual
basis.  Costs  associated with SPS's DSM programs are also deferred and, as part
of a negotiated  settlement  agreement reached in July 1995, will be included in
rate base and cost of service in future PUCT proceedings.

      Costs  incurred to reacquire  debt prior to scheduled  maturity  dates are
deferred  and  amortized  over  the  life of the  debt  issued  to  finance  the
reacquisition, or as approved by the applicable regulatory authority.


                                       26
<PAGE>


      Recovered/Recoverable Purchased Gas and Electric Energy Costs -Net

      The Company's  utility  subsidiaries  have adjustment  mechanisms in place
which currently  provide for the recovery of certain  purchased gas and electric
energy costs.  These cost adjustment  tariffs may increase or decrease the level
of  costs  recovered  through  base  rates  and  are  revised  periodically,  as
prescribed by the appropriate  regulatory  agencies,  for any difference between
the total amount collected under the clauses and the recoverable  costs incurred
(see Note 9. Regulatory Matters).

      Other Property

      Property,  plant and equipment  includes  approximately  $18.4 million and
$25.4 million, respectively, for costs associated with the engineering design of
the future  Pawnee 2  generating  station and certain  water  rights  located in
southeastern  Colorado,  also obtained for a future generating station.  PSCo is
earning a return on these investments based on its weighted average cost of debt
in accordance with a CPUC rate order.

Non-utility Subsidiaries and International Investments

      The  Company's  non-utility   subsidiaries  are  principally  involved  in
energy-related  businesses  including  the  following:  engineering,  design and
construction management,  non-regulated energy services, including gas and power
marketing,  the management of real estate and certain life  insurance  policies,
the financing of certain  current assets of PSCo and investments in cogeneration
facilities,  electric  wholesale  generators and a foreign utility company.  The
Company's  international  investments are subject to regulation in the countries
in which such  investments  are made (see Note 2.  Investment in Yorkshire Power
and U.K.  Windfall  Tax).  Financial  statements  of  foreign  subsidiaries  are
translated into U.S.  dollars at current rates,  except for revenues,  costs and
expenses,  which are  translated at average  current rates during each reporting
period.

Consolidation and Financial Statement Presentation

      The Company  follows the  practice of  consolidating  the  accounts of its
majority owned and controlled  subsidiaries.  The Company  recognizes  equity in
income from its unconsolidated investments accounted for under the equity method
of accounting.  All intercompany  items and  transactions  have been eliminated.
Certain  prior year  amounts  have been  reclassified  to conform to the current
year's presentation.

      Effective August 1, 1997,  following the receipt of all required state and
Federal  regulatory  approvals,  PSCo and SPS  merged in a  tax-free  "merger of
equals"   transaction  and  became   wholly-owned   subsidiaries  of  NCE.  Each
outstanding share of PSCo common stock was canceled and converted into the right
to receive  one share of NCE common  stock,  and each  outstanding  share of SPS
common stock was canceled  and  converted  into the right to receive 0.95 of one
share of NCE  common  stock.  The  Merger  was  accounted  for as a  pooling  of
interests.   Effective  with  the  Merger,   certain   utility  and  non-utility
subsidiaries were transferred within NCE's common controlled  subsidiaries.  The
common stock of Quixx and UE, former SPS subsidiaries,  were transferred through
the sale by SPS of the  common  stock of such  subsidiaries  at net book  value,
aggregating  approximately  $119.0  million,  to NC  Enterprises in exchange for
notes payable of NC Enterprises.  Subsidiaries  of PSCo (Cheyenne,  WGI, e prime
and  Natural  Fuels)  were  transferred  by a  declaration  of a dividend of the
subsidiaries' stock, at net book value, aggregating approximately $49.9 million,
to NCE. NCE subsequently made a capital  contribution of the e prime and Natural
Fuels common stock, at net book value, aggregating  approximately $29.5 million,
to NC Enterprises.

     On April 22, 1997, SPS changed its fiscal year from a twelve-month period
ending  August  31 to  twelve-month  period  ending  December  31.  SPS  filed a
Transition  report on Form 10-K for the period September 1, to December 31, 1996
("Transition  Period"). The fiscal year periods presented in SPS's statements of
income and cash flows are for the  twelve-months  ending  December  31, 1998 and
1997 and August 31, 1996.


                                       27
<PAGE>


Revenue Recognition

      The Company's utility  subsidiaries accrue for estimated unbilled revenues
for services  provided  after the meters were last read on a cycle billing basis
through the end of each year.

Risk Management

      The Company and its  subsidiaries  have  initiated  the  utilization  of a
variety of energy  contracts,  both financial and commodity based, in the energy
trading and energy non-trading  operations to reduce their exposure to commodity
price risk.  These  contracts  consist mainly of commodity  futures and options,
index or fixed price swaps and basis swaps.

      Energy contracts entered into for the trading operations are accounted for
using the mark-to-market method of accounting.  Under mark-to-market accounting,
natural gas and power trading  contracts,  including both physical  transactions
and  financial  instruments,  are  recorded at fair value and  recognized  as an
increase  or  decrease  to  purchased  power or cost of gas sold  upon  contract
execution.  Changes in the market value of the portfolio are recognized as gains
or losses in the period of change and the resulting  unrealized gains and losses
are  recorded  as  other  current  assets  and  liabilities.  Such  amounts  are
recognized  as net  positions  in the  consolidated  balance  sheets  and income
statements as NCE and its subsidiaries  have master netting  agreements in place
with counterparties.

      Energy  contracts are also  utilized in the Company and its  subsidiaries'
non-trading  operations  to reduce  commodity  price risk.  Hedge  accounting is
applied only if the  contract  reduces the price risk of the  underlying  hedged
item and is designated as a hedge at its inception.  Gains and losses related to
qualifying  hedges of firm commitments or anticipated  transactions are deferred
and  recognized  as a  component  of  purchased  power or cost of gas sold  when
settlement occurs. If, subsequent to being hedged,  underlying  transactions are
no longer likely to occur, the related gains and losses are recognized currently
in income  (see Note 8.  Financial  Instruments  - Risk  Management  for further
discussion of the Company's risk management activities).

Comprehensive Income

      The  Company  and  its  subsidiaries  adopted  SFAS  No.  130,  "Reporting
Comprehensive  Income,"  effective  January 1, 1998. This statement  establishes
standards for the reporting and display of comprehensive income (net income plus
all other changes in net assets from  non-owner  sources) and its  components in
financial  statements.  Other comprehensive income for NCE and PSCo was reported
in the consolidated  Statements of Shareholders'  Equity and consists of foreign
currency translation adjustments related to the investment in Yorkshire Power.

Basic and Diluted Earnings Per Share

      Effective in calendar year 1997,  the FASB issued SFAS No. 128,  "Earnings
per Share" ("SFAS 128") requiring presentation of basic and diluted earnings per
share. Basic earnings per share is based upon the weighted average common shares
outstanding  during the year.  Diluted earnings per share reflects the potential
dilution  that could occur if  securities  or other  agreements  to issue common
stock were exercised or converted into common stock.  Diluted earnings per share
is  based  upon  the  weighted  average  common  and  common  equivalent  shares
outstanding  during each year.  Employee  stock options are the  Company's  only
common stock equivalents. There are no other potentially dilutive securities (in
thousands, except per share data).

                                       28
<PAGE>


                                            For the year ended December 31, 1998
                                            ------------------------------------
                                           Income       Shares        Per Share
                                        (Numerator)  (Denominator)      Amount
                                        -----------  -------------      ------
Basic EPS
  Net income..........................   $341,957      111,859        $  3.06
                                                                      =======

Effect of Dilutive Securities:
  Common stock options................          -          149
                                         --------      -------

Diluted EPS
  Net income and assumed conversion...   $341,957        112,008      $  3.05
                                         ========        =======      =======

     SFAS 128 had no effect on the Company's 1997 and 1996 reported earnings per
share information.

      Approximately  780,000 common stock options were outstanding  during 1998,
but were not included in the  computation of diluted  earnings per share because
the options'  exercise  prices were greater than the average market price of the
common stock.

Income Taxes

      The  Company  and  its   subsidiaries   file   consolidated   Federal  and
consolidated  and separate state income tax returns.  Income taxes are allocated
to the subsidiaries based on separate company  computations of taxable income or
loss. Investment tax credits have been deferred and are being amortized over the
service lives of the related property.  Deferred taxes are provided on temporary
differences  between  the  financial  accounting  and tax  bases of  assets  and
liabilities  using the tax rates which are in effect at the  balance  sheet date
(see Note 13. Income Taxes).

Stock-based Compensation

      The Company uses the intrinsic  value based method of  accounting  for its
stock-based  compensation  plan  (see Note 12.  Employee  Benefits  -  Incentive
Compensation).

Temporary Cash Investments and Statements of Cash Flows

      For purposes of the consolidated statements of cash flows, the Company and
its subsidiaries consider all temporary cash investments to be cash equivalents.
These temporary cash  investments are securities  having original  maturities of
three  months or less or having  longer  maturities  but with put dates of three
months or less.  At  December  31,  1998,  approximately  $14.3  million of cash
balances are  restricted  for  operational  uses as they have been committed for
investments in cogeneration projects.

     Income  Taxes  and  Interest  (Excluding  Amounts   Capitalized)  Paid  (in
thousands):

NCE                                              1998        1997        1996 
                                               -------     -------     -------

Income taxes ...............................   $135,776    $99,938     $117,121
Interest....................................   $249,405    $230,507    $197,073

PSCo                                             1998        1997        1996 
                                               -------     -------     -------

Income taxes, including amounts paid to NCE    $114,340    $ 75,439    $ 66,871
Interest....................................   $188,443    $172,470    $144,533


                                       29
<PAGE>


SPS                                              1998        1997        1996 
                                               -------     -------     -------

Income taxes, including amounts paid to NCE    $69,111     $37,752     $50,250
Interest....................................   $55,739     $56,486     $52,540

      Non-cash Transactions:

      Shares of NCE's common  stock in 1998 and PSCo's  common stock in 1997 and
1996  (222,387  in 1998,  250,058 in 1997 and  274,934  in 1996),  valued at the
market price on date of issuance (approximately $10 million for each year), were
issued to a savings  plan of the Company.  The  estimated  issuance  values were
recognized in other operating expenses during the respective preceding years.

      Effective March 31, 1998, PSCo sold its common stock  investment in NCI to
NC  Enterprises,  an NCE  subsidiary.  PSCo received as  consideration a 20-year
promissory  note  from NC  Enterprises  in the  amount of  approximately  $292.6
million (see Note 2. Investment in Yorkshire Power and U.K. Windfall Tax).

      Stock issuances and the dividend of subsidiaries' stock in connection with
the Merger discussed above were non-cash financing and investing  activities and
are not reflected in the consolidated statements of cash flows.

      During 1996, PSCo exchanged  shares of its common stock in connection with
the acquisition of TOG and TOP (see Note 3. Acquisitions and Divestitures).

Property and Depreciation

      Property, plant and equipment is stated at original cost. Replacements and
capital   improvements,   representing  units  of  property,   are  capitalized.
Maintenance  and  repairs of  property  and  replacements  of items of  property
determined  to be less than a unit of  property  are  charged to  operations  as
maintenance expense.  The cost of units of property retired,  together with cost
of removal, less salvage, is charged to accumulated depreciation.

      Depreciation  expense, for financial  accounting purposes,  is computed on
the  straight-line  basis  based on the  estimated  service  lives  and costs of
removal of the various classes of property. Depreciation expense, expressed as a
percentage of average  depreciable  property,  for NCE, PSCo and SPS ranged from
approximately  2.7%-2.9% for the years ended  December 31, 1998,  1997 and 1996.
For income tax  purposes,  the  Company  and its  subsidiaries  use  accelerated
depreciation and other elections provided by the tax laws.

Allowance for Funds Used During Construction

      AFDC,  as  defined  in the  system  of  accounts  prescribed  by the FERC,
represents the net cost during the period of construction of borrowed funds used
for  construction  purposes  and a reasonable  rate on funds  derived from other
sources. AFDC does not represent current cash earnings.  The Company's regulated
subsidiaries capitalize AFDC as a part of the cost of utility plant.

Gas in Underground Storage (NCE and PSCo)

      Gas in underground  storage is accounted for under the last-in,  first-out
("LIFO")  cost method.  The  estimated  replacement  cost of gas in  underground
storage at December 31, 1998 and 1997,  exceeded the LIFO cost by  approximately
$13.0 million and $36.0 million, respectively.


                                       30
<PAGE>


Cash Surrender Value of Life Insurance Policies (NCE and PSCo)

      The following amounts related to  corporate-owned  life insurance ("COLI")
contracts, issued by one major insurance company, are recorded as a component of
Investments, at cost, on the consolidated balance sheets (in thousands):

                                                             1998        1997 
                                                             ----        ----
Cash surrender value of contracts.....................     $461,752    $408,425
Borrowings against contracts..........................      458,104     405,285
                                                            -------     -------
   Net investment in life insurance contracts.........     $  3,648     $ 3,140
                                                           ========     =======

     Refer  to Note 10.  "Commitments  and  Contingencies",  for  discussion  of
certain tax matters.

Management 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 the
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

2. Investment in Yorkshire Power and U.K. Windfall Tax (NCE and PSCo)

Acquisition

      During  the second  quarter  of 1997,  Yorkshire  Power,  a joint  venture
initially  equally  owned  by  PSCo  and  AEP,  acquired  indirectly  all of the
outstanding   ordinary  shares  of  Yorkshire   Electricity,   a  U.K.  regional
electricity  company.  NCI accounts for its investment in Yorkshire  Power using
the equity  method.  Yorkshire  Power's  results of  operations  include 100% of
Yorkshire  Electricity's results since the April 1, 1997 acquisition date. NCI's
equity in earnings of Yorkshire Power is 50%, the same as its ownership share.

      Effective March 31, 1998, PSCo sold its common stock  investment in NCI to
NC Enterprises, an NCE subsidiary.  NCI's primary investment is Yorkshire Power.
PSCo received as consideration a 20-year  promissory note from NC Enterprises in
the  amount of  approximately  $292.6  million.  Annual  interest  payments  are
required for the first three years  followed by principal and interest  payments
for the remaining  seventeen  years. The interest rate on the note is 7.02%. NCE
intends to make additional  capital  contributions  to NC Enterprises to provide
the necessary cash flow  requirements to make payments on the promissory note to
PSCo. In October 1998, NCE contributed $100 million to NC Enterprises, which was
used to reduce the principle balance of the promissory note to PSCo.

U.K. Windfall Tax

      In July  1997,  the U.K.  government  enacted a  windfall  tax on  certain
privatized  business  entities,  payable in two  installments  with the first in
December  1997  and  the  second  in  December  1998.  The  windfall  tax  was a
retroactive  adjustment to the privatization  value based on  post-privatization
profits  during  the 1992 to 1995  period.  During  the third  quarter  of 1997,
Yorkshire Power recorded an extraordinary  charge of approximately  $221 million
(135 million pounds sterling) for this windfall tax. The Company's share of this
tax was approximately $110.6 million.

Investment in Ionica

     During the second quarter of 1998, Yorkshire Electricity recognized a $54.7
million   after-tax   impairment  of  its  investment  in  Ionica,   a  wireless
telecommunications  company, upon the May 22, 1998,  announcement by Ionica that
negotiations  for release of lines of credit  from  existing  providers  of bank
facilities had been  unsuccessful.  In November of 1998,  Ionica was placed into
receivership and an administrator was appointed to

                                       31

<PAGE>

oversee  its  operations  and  distribute  its  remaining  assets.  Due  to  the
complexity of Ionica  operations it may take  considerable time to complete this
process.  Yorkshire  Electricity  continues to assess the  recoverability of the
remaining book value of this  investment  (approximately  $7 million at December
31, 1998).

Generation Sale

      In the fourth quarter of 1998,  Yorkshire Power recognized a $42.1 million
after-tax gain on the sale of its generation  assets.  This included the sale of
its 75% interest in Regional Power Generators,  Ltd., which owned a 272-megawatt
combined cycle, gas fired plant located in North  Lincolnshire,  England and the
sale of other generation capacity. Proceeds from these sales were used to reduce
the debt of Yorkshire Power. Yorkshire Electricity is focusing its main business
on the distribution and supply of electricity and the supply of natural gas.

      Summarized  income  statement  information for the year ended December 31,
1998 and from the date of  acquisition,  April 1, 1997 to December 31, 1997,  is
presented below (in millions):

                                                   1998            1997 
                                            ------------------   -------
                                              Year     3 Months
                                              Ended      Ended     (NCE
                                           December 31, March 31,   and
                                              (NCE)       (PSCo)    PSCo)    
    Yorkshire Power:
      Operating revenues...............     $2,281.7  $  663.2   $1,492.9
                                            --------  --------   --------

      Operating income.................        324.9      65.5      202.3
                                            --------  --------   --------

      Income before extraordinary item.         76.9       6.9       69.8
                                            --------  --------   --------

      Extraordinary item - U.K. windfall
        tax ...........................                      -     (221.1)
                                             --------   ------   --------

      Net income (loss)................     $   76.9  $    6.9   $ (151.3)
                                            ========  ========   ========

    NCI's equity in earnings (losses):
      Equity in earnings of Yorkshire Power     38.5       3.5       34.9
      Extraordinary item - U.K. windfall tax       -         -     (110.6)
                                            --------  -------    --------
                                            $   38.5  $    3.5   $  (75.7)
                                            ========  ========   ========

      NCI's  investment  in  Yorkshire  Power at December  31, 1998 and 1997 was
approximately  $333 million and $290 million,  respectively.  Summarized balance
sheet  information  for  Yorkshire  Power as of December  31, 1998 and 1997,  is
presented below (in millions):
                                                    1998     1997
                                                    ----     ----
    Assets:
      Property, plant and equipment............    $1,602   $1,645
      Current assets...........................       552      602
      Goodwill (net)...........................     1,547    1,602
      Other assets.............................       295      293
                                                   ------   ------
                                                   $3,996   $4,142
                                                   ======   ======    
    Capitalization and Liabilities:
      Common shareholders' equity..............    $  655   $  542
      Long-term debt...........................     2,121      704
      Other non-current liabilities............       413      489
      Current liabilities......................       807    2,407
                                                   ------   ------
                                                   $3,996   $4,142
                                                   ======   ======

      The  unaudited pro forma  financial  information  presented  below for NCE
assumes  that  Yorkshire  Power was  acquired on January 1, 1997.  The pro forma
adjustments include recognition of equity in the estimated earnings of Yorkshire
Power, an adjustment for interest expense on debt associated with the investment

                                       32

<PAGE>

in Yorkshire Power and related income taxes. The estimated earnings of Yorkshire
Power were based on historical earnings of Yorkshire  Electricity,  prior to its
acquisition by Yorkshire Power,  adjusted for the estimated  effects of purchase
accounting (including the amortization of goodwill), conversion to United States
generally  accepted  accounting  principles,  interest expense on debt issued by
Yorkshire Power associated with the acquisition and related income taxes.  Sales
of electricity are affected by seasonal  weather  patterns and,  therefore,  the
results of Yorkshire Power/Yorkshire  Electricity will not be distributed evenly
during  the year.  Equity  in  earnings  (losses)  of  Yorkshire  Power has been
converted at the average exchange rates for the year ended December 31, 1997 and
December 31, 1996, of $1.639/pound and $1.561/pound, respectively.

      Based on the  above  assumptions,  shown  below  is  unaudited  pro  forma
financial  information  for the  years  ended  December  31,  1997  and 1996 (in
millions, except per share amounts):

                                                      NCE Earnings         
                                             Available for
                                             common stock     EPS-Basic (1)  
                                              1997   1996     1997    1996
                                              ----   ----     ----    ----

Net income before extraordinary item...      $261.5 $272.3    $2.50   $2.64
                                                              =====   =====

Pro forma adjustments:

  Equity in earnings of
   Yorkshire Power, net of
   U.S. tax benefits (2)...............      (10.1)   19.3

  Interest expense, net of tax.........       (3.5)  (13.8)
                                             -----  ------

Pro forma result.......................      $247.9 $ 277.8   $2.37   $2.70
                                             ====== =======   =====   =====

  (1) Based on the weighted average number of common shares  outstanding for the
      period.
  (2) The years ending  December 31, 1997 and 1996 amounts  include $24.0
      million and $18.9 million ($17.9 million and $11.7 million after-tax),
      respectively, of write-offs related to certain computer development costs,
      acquisition expenses and costs incurred for the preparation for 
      deregulation.

      The unaudited pro forma  financial  information  presented  below for PSCo
assumes that NCI was sold to NC Enterprises  effective  January 1, 1997. NCI was
formed  in  connection  with  the  investment  in  Yorkshire  Power  and  had no
operations  during the first  three  months of 1997.  The pro forma  adjustments
represent  the  removal  of NCI's  net  income  from PSCo and the  inclusion  of
interest  income,  net of  tax,  from  the  promissory  note  to  PSCo  from  NC
Enterprises.

      Based  upon the above  assumptions,  shown  below is  unaudited  pro forma
financial  information  for the  years  ended  December  31,  1998  and 1997 (in
millions):
                                                               PSCo Earnings
                                                              1998    1997
                                                              ----    ----

Net income before extraordinary item.....................     $200.1  $204.0

Pro forma adjustments:

  NCI's net income before extraordinary item.............      (2.8)  (35.9)
  Interest income from promissory note, net of tax.......       3.2     9.5
                                                              -----   -----

Pro forma result.........................................     $200.5  $177.6
                                                              ======  ======


                                       33
<PAGE>


3. Acquisitions and Divestitures

Acquisition of Planergy (NCE)

      Effective  April 1, 1998,  the  Company  acquired  all of the  outstanding
common stock of Falcon Seaboard Energy Services,  Inc.  ("Planergy") and assumed
other outstanding debt.  Planergy includes Planergy,  Inc. and Planergy Services
and is primarily engaged in energy  consulting,  energy  efficiency  management,
conservation programs and mass-market services..  Such acquisition was accounted
for using the  purchase  method and the  acquired  assets and  liabilities  were
valued at their  estimated  fair  market  values as of the date of  acquisition.
Planergy  has  been  consolidated  as a  subsidiary  of NC  Enterprises  in  the
Company's consolidated financial statements.

Carolina Energy Limited Partnership Investment (NCE and SPS)

      The Carolina Energy Partnership, a waste-to-energy  cogeneration facility,
was  originally  scheduled to be completed  in 1997,  but was halted  pending an
independent analysis of the project's  engineering and financial viability.  The
banks  providing  debt  financing to the project  withheld  funds for  continued
construction.   Quixx,  UE,  other  equity  owners,  senior  creditors  and  the
construction  contractor  were  unable to  restructure  the  project on mutually
agreeable  terms and the senior  creditors took  possession of the assets of the
facility.  In June 1997, Quixx wrote-off its investment of  approximately  $13.6
million in the Carolina Energy Partnership.  Additionally,  UE wrote-off its net
investment of approximately $2.4 million in this same partnership. Quixx holds a
one-third ownership interest,  including a 1% general partnership  interest,  in
the  partnership.  UE's net  investment  in the  partnership  was  comprised  of
subordinated  debt,  the  related  interest  receivable,  as well  as  fees  for
engineering services.

BCH Energy Limited Partnership Investment (NCE and SPS)

      Quixx  holds a 49%  limited  partnership  interest  in BCH Energy  Limited
Partnership  which owned a  waste-to-energy  cogeneration  facility located near
Fayetteville,  North Carolina.  Limited commercial  operation of the BCH project
began  in June  1996;  however,  the  facility  did  not  achieve  the  expected
performance  level. An effort was made to restructure the project but it was not
possible to achieve the required  improvements on economically  viable terms. In
late 1996,  senior  creditors took possession of the assets of the facility.  In
December 1996,  Quixx wrote-off its investment of  approximately  $16 million in
this project.

Quixx Underground Water Rights (NCE and SPS)

      During  1996,  Quixx sold a portion of its  underground  water  rights for
approximately  $14 million.  Quixx  recognized an after-tax  gain on the sale of
these water  rights of  approximately  $11.7  million,  which is  reflected,  in
Miscellaneous income and deductions net for the year ended December 31, 1996.

Acquisition of Texas-Ohio Gas, Inc. and Texas-Ohio Pipeline, Inc. (NCE and PSCo)

      Effective September 1, 1996, e prime acquired all of the outstanding stock
of TOG and TOP in exchange for a  combination  of common stock of PSCo and cash.
Such  acquisitions were accounted for using the purchase method and the acquired
assets and  liabilities  were valued at their estimated fair market values as of
the date of acquisition.  These companies are primarily engaged in gas brokering
and marketing activities and interstate gas transmission and are subsidiaries of
e prime.

Acquisition of TNP Properties (SPS)

      In September  1995,  SPS purchased  properties of TNP located in the Texas
Panhandle  area for  $29.2  million.  The  purchase  added  approximately  8,000
customers and was accounted for using the purchase method. Cost recovery of this
amount was allowed by the PUCT through a rate surcharge over a ten-year period.

                                       34

<PAGE>

4. Capital Stock (NCE, PSCo and SPS)

Shareholder Rights

      On April 30, 1997, the Board of Directors  declared that a dividend of one
right  for each  Common  Share  be paid on the  effective  date of the  business
combination  among the Company,  PSCo and SPS to  shareholders  of record of the
common shares issued and  outstanding at the close of business on the day before
the effective date of the business combination.  Each right represents the right
to  purchase  one  one-hundredth  of a share of  Series  A Junior  Participating
Preferred Stock at a price of $100 per one  one-hundredth  share.  Additionally,
the Board of Directors created a Series A Junior Participating  Preferred Stock,
$1 par value,  and reserved 2.6 million shares for issuance upon exercise of the
Rights.  In the event any person or group  acquires 10% or more of the Company's
common stock,  the holders of the rights  generally will be entitled to receive,
upon exercise, common stock of the Company having a value equal to two times the
exercise  price of the right.  In addition,  the Board of Directors  may, at its
option  after a person or group  acquires  10% or more of the  Company's  common
stock,  exchange  all or part of the rights for shares of the  Company's  common
stock.  In the event that the Company is acquired in a merger or other  business
combination  or 50% or more of the Company's  assets or earning power is sold or
transferred, the holders of the rights have the right to receive, upon exercise,
common  stock of the  acquiring  company  having a value  equal to two times the
exercise  price of the right.  The  Company  may redeem the rights at a price of
$0.001  per  right at any time  prior to the tenth  day  following  the date any
person or group acquires 10% or more of the Company's  common stock.  The rights
expire 10 years after the record date,  unless earlier  redeemed or exchanged by
the Company.

Common Stock Issuances

      In November 1998,  NCE issued 2.5 million shares of common stock.  The net
proceeds  totaling $117.0 million were used for general  corporate  purposes and
the  retirement of short-term  debt.  In December  1997,  NCE issued 5.9 million
shares of common  stock,  resulting in net proceeds  (after  deducting  issuance
costs)  totaling  approximately  $251.4  million.  The proceeds from the sale of
stock  were  used  for  general  corporate  purposes,  including  retirement  of
short-term  debt and a capital  contribution to PSCo. PSCo used such proceeds to
retire short-term debt.


                                       35
<PAGE>


Preferred Stock of NCE

      NCE has 20 million shares of preferred stock  authorized.  At December 31,
1998, the Company has not issued any of the preferred stock.

Preferred Stock of Subsidiaries
                                          December 31, 1998    December 31, 1997
                                          Shares     Amount    Shares    Amount
                                                 (Thousands          (Thousands
                                                 of Dollars)         of Dollars)
PSCo cumulative preferred stock, $100
 par value, 3 million shares authorized:
  Issued and outstanding:
   Not subject to mandatory redemption (1):
     4.20% series...................           -         -    100,000  $ 10,000
     41/4% series (includes $7,500 premium)    -         -    174,997    17,507
     41/2% series....................          -         -     65,000     6,500
     4.64% series...................           -         -    159,950    15,995
     4.90% series...................           -         -    150,000    15,000
     4.90% 2nd series...............           -         -    150,000    15,000
     7.15% series...................           -         -    250,000    25,000
                                          ------   -------    -------   -------

     Total..........................           -         -  1,049,947  $105,002
                                          ======   ======= ==========  ========

   Subject to mandatory redemption (2):
     7.50% series ..................           -         -    216,000  $ 21,600
     8.40% series...................           -         -    202,294    20,229
                                          ------   -------    -------  --------
                                               -         -    418,294    41,829
   Less: Preferred stock subject to 
     mandatory redemption within one year      -         -    (25,760)   (2,576)
                                          ------   -------   --------  --------
       Total........................           -         -    392,534  $ 39,253
                                          ======   =======   ========  ========

PSCo cumulative preferred stock, $25 
 par value, 4 million shares authorized:
  Issued and outstanding:
  Not subject to mandatory redemption (1):
     8.40% series...................           -         -  1,400,000  $ 35,000
                                          ======   =======  =========  ========

PSCo cumulative preferred stock, $0.01
 par value, 10 million shares authorized
 with no shares outstanding (3)                -         -          -  $      -
                                             ===   =======     ======   =======
SPS cumulative preferred stock, $1 
 par value, 10 million shares authorized
 with no shares outstanding (4)                -        -           -  $      -
                                             ===   =======     ======  ========

(1) On June 10, 1998, PSCo redeemed all of the preferred stock,  $100 par value,
at a value of $101 per share plus  accrued  dividends  and all of the  preferred
stock, $25 par value, at a value of $25.25 per share plus accrued dividends.

(2) On June 10, 1998, PSCo redeemed all  outstanding  shares of the 7.50% series
subject to mandatory redemption for $101.50 per share plus accrued dividends and
all of the 8.40% series  subject to mandatory  redemption  for $101.75 per share
plus accrued  dividends.  In 1997,  PSCo  repurchased  6,598 shares of the 8.40%
cumulative  preferred  series  subject to mandatory  redemption.  In 1996,  PSCo
repurchased  13,760 shares of the 8.40%  cumulative  preferred series subject to
mandatory redemption.

(3) On July 10,  1998,  the  shareholders  of PSCo  approved an amendment to the
Restated Articles of Incorporation to replace the existing authorized  preferred
stock and to provide for a class of 10 million  authorized  shares of  preferred
stock,  $0.01 par value. This preferred stock may be issued from time to time in
such series and having such designations,  preferences, limitations and relative
rights as the Board of Directors may determine.

(4) On January 31, 1996,  the  shareholders  of SPS approved an amendment to the
Restated Articles of Incorporation to replace the existing authorized  preferred
stock and to provide for a class of 10 million  authorized  shares of  preferred
stock,  $1.00 par value. This preferred stock may be issued from time to time in
such series and having such designations,  preferences, limitations and relative
rights as the Board of Directors may determine.


                                       36
<PAGE>


5. Obligated  Mandatorily  Redeemable  Preferred Securities of Subsidiary Trusts
Holding Solely Subordinated Debentures (NCE, PSCo and SPS)

      In May 1998,  PSCo Capital Trust I, a wholly-owned  trust of PSCo,  issued
7,760,000  shares of its 7.60% Trust  Originated  Preferred  Securities for $194
million.  The sole asset of the trust is $200 million principal amount of PSCo's
7.60% Deferrable Interest Subordinated Debentures, due June 30, 2038. Holders of
the securities are entitled to receive quarterly  dividends at an annual rate of
7.60% of the liquidation  preference value of $25. The securities are redeemable
at the option of PSCo on and after May 11, 2003 at 100% of the principal  amount
outstanding plus accrued interest.  In addition to PSCo's  obligations under the
Subordinated Debentures,  PSCo has agreed, pursuant to a guarantee issued to the
trust and the provisions of the trust  agreement  establishing  the trust,  on a
subordinated  basis,  payment of distributions on the preferred  securities (but
not if the trust does not have sufficient funds to pay such  distributions)  and
to  pay  all  of  the  expenses  of  the  trust   (collectively,   the  "Back-up
Undertakings").  Considered together, the Back-up Undertakings constitute a full
and unconditional guarantee by PSCo of the trust obligations under the preferred
securities.  The proceeds from the sale of the 7.60% Trust Originated  Preferred
Securities  were  used to  redeem  all  $181.8  million  of  PSCo's  outstanding
preferred stock on June 10, 1998, and for general corporate purposes.

      In October 1996,  Southwestern  Public  Service  Capital I, a wholly-owned
trust of SPS,  issued  $100  million of its 7.85%  Trust  Preferred  Securities,
Series A. The sole asset of the trust is $103 million  principal amount of SPS's
7.85% Deferrable  Interest  Subordinated  Debentures,  Series A due September 1,
2036.  The  securities  are redeemable at the option of SPS on and after October
21, 2001 at 100% of the principal amount plus accrued  interest.  In addition to
SPS's obligations under the Subordinated Debentures, SPS has agreed, pursuant to
a  guarantee  issued  to  the  trust,  the  provisions  of the  trust  agreement
establishing  the trust and a  related  expense  agreement  to  guarantee,  on a
subordinated  basis,  payment of distributions on the preferred  securities (but
not if the trust does not have sufficient funds to pay such  distributions)  and
to pay all of the  expenses  of the  trust.  Considered  together,  the  Back-up
Undertakings  constitute a full and unconditional  guarantee by SPS of the trust
obligations under the preferred securities. The proceeds from the sale were used
to reduce short-term debt.


                                       37
<PAGE>


6. Long-Term Debt of Subsidiaries (NCE, PSCo and SPS)
                                                              1998       1997
                                                              ----       ----
                                                          (Thousands of Dollars)
   First Mortgage Bonds:
     6-3/4% retired July 1, 1998........................    $    -      $25,000
     6-7/8% due December 1, 1999........................     90,000      90,000
     6.00% due January 1, 2001..........................    102,667     102,667
     7-7/8% due April 1, 2003...........................      4,000       4,000
     6.00% due April 15, 2003...........................    250,000           -
     8-1/8% due March 1, 2004...........................    100,000     100,000
     5-7/8% due March 1, 2004...........................     21,500      22,000
     7-1/4% due July 15, 2004...........................    135,000     135,000
     6-3/8% due November 1, 2005........................    134,500     134,500
     6-1/2% due March 1, 2006...........................     60,000      60,000
     7-1/8% due June 1, 2006............................    125,000     125,000
     5-5/8% due April 1, 2008...........................     18,000      18,000
     7-3/8% due November 1, 2009........................     27,250      27,250
     5-1/2% due June 1, 2012............................     50,000      50,000
     5-7/8% due April 1, 2014...........................     61,500      61,500
     9-7/8% due July 1, 2020............................     75,000      75,000
     Variable rate (4.05% and 3.80% at December 31, 1998
      and 1997) due September 1, 2021 ..................      7,000       7,000
     8-3/4% due March 1, 2022...........................    150,000     150,000
     8-1/4% due July 15, 2022...........................     40,000      40,000
     8.20% due December 1, 2022.........................    100,000     100,000
     7-1/4% due January 1, 2024.........................    110,000     110,000
     7.50% due January 1, 2024..........................      8,000       8,000
     8.50% due February 15, 2025........................     70,000      70,000
     Variable rate (2.90% and 3.80% at December 31, 1998
      and 1997) due March 1, 2027 ......................     10,000      10,000
     Secured Medium-Term Notes, 6.02% - 9.25%, due 
       March 4, 1998 - March 5, 2007 ...................    296,500     423,500
   Other secured long-term debt 13.25%, due in 
     installments through October 1, 2016 ..............     30,755      31,155
   Pollution control obligations, securing pollution
      control revenue bonds:
     Not collateralized by First Mortgage Bonds:
       Variable rate (4.30% at December 31, 1998 and 
         1997), due July 1, 2011 .......................     44,500      44,500
       Variable rate (6.435% effective at December 31, 
         1998 and 1997), due July 1, 2016 ..............     25,000      25,000
       5-3/4% series, due September 1, 2016.............     57,300      57,300
     Less: funds held by Trustee:.......................       (168)       (161)
   Unsecured Medium-Term Notes:
       5.86% - 6.14% due October 13, 1998 - May 30, 2000    100,000     100,000
   Capital lease obligations, 4.21% - 11.21% due in
     installments through May 31, 2025 .................     39,751      44,747
   Other................................................      6,284         286
   Unamortized discount and premium - net...............     (5,629)     (5,820)
                                                             ------      ------
                                                          2,343,710   2,245,424
Less: maturities due within one year....................    138,165     257,469
                                                            -------     -------
                                                         $2,205,545  $1,987,955
                                                         ==========  ==========

      The First  Mortgage  Bonds include all debt  (including  First  Collateral
Trust Bonds) issued by the Company's utility subsidiaries under various mortgage
indentures.  Substantially all properties of the Company's utility subsidiaries,
other than expressly  excepted  property,  are subject to the liens securing the
First  Mortgage  Bonds.  Additionally,  the SPS  Indenture  provides for certain
restrictions on the payment of dividends by SPS.

      The Red River Authority of Texas has issued certain obligations,  based on
long-term  installment  sale  agreements  executed  by SPS,  that  relate to the
pollution control  facilities  installed at SPS's coal-fueled  generating units.
SPS's payments under the pollution control obligations are pledged to secure the
Red River Authority Pollution Control Revenue Bonds.


                                       38
<PAGE>


      The annual maturities and sinking fund requirements  during the five years
subsequent to December 31, 1998 are (in thousands of dollars):

          Year           Maturities     Sinking Fund Requirements       Total
          ----           ----------     -------------------------       -----
NCE       1999             $138,165              $  560               $138,725
          2000              131,721               1,310                133,031
          2001              140,969               1,310                142,279
          2002               16,806               2,810                 19,616
          2003              281,848               2,810                284,658

PSCo      1999             $ 44,481              $  500               $ 44,981
          2000              131,656               1,250                132,906
          2001              140,969               1,250                142,219
          2002               16,806               2,750                 19,556
          2003              281,848               2,750                284,598

SPS       1999             $ 90,113              $    -               $ 90,113
          2000                    -                   -                      -
          2001                    -                   -                      -
          2002                    -                   -                      -
          2003

      The sinking fund requirements  relate to PSCo and Cheyenne and they expect
to satisfy  substantially  all of their sinking fund  obligations  in accordance
with  the  terms of their  respective  indentures  through  the  application  of
property additions. SPS has no significant sinking fund requirements.

7. Short-term Borrowing Arrangements (NCE, PSCo and SPS)

Notes Payable and Commercial Paper

       Information  regarding  notes payable and commercial  paper for the years
ended December 31, 1998 and 1997 is as follows (in thousands of dollars,  except
interest rates):

                                                             1998        1997 
                                                             ----        ---- 
NCE
   Notes payable to banks...............................   $ 36,437    $147,500
   Commercial paper.....................................    487,957     440,843
                                                           -------      -------
                                                           $524,394    $588,343

Weighted average interest rate at year end..............      5.57%       5.74%

PSCo
   Notes payable to banks...............................   $      -    $ 50,000
   Commercial paper.....................................    402,795     286,599
   Note payable to affiliates (by NCI to Quixx).........          -      11,956
                                                           --------    --------
                                                           $402,795    $348,555

Weighted average interest rate at year end..............      5.72%       5.78%

SPS
   Commercial paper.....................................   $85,162     $154,244
   Note payable to affiliates (UE)......................     9,000        9,000
   Note payable to affiliates (Quixx)...................         -       16,160
                                                           -------     -------
                                                           $94,162     $179,404

Weighted average interest rate at year end..............     5.50%       5.60%

                                       39
<PAGE>


Bank Lines of Credit and Compensating Bank Balances

      In August  1997,  NCE entered  into a $225 million  credit  facility  with
several  banks.  Originally,  the credit  facility  provided for $100 million of
direct  borrowings  by NCE  until  the  outstanding  common  stock of  PSCCC,  a
wholly-owned  subsidiary of PSCo, was  transferred to NCE. On June 30, 1998, the
credit facility was amended to eliminate the PSCCC common stock  restriction and
to provide for $200 million of direct  borrowings by NCE. In addition,  Cheyenne
was added as a borrower of up to $25 million  with an NCE  guaranty.  The credit
facility  expires  August 11, 2002.  As of December  31, 1998,  NCE had used $37
million.

      PSCo and its subsidiaries have entered into a credit facility with several
banks  providing  $300  million in  committed  bank lines of credit.  The credit
facility, which is used primarily to support the issuance of commercial paper by
PSCo and PSCCC,  alternatively provides for direct borrowings  thereunder.  1480
Welton,  Inc. and PSRI are provided  access to the credit  facility  with direct
borrowings   guaranteed  by  PSCo.  The  facility  expires  November  17,  2000.
Additionally,  PSCo  has a  credit  facility  which  provides  $150  million  in
committed  lines  of  credit  and  expires  on June 25,  1999.  SPS has a credit
facility  which  provides  $200  million in  committed  bank lines of credit and
expires  February 26, 1999. As of December 31, 1998,  PSCo had used $404 million
and SPS had used $86 million.

      Borrowings permitted under the committed bank lines of credit totaled $705
million at December 31, 1998.  Arrangements by the Company and its  subsidiaries
for committed  lines of credit are  maintained by a combination  of fee payments
and compensating balances.

      PSCo and SPS may borrow under uncommitted preapproved lines of credit upon
request;  however,  the  banks  have no firm  commitment  to  make  such  loans.
Individual PSCo  arrangements  for uncommitted  bank lines of credit totaled $50
million  at  December  31,  1997,  of which  all were  used.  None  were used or
outstanding as of December 31, 1998.

8.  Financial Instruments (NCE, PSCo and SPS)

Fair Value of Financial Instruments

      The following  tables present the carrying  amounts and fair values of the
Company's and subsidiaries'  significant  financial  instruments at December 31,
1998  and  1997.  The  carrying  amount  of  all  other  financial   instruments
approximates  fair  value.  SFAS  No.  107,  "Disclosures  about  Fair  Value of
Financial  Instruments," defines the fair value of a financial instrument as the
amount at which  the  instrument  could be  exchanged  in a current  transaction
between willing parties, other than in a forced or liquidation sale.

                                             1998                  1997     
                                        ----------------     -----------------
                                        Carrying     Fair    Carrying    Fair
                                        Amount       Value   Amount      Value
                                        ------       -----   ------      -----
                                               (Thousands of Dollars)
NCE
Investments, at cost................    $35,885   $ 35,256    $36,936   $ 36,072
Preferred stock of subsidiaries
 subject to mandatory redemption ...          -          -     41,829     42,893
PSCo and SPS obligated mandatorily
 redeemable preferred securities
 of subsidiary trust holding solely
 subordinated debentures of SPS
 and PSCo...........................    294,000    308,250    100,000    104,752
Long-term debt of subsidiaries......  2,343,710  2,434,249  2,245,424  2,251,523

PSCo
Investments, at cost................  $  30,355  $  31,324  $  36,936 $   36,072
Preferred stock subject to mandatory
 redemption ........................          -          -     41,829     42,893
PSCo obligated mandatorily redeemable
 preferred securities of
 subsidiary trust holding solely 
 subordinated debentures of PSCo        194,000    204,000          -          -
Long-term debt......................  1,687,611  1,590,226  1,595,298  1,604,160


                                       40
<PAGE>


                                             1998                  1997     
                                        ----------------     -----------------
                                        Carrying     Fair    Carrying    Fair
                                        Amount       Value   Amount      Value
                                        ------       -----   ------      -----
                                               (Thousands of Dollars)
SPS
Investments, at cost................    $  5,530   $  3,932   $      - $    -
SPS obligated mandatorily redeemable
 preferred securities of subsidiary
 trust holding solely subordinated 
 debentures of SPS ................      100,000    104,250    100,000  104,752
Long-term debt.....................      620,731    661,823    620,771  625,348

      The fair value of the debt and equity securities  included in Investments,
at cost,  is  estimated  based on quoted  market  prices for the same or similar
investments.  The debt  securities  are classified as  held-to-maturity  and the
equity securities are classified as  available-for-sale.  The unrealized holding
gains and losses for these debt and equity securities are not significant.

      The PSCo and SPS obligated mandatorily redeemable preferred securities and
long-term  debt are  based  on  quoted  market  prices  of the  same or  similar
instruments.  Since PSCo, SPS and Cheyenne are subject to regulation,  any gains
or losses  related to the  difference  between the carrying  amount and the fair
value of these  financial  instruments  would not be realized  by the  Company's
shareholders.

      The  fair  value  estimates   presented  herein  are  based  on  pertinent
information available to management as of December 31, 1998 and 1997. 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.

Off-Balance-Sheet Financial Instruments

      NCE has entered in to a  construction  contract  guarantee  which  assures
Quixx's  performance  under  its  engineering,   procurement,  and  construction
contract with Borger Energy Associates,  L.P. ("BEA").  Quixx, which owns 45% of
BEA, is constructing a 230 Mw cogeneration facility at a Phillips Petroleum site
near Borger,  Texas. The maximum  aggregate amount of this guarantee at December
31, 1998 was $88.4 million.  This maximum  amount  decreases to $25.0 million at
commercial  operation of the facility,  currently  estimated in March 1999,  and
remains  in effect  for a period of no longer  than 24 months  before  expiring.
Based upon the current state of construction of the facility,  this guarantee is
not expected to have any financial impact on NCE.

      As of December 31, 1998,  NCE had $59.9 million of guarantees  outstanding
to e prime.  These guarantees were made to facilitate e prime's energy marketing
and trading activities.  Also, e prime, inc. has guaranteed obligations relating
to the sale and  purchase  of energy  and  capacity  for TOG.  These  guarantees
totaled $13.3 million at December 31, 1998.

      In  connection  with an  agreement  for the sale of  electric  power,  SPS
guaranteed  certain  obligations  of a  customer  totaling  $48  million.  These
obligations related to the construction of certain utility property that, in the
event of default by the customer, would revert to SPS.

      NCE and YGSC have  guaranteed 50% of amounts  financed under a $32 million
Credit  Agreement among Young Storage and various lending  institutions  entered
into on June 27, 1995. This debt financing is for the development,  construction
and operation of an  underground  natural gas storage  facility in  northeastern
Colorado. (see Note 3.
Acquisition and Divestiture of Investments).

      NC Enterprises has guarantees  totaling $10 million of New Century Cadence
as of December 31, 1998. These guarantees relate to the capital requirements and
operations  of Cadence  Network  LLC,  in which New  Century  Cadence is a 33.3%
partner.


                                       41
<PAGE>


Risk Management

Energy Financial Contracts - Trading

      The  Company  and  its  subsidiaries  use  the  mark-to-market  method  of
accounting  for energy  trading  activities  and  recognized a gain related to e
prime's  power  trading  activities  and a loss related to e prime's gas trading
activities.  These gains and losses were  recognized as part of purchased  power
and gas purchased for resale, respectively,  and totaled less than $500,000. The
following  table  displays  the  mark-to-market  values  of the  energy  trading
financial  instruments of the Company and its  subsidiaries at December 31, 1998
and the average value for the period then ended.
                                       Assets                Liabilities     
                  Net Notional   Average  Dec. 31, 1998  Average  Dec. 31, 1998
                     Amount       Value       Value       Value       Value
                     ------       -----       -----       -----       -----
                              (in thousands of dollars)(in thousands of dollars)
Natural Gas (Mmbtus) 30,000       $ 335       $ 467      $ 344        $ 489
Power (Mwhs)         61,800         149         426        256          795

      In  addition,  PSCo  and SPS did not  hold any  energy  trading  financial
instruments  at  December  31,  1998.  There  were no energy  trading  financial
instruments held by NCE and its subsidiaries at December 31, 1997.

Energy Financial Contracts - Other than Trading

      Various energy financial  instruments are used by NCE and its subsidiaries
as hedging mechanisms against future contractual energy related obligations. The
weighted  average  maturity  of these  instruments  is less  than one  year.  At
December  31,  1998,  the  Company,  as part of e prime's  retail gas  marketing
business,  held notional long volumetric positions of approximately 14.2 million
Mmbtus of natural gas related to these financial  instruments  which had related
unrealized losses of approximately  $6.4 million.  At December 31, 1997, e prime
held notional long volumetric  positions of approximately $5.2 million Mmbtus of
natural gas related to these financial  instruments which had related unrealized
losses of approximately $0.7 million. In addition, PSCo and SPS did not hold any
energy financial instruments at December 31, 1998.

Financial Derivatives - Interest Rates

      SPS has an  interest  rate swap  agreement,  which,  in effect,  fixes the
interest  rate on a $25  million  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.
SPS is  exposed  to  interest  rate  risk  in the  event  of  nonperformance  by
counterparties; however, SPS does not anticipate such nonperformance.

Credit Risk

      In addition to the risks discussed  above,  NCE and its  subsidiaries  are
exposed to credit risk in its risk management activities. Credit risk relates to
the risk of loss resulting  from the  nonperformance  of a  counterparty  of its
contractual  obligations.  As the Company  continues to expand its gas and power
marketing  and trading  activities,  the  Company's  exposure to credit risk and
counterparty  default may increase.  NCE and its  subsidiaries  maintain  credit
policies intended to minimize overall credit risk.

      NCE and its  subsidiaries  conduct  standard  credit review for all of its
counterparties.  The Company employs  additional credit risk control  mechanisms
when  appropriate,   such  as  letters  of  credit,   parental   guarantees  and
standardized master netting agreements 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.


                                       42
<PAGE>


Concentration of Credit Risk - Accounts Receivable

      No individual customer or group of customers engaged in similar activities
represents  a  material  concentration  of credit  risk to the  Company  and its
subsidiaries.

9. Regulatory Matters (NCE, PSCo and SPS)

Electric Utility Matters

PSCo Performance Based Regulatory Plan

      PSCo's  base  electric  rates are  based on  traditional  cost of  service
ratemaking principles.  The CPUC established a performance based regulatory plan
in  connection  with the  CPUC's  decision  to  approve  the  Merger.  The major
components of this regulatory plan include the following:

-     an annual electric  department  earnings test with the sharing of earnings
      in excess of an 11% return on equity for the calendar years 1997-2001;
-     a Quality of Service Plan ("QSP")  designed with  performance  measures to
      effectively  penalize  or reward  PSCo  based on the  quality  of  service
      provided to retail customers; and
-     an Incentive  Cost  Adjustment  ("ICA") which  provides for the sharing of
      energy costs and savings relative to an annual target cost/delivered Kwh.

      The  sharing  of  earnings  in excess of an 11%  return on equity  for the
calendar years 1997-2001 are as follows:
                  Electric Department            Sharing of Excess Earnings
                  Return on Equity             Customers      Shareholders
                  ----------------             ---------      ------------
                       11-12%                   65%              35%
                       12-14%                   50%              50%
                       14-15%                   35%              65%
                      over 15%                 100%               0%

      The QSP  provides  for  bill  credits  if PSCo  does not  achieve  certain
performance measures relating to electric  reliability,  customer complaints and
telephone response to inquiries. For 1997, the QSP provided for up to $3 million
of rewards for its  performance  and PSCo's actual reward totaled  approximately
$1.5  million.  During the third  quarter  of 1998,  PSCo  reached a  settlement
agreement  with  the CPUC  Staff  and the OCC  which  modified  the bill  credit
structure for 1998 electric  reliability and eliminated the reward structure for
the years 1999  through  2001.  Approval of this  modification  was  obtained in
November 1998.

      In April 1998,  PSCo filed with the CPUC its  proposed  Performance  Based
Regulatory Plan adjustment for calendar year 1997. This adjustment  provides the
means for  implementing  the sharing  mechanism  for the  customers'  portion of
earnings over PSCo's  authorized  return on equity threshold  resulting from the
1997  earnings  test,  net of QSP  rewards.  PSCo  recorded  a  customer  refund
obligation of $15.1 million for the 1997 earnings test. In July 1998, PSCo began
refunding a portion of this amount to  customers  through  bill  credits.  As of
December 31, 1998, PSCo recorded an estimated refund obligation of approximately
$8.1 million for the 1998 earnings test.

      Additionally,  a $6 million annual  electric rate reduction was instituted
October 1, 1996,  followed by an  additional  $12 million  annual  electric rate
reduction  effective with the implementation of new retail gas rates on February
1, 1997.  PSCo  agreed to freeze  base  electric  rates  after the  Merger  rate
reductions for the period through December 31, 2001 with the flexibility to make
certain other rate changes,  including  those necessary for the recovery of DSM,
QF capacity costs and  decommissioning  costs. The freeze in base electric rates
does not  prohibit  PSCo from  filing a general  rate case or deny any party the
opportunity to initiate a complaint or show cause proceeding.


                                       43
<PAGE>

PSCo FERC Rate Case

      PSCo filed a rate case with the FERC on December  29,  1995,  requesting a
slight  overall  rate  increase  (less  than  1%) from  its  wholesale  electric
customers.  This filing, among other things,  requested approval for recovery of
OPEB costs under SFAS 106,  postemployment  benefit costs under SFAS 112 and new
depreciation  rates based on the Company's most recent  depreciation  study.  In
March 1997, the FERC issued an order accepting for filing and suspending certain
proposed rate changes.  Settlement  agreements were reached with all parties and
filed with the FERC,  which,  resulted in a slight decrease in rates overall.  A
final order accepting the settlement agreements was received in June 1997.

SPS Merger Related Rate Reductions

      Under the  various  regulatory  commission  approvals,  SPS is required to
provide  credits to  customers  over five  years for  one-half  of the  measured
non-fuel  operation and maintenance  expense savings associated with the Merger.
SPS will provide  guaranteed  minimum annual  credits to retail  customers of $3
million in Texas, $100,000 in Oklahoma and $10,000 in Kansas and $1.5 million to
wholesale customers.

      Under a settlement  reached with the NMPRC,  effective  December 30, 1998,
SPS  discontinued  the merger  savings  credit of $1.2 million per year with the
implementation of new retail rates in New Mexico as discussed below.

SPS Electric Cost Adjustment Mechanisms

      Substantially  all fuel and  purchased  power costs are  recoverable  from
utility customers,  as determined on a jurisdictional basis, using approved cost
adjustment  mechanisms.  As a result  of  amendments  during  1998 to  contracts
between the coal  supplier  to SPS and the  railroad  company it  employs,  coal
transportation costs are projected to decline  significantly for the period from
November  1998  through  December  2002.  These  savings  will be  passed  on to
customers.

Texas

      The PUCT's  regulations  require  periodic  examination  of SPS's fuel and
purchased  power costs,  the  efficiency  of the use of such fuel and  purchased
power, fuel acquisition and management  policies and purchase power commitments.
SPS is required to file an  application  for the  Commission to  retrospectively
review,  at least every three years,  the operations of a utility's  electricity
generation  and  fuel  management  activities.  In  June  1998,  SPS  filed  its
reconciliation  for the  generation  and  fuel  management  activities  totaling
approximately  $690 million,  for the period from January 1995 through  December
1997.   For  this  same  period,   SPS  had   approximately   $21.4  million  in
underrecovered  fuel costs  associated with the Texas retail  jurisdiction.  The
Company has also  requested the  prospective  sharing of margins from  wholesale
non-firm sales.  The outcome of this fuel  reconciliation  proceeding is pending
and a hearing has been set for June 1999.

      SPS was named as a defendant in a case entitled Thunder Basin Coal Co. vs.
Southwestern  Public Service Co. In November,  1994, the jury returned a verdict
in favor of Thunder Basin and awarded  damages of  approximately  $18.8 million.
SPS  appealed the judgment  and, in January  1997,  that Court found in favor of
Thunder  Basin and upheld the  judgment.  In February  1997,  SPS  recorded  the
liability  for the judgment  including  interest and court costs.  The amount of
approximately $22.3 million was paid in April 1997.

      During  1996 and  1997,  SPS  obtained  conditional  approval  to  collect
portions of the Thunder Basin  judgment from  wholesale  customers from the FERC
and the  NMPRC  issued  an order  granting  recovery  of the New  Mexico  retail
jurisdictional  portion of the judgment.  In May 1997,  SPS filed a request with
the PUCT to surcharge  undercollected  fuel and purchased power expenses,  which
included $9.1 million of the Thunder Basin judgment.  The PUCT issued a decision
which denied  recovery of the  judgment  through a surcharge on the grounds that
the costs were not classified as fuel costs. In 1997, SPS expensed approximately
$12.1  million of the Texas retail  jurisdictional  portion of the Thunder


                                       44
<PAGE>

Basin  judgment  and   recognized  an  equal  amount  as  deferred   revenue  in
anticipation  of  future  recovery  through  the  pending  fuel   reconciliation
proceeding.

      SPS believes that recovery of the Thunder Basin costs for the Texas retail
jurisdiction  will be approved in the pending  fuel  reconciliation  proceeding.
Under the PUCT  regulations,  a utility may recover  eligible  fuel  expenses or
fuel-related  expenses,  which result in benefits to  customers  that exceed the
costs that  customers  would  otherwise  have to pay.  The  Thunder  Basin costs
resulted in total net savings to customers of approximately  $8.5 million,  with
approximately   $4.6   million  net  savings   attributable   to  Texas   retail
jurisdictional customers.

New Mexico

      In October  1997,  the NMPRC  approved  a fixed fuel  factor for SPS's New
Mexico retail  jurisdiction,  effective January 1998. This employs an over/under
fuel collection calculation made on a monthly basis. SPS is required to petition
for a change in the fixed fuel factor if the over/under recovery balance reaches
$5 million. In addition, on an annual basis SPS files with the NMPRC a report of
SPS's fuel and purchase  power  costs,  which  includes  the current  over/under
recovery  balance and proposed  rate changes to refund or surcharge the balance.
The methodology of the over/under calculation,  plus interest, is similar to the
Texas  fixed  fuel  factor   calculation.   Previously,   New  Mexico's   retail
jurisdictional  electric  rates applied a monthly fuel factor.  In January 1999,
SPS  implemented  new annual fixed fuel cost  recovery  factors to reflect lower
fuel costs primarily as a result of the aforementioned  coal transportation cost
settlement between SPS's coal supplier and the railroad company.

SPS Rate Cases

New Mexico

      In November 1997, the NMPRC issued an order  investigating SPS's rates. In
the order, the NMPRC  determined that because of the rapid changes  occurring in
the  electric  industry  the NMPRC would  require rate case filings by the major
electricity  suppliers who have not adopted a plan to provide retail open access
and customer  choice of  suppliers.  SPS made a  compliance  filing in May 1998,
which proposed a $1.7 million annual rate reduction for certain retail customers
in New  Mexico and  incorporated  the $1.2  million  guaranteed  minimum  annual
credits,  discussed  above.  In October  1998,  SPS entered into an  uncontested
stipulation  agreement  settling the rate  investigation  case.  As part of this
settlement,  SPS  instituted  a  $6  million  annual  reduction  in  base  rates
(discontinuing  the $1.2  million in  guaranteed  minimum  annual  credits)  for
certain retail customers.  Additionally,  SPS implemented full  normalization in
its accounting  for income taxes with recovery of the New Mexico  jurisdictional
portion of the tax regulatory  asset over 16.8 years.  On November 30, 1998, the
NMPRC approved the stipulation and the rate reduction became effective  December
30, 1998.

Wholesale - FERC

      In 1989,  the FERC issued its final order  regarding a 1985 wholesale rate
case. SPS appealed certain portions of that order that related to recognition of
rates of the  reduction  of the  federal  income tax rates from 46% to 34%.  The
United  States  Court  of  Appeals  remanded  the  case,  directing  the FERC to
reconsider  SPS's claim.  Negotiated  settlements  with certain  customers  were
reached,  and  approved  by the  FERC,  in 1993 and  1995,  with  SPS  receiving
approximately  $10  million,  including  interest.  Settlement  agreements  were
reached with the two remaining  customers  during 1998 and approved by the FERC.
In connection with these  settlements,  SPS recorded $16.9 million of additional
revenues and $7.6 million of additional depreciation expense.

Cheyenne Electric Cost Adjustment Mechanism

      Cheyenne  filed  for an  increase  in its ECA  rates of  approximately  $3
million and new rates became effective January 1, 1999. This increase,  however,
is being contested and hearings are scheduled for March 1999.


                                       45
<PAGE>

Gas Utility Matters

PSCo Rate Cases

      On June 5, 1996, PSCo filed a retail rate case with the CPUC requesting an
annual increase in its jurisdictional  gas department  revenues of approximately
$34  million.   In  early  1997,  the  CPUC  approved  an  overall  increase  of
approximately $18 million with an 11.25% return on equity, effective February 1,
1997 and as  modified  on May 15,  1997.  The CPUC  disallowed  the  recovery of
certain  postemployment  benefit  costs under SFAS 112 and  imputed  anticipated
merger  related  savings net of costs  related to the gas business  (see Note 1.
Summary of  Significant  Accounting  Policies).  PSCo filed a petition  with the
Denver  District Court appealing the CPUC's  decision.  The District Court judge
requested oral arguments in the proceeding.  The Company  anticipates a decision
during 1999.

      In  November  1998,  PSCo  filed a  retail  gas  rate  case  with the CPUC
requesting  an annual  increase in rates of  approximately  $23.4  million.  The
request for a rate increase reflects revenues for additional plant investment, a
12.0% return on equity and the recovery of incremental year 2000 costs (see Note
5.  Commitments  and   Contingencies  -  Year  2000  Costs).   The  recovery  of
postemployment benefit costs was not included in this request pending a decision
from the Denver District Court, as discussed  above.  Hearings are set for April
1999. The new rates, if approved, would become effective July 1, 1999.

Cheyenne Rate Case

      In May 1997,  Cheyenne filed an  application  with the WPSC for an overall
annual increase in retail gas revenues of approximately $1.25 million.  The WPSC
approved an increase in retail gas revenues of approximately $1.19 million, with
an 11.71% return on equity, effective October 1, 1997.

10. Commitments and Contingencies (NCE, PSCo and SPS)

Environmental Issues

      The Company  and its  subsidiaries  are  subject to various  environmental
laws, including  regulations governing air and water quality and the storage and
disposal of hazardous or toxic wastes. The Company and its subsidiaries  assess,
on an ongoing basis,  measures to ensure  compliance  with laws and  regulations
related  to air and water  quality,  hazardous  materials  and  hazardous  waste
compliance and remediation activities.

Environmental Site Cleanup

      As  described  below,  PSCo has  been or is  currently  involved  with the
cleanup of contamination from certain hazardous substances.  In many situations,
PSCo is  pursuing  or intends to pursue  insurance  claims and  believes it will
recover some portion of these costs  through  such claims.  Additionally,  where
applicable, PSCo is pursuing, or intends to pursue, recovery from other PRPs and
through the rate regulatory  process.  To the extent any costs are not recovered
through the options listed above, PSCo would be required to recognize an expense
for such unrecoverable amounts.

      Under the CERCLA,  the U.S. EPA identified,  and a Phase II  environmental
assessment  revealed,  low  level,   widespread   contamination  from  hazardous
substances at the Barter Metals Company ("Barter") properties located in central
Denver.  For an  estimated  30 years,  PSCo  sold  scrap  metal  and  electrical
equipment to Barter for  reprocessing.  PSCo has  completed  the cleanup of this
site at a cost of approximately  $9 million and has received  responses from the
Colorado Department of Public Health and Environment  ("CDPHE")  indicating that
no further action is required related to these  properties.  On January 3, 1996,
in a lawsuit by PSCo against its insurance providers,  the Denver District Court
entered  final  judgment  in favor of PSCo in the  amount  of $5.6  million  for
certain  cleanup  costs at Barter.  Several  appeals and cross appeals have been
filed  by one of the  insurance  providers  and  PSCo in the  Colorado  Court of
Appeals.  The insurance  provider has posted  supersedeas bonds in the amount of
$9.7 million ($7.7 million  attributable  to the Barter  judgment).  On July 10,
1997,  the Colorado  Court of Appeals  overturned  the  previously  awarded $7.7
million judgment on the basis that the jury had not been properly  instructed by
the Judge regarding a narrow issue associated with certain policies. Previously,
PSCo had received  certain  insurance  settlement  proceeds from other insurance

                                       46
<PAGE>

providers for Barter and other  contaminated  sites and a portion of those funds
remains  to be  allocated  to this site by the trial  court.  Both  sides of the
litigation  filed  petitions for certiorari to the Colorado  Supreme Court which
granted a hearing on several  issues,  although the matter is still pending.  In
addition,  in August  1996,  PSCo  filed a  lawsuit  against  four PRPs  seeking
recovery of certain Barter related costs.  Settlement has been achieved with two
smaller PRPs. On December 16, 1997,  the U. S.  District  Court awarded  summary
judgment in favor of the remaining PRPs, on the basis that PSCo failed to follow
CERCLA guidelines in the cleanup. On January 15, 1998, PSCo appealed the summary
judgment to the U.S. Court of Appeals,  which is still  pending.  In March 1998,
PSCo sold the  remaining  Barter  properties,  and the total  proceeds were $1.1
million.

      PCB presence was identified in the basement of an historic office building
located in downtown Denver.  The Company was negotiating the future cleanup with
the current  owners;  however,  in October 1993, the owners filed a civil action
against  PSCo in the Denver  District  Court.  The action  alleged that PSCo was
responsible  for the PCB  releases and  additionally  claimed  other  damages in
unspecified  amounts.  In August  1994,  the  Denver  District  Court  entered a
judgment  approving a $5.3  million  offer of  settlement  between  PSCo and the
building owners  resolving all claims.  In December 1995, PSCo filed  complaints
against all applicable  insurance carriers in the Denver District Court. In June
1997,  the Court  ruled in favor of the  carriers  on summary  judgment  motions
addressing late notice and other issues. In August 1997, PSCo filed an appeal of
the decision with the Colorado  Court of Appeals,  which is still  pending.  One
carrier was  excluded  from the summary  judgment;  subsequently,  that  carrier
received  approval to be dismissed on the same basis as the other  carriers.  In
March 1998,  PSCo reached a settlement  with another carrier who was not part of
the Denver District Court action.  In December 1998, the CPUC approved  recovery
of the electric  jurisdictional  net costs totaling  approximately  $3.1 million
through PSCo's electric department  earnings test over a five-year  amortization
period.

      In addition to these sites, PSCo has identified  several other sites where
clean up of hazardous substances may be required.  While potential liability and
settlement costs are still under  investigation  and negotiation,  PSCo believes
that the resolution of these matters will not have a material  adverse effect on
PSCo's financial position, results of operations or cash flows. PSCo will pursue
the  recovery  of all  significant  costs  incurred  for such  projects  through
insurance claims and/or the rate regulatory process.

Other Environmental Matters

      Under the Clean Air Act  Amendments of 1990  ("CAAA"),  coal-fueled  power
plants are required to reduce SO2 and NOx emissions to specified  levels through
a phased  approach.  PSCo and SPS's  facilities  must  comply  with the Phase II
requirements,  which  will be  effective  in the  year  2000.  Currently,  these
regulations  permit  compliance  with SO2  emission  limitations  by  using  SO2
allowances  allocated  to  plants  by the EPA,  using  allowances  generated  by
reducing  emissions at existing  plants and by using  allowances  purchased from
other  companies.  The Company  expects to meet the Phase II emission  standards
placed on SO2 through the  combination of: a) the use of low sulfur coal, b) the
operation of air quality control equipment on certain generation facilities, and
c) allowances issued by the EPA and purchased from other companies. In addition,
PSCo will be required to modify  certain  boilers by the year 2000 to reduce the
NOx emissions in order to comply with Phase II requirements. The estimated Phase
II costs for these future plant  modifications  to meet NOx  requirements  total
approximately  $2.5  million  and  pertain to PSCo's  Cherokee  Unit 1 and 2 and
Arapahoe Unit 3.

      PSCo has announced its  intention to spend  approximately  $211 million on
its Denver and Boulder  Metro area  coal-fueled  power plants to further  reduce
such emissions below the required  regulatory  levels  discussed above, but will
only do so if the following  three  conditions are met: 1) the Colorado  General
Assembly  and the  CPUC  approve  recovery  of  these  costs,  2)  PSCo  obtains
flexibility  in  operating  the  plants,  and 3) PSCo is  assured  the  emission
reduction  plan is  sufficient to meet future state  requirements  for 15 years.
Legislation  was passed and signed  into law during the second  quarter of 1998.
During the third  quarter of 1998,  PSCo and the CDPHE  entered into a voluntary
emissions  reduction  agreement  under the  legislation.  In November  1998, the
Company filed for recovery of these costs with the CPUC. The voluntary emissions
reduction  agreement will be effective only if the CPUC approves a cost recovery
mechanism acceptable to PSCo.

                                       47
<PAGE>

Hayden Steam Electric Generating Station

      In May 1996,  PSCo and the other joint owners of Hayden Station reached an
agreement  resolving  violations  alleged in complaints  filed by a conservation
organization,  the  CDPHE and the EPA  against  the  joint  owners.  PSCo is the
operator  and owns an average  undivided  interest of  approximately  53% of the
station's two generating  units. In connection  with the  settlement,  the joint
owners of the Hayden station were required to install emission control equipment
of approximately $130 million (PSCo's portion is approximately $70 million). The
settlement  included  stipulated future penalties for failure to comply with the
terms  of the  agreement,  including  specific  provisions  related  to  meeting
construction  deadlines  associated with the installation of additional emission
control  equipment  and  complying  with  particulate,  SO2  and  NOx  emissions
limitations.  In  August  1996,  the U.S.  District  Court for the  District  of
Colorado  entered the  settlement  agreement,  which  effectively  resolved this
litigation. Installation of this emission control equipment is in process and on
schedule in accordance with the settlement  agreement.  The initial installation
of some equipment at Unit 1 was completed in late 1998.

Craig Steam Electric Generating Station

      In October 1996, a conservation organization filed a complaint in the U.S.
District  Court  pursuant to provisions of the Federal Clean Air Act (the "Act")
against the joint owners of the Craig Steam Electric  Generating Station located
in western Colorado. Tri-State Generation and Transmission Association,  Inc. is
the operator of the Craig station and PSCo owns an undivided  interest (acquired
in April 1992) in each of two units at the station totaling  approximately 9.7%.
The plaintiff alleged that: 1) the station exceeded the 20% opacity  limitations
in excess of 14,000 six minute  intervals  during the period  extending from the
first  quarter of 1991  through  the second  quarter of 1996,  and 2) the owners
failed to operate the  station in a manner  consistent  with good air  pollution
control  practices.  The complaint  seeks,  among other things,  civil  monetary
penalties and injunctive relief. The Act provides for penalties of up to $25,000
per day per  violation,  but the level of  penalties  imposed in any  particular
instance is discretionary. Settlement discussions were held in 1998, although no
settlement  was  achieved.  There have been no further  settlement  discussions.
Resolution of this matter may require the  installation  of additional  emission
control  equipment.  Management does not believe that this potential  liability,
the future impact of this  litigation on plant  operations,  or any related cost
will have a material  adverse impact on PSCo's  financial  position,  results of
operations or cash flows.

Fort St. Vrain Defueling and Decommissioning

      In 1989, PSCo announced its decision to end nuclear operations at Fort St.
Vrain.   Defueling  of  the  reactor  to  the  Independent  Spent  Fuel  Storage
Installation  ("ISFSI") was completed in June 1992. In March 1996,  PSCo and the
decommissioning   contractors   announced  that  the  physical   decommissioning
activities  at the  facility  had been  completed.  The final  site  survey  was
completed  in late October  1996.  On August 5, 1997,  the NRC  approved  PSCo's
request to terminate the Part 50 license.  This  concluded  the  decommissioning
activities as the  facilities  and the site was released for  unrestricted  use.
PSCo is currently operating a gas-fired combined cycle steam generation plant at
this facility.

      On February 9, 1996, PSCo and the DOE entered into an agreement  resolving
all the  defueling  issues.  As part of this  agreement,  PSCo has agreed to the
following:  1) the DOE assumed title to the fuel currently  stored in the ISFSI,
2) the DOE will assume title to the ISFSI and will be responsible for the future
defueling and decommissioning of the facility, 3) the DOE agreed to pay PSCo $16
million  for the  settlement  of  claims  associated  with the  ISFSI,  4) ISFSI
operating and maintenance costs,  including  licensing fees and other regulatory
costs, will be the  responsibility of the DOE, and 5) PSCo provided to the DOE a
full and complete  release of claims  against the DOE resolving all  contractual
disputes  related to  storage/disposal  of Fort St. Vrain spent nuclear fuel. On
December 17, 1996,  the DOE submitted a request to the NRC to transfer the title
of the ISFSI. The NRC is reviewing this request and PSCo anticipates approval in
early 1999.

      As a result  of the DOE  settlement,  coupled  with a  complete  review of
expected  remaining  decommissioning  costs and establishment of the anticipated
refund to customers, pre-tax earnings were positively impacted for 1997 and 1996
by  approximately $5 million and $16 million,  respectively.  In accordance with
the 1991 CPUC approval to recover certain decommissioning costs, 50% of any cash
amounts received from the DOE as part of a settlement,  net of 

                                       48
<PAGE>

costs incurred by PSCo,  including  legal fees, is to be refunded or credited to
customers.  At December 31, 1998,  a $4.7 million  refund to customers  has been
recorded on the consolidated balance sheet.

      Under  the   Price-Anderson   Act,  PSCo  remains   subject  to  potential
assessments  levied in response to any  nuclear  incidents  prior to early 1994.
PSCo continues to maintain primary  commercial  nuclear  liability  insurance of
$100  million for the Fort St.  Vrain site and the  adjoining  ISFSI.  PSCo also
maintains   coverage   of  $20.4   million  to  provide   property   damage  and
decontamination protection in the event of an accident involving the ISFSI.

Leyden Gas Storage Facility

      During August 1998, a Jefferson County, Colorado District Court jury found
PSCo liable for  approximately  $1.8 million for the reduction in land value and
related  damages  resulting from the  allegations  that natural gas had migrated
from the Leyden Gas Storage facility.  PSCo appealed the judgment.  The affected
land is located north of, but not immediately adjacent to, the storage facility.

Fuel Purchase Requirements

Coal Purchases and Transportation

      PSCo and SPS have in place  various  long-term  contracts for the purchase
and  transportation of coal (and with respect to SPS, the processing of coal for
deliveries  to its bunkers)  which are used in the  generation  of  electricity.
These  contracts  expire on various dates through 2017 and at December 31, 1998,
the  total  estimated   obligations,   based  on  1998  prices,  for  PSCo  were
approximately $729.2 million, and for SPS were approximately $1.2 billion.

Gas Purchases and Transportation

      PSCo  and  Cheyenne  have  long-term  contracts  for  the  purchase,  firm
transportation  and  storage of natural  gas.  These  contracts,  excluding  the
thirty-year  contract  with  Young  Storage  which has been  accounted  for as a
capital lease, are primarily used to support distribution of natural gas and the
majority of these  contracts  expire on various  dates through 2002. At December
31,  1998,  PSCo  has  minimum  annual   obligations  under  such  contracts  of
approximately  $167 million in 1999 declining  thereafter for a total  estimated
commitment of approximately $245 million. The combined PSCo and Cheyenne minimum
annual  obligation at December 31, 1998,  under such contracts is  approximately
$169 million in 1999 declining  thereafter for a total  estimated  commitment of
approximately  $248  million.  SPS does not have any  long-term  contracts  with
minimum obligations.

Purchased Power

      PSCo, SPS and Cheyenne have entered into agreements with utilities and QFs
for  purchased  power to meet  system  load  and  energy  requirements,  replace
generation from  company-owned  units under maintenance and during outages,  and
meet operating reserve obligations.

      PSCo and SPS have various  pay-for-performance  contracts  with QFs having
expiration dates through the year 2022. In general,  these contracts provide for
capacity payments, subject to the QFs meeting certain contract obligations,  and
energy  payments based on actual power taken under the  contracts.  The capacity
and energy  costs are  recovered  through  base  rates and other  cost  recovery
mechanisms.  Additionally,  the Company's  regulated  utilities  have  long-term
purchased power contracts with various regional utilities expiring through 2018.
Total capacity and energy  payments  associated with such contracts for NCE were
$490 million,  $477 million,  and $473 million; for PSCo such payments were $439
million,  $452 million and $453  million;  and, for SPS such  payments  were $23
million, $15 million and $20 million in 1998, 1997 and 1996, respectively.


                                       49
<PAGE>


      At December 31, 1998, the estimated future payments for capacity that NCE,
PSCo and SPS are obligated to purchase, subject to availability,  are as follows
(in thousands):
                                                           Regional
                                                 QFs     Utilities       Total
                                                 ---     ---------       -----
NCE
  1999..............................          $ 156,489     $182,969    $339,458
  2000..............................            153,808      163,990     317,798
  2001..............................            151,903      142,301     294,204
  2002..............................            139,656      130,534     270,190
  2003..............................            128,171      119,397     247,568
  2004 and thereafter...............          1,053,855    1,018,503   2,072,359
                                              ---------    ---------   ---------
   Total............................         $1,783,882   $1,757,694  $3,541,576
                                             ==========   ==========  ==========

PSCo
  1999..............................          $ 140,445     $166,620    $307,065
  2000..............................            137,497      155,227     292,724
  2001..............................            135,323      142,301     277,624
  2002..............................            122,802      130,534     253,336
  2003..............................            111,035      119,397     230,432
  2004 and thereafter...............            758,917    1,018,504   1,777,421
                                               --------    ---------   ---------
   Total............................         $1,406,019   $1,732,583  $3,138,602
                                             ==========   ==========  ==========

SPS
  1999..............................          $  16,044     $ 7,923     $ 23,967
  2000..............................             16,311           -       16,311
  2001..............................             16,580           -       16,580
  2002..............................             16,854           -       16,854
  2003..............................             17,136           -       17,136
  2004 and thereafter...............            294,938           -      294,938
                                              ---------     -------     --------
   Total............................          $ 377,863     $ 7,923     $385,786
                                              =========     =======     ========

      Historically,  all  minimum  coal,  coal  transportation,  natural gas and
purchased power requirements have been met.

System Purchase Option

      SPS 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 SPS 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 SPS 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. SPS has
the right to terminate the agreement if, in SPS'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 SPS's termination of the
agreement, SPS 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. It is anticipated that the City will file
a in suit in State  District  Court in 1999  seeking  to  condemn  the  electric
distribution facilities of EPE. In conjunction with the agreement, the NMPRC 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. SPS 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  was
conducted in Case 2651 in July 1997.  On November 24, 1998,  the NMPRC issued an
order dismissing the investigation.

                                       50
<PAGE>

Other
      In  connection  with an  agreement  for the sale of  electric  power,  SPS
guaranteed  certain  obligations of a customer  totaling $48 million at December
31, 1997.  These  obligations are related to the construction of certain utility
property  that,  in the event of default by the  customer,  would revert to SPS.
Additionally,  the Company and its subsidiaries have commitments  related to the
purchase of materials, plant and equipment additions, DSM expenditures and other
various items resulting from the normal course of business.

Tax Matters

      PSRI, a subsidiary  of PSCo,  owns and manages  permanent  life  insurance
policies  on certain  past and present  employees.  These  corporate  owned life
insurance  ("COLI")  policies  were entered into prior to July 1, 1986. In 1996,
Congress  passed  legislation  to phase out the tax  benefits  with certain COLI
policies,   however,  the  Company's  policies  were  grandfathered  under  this
legislation.  In August  1998,  the IRS issued a Notice of  Proposed  Adjustment
proposing to disallow the 1993 and 1994  deductions of interest  expense related
to policy loans on the COLI policies  totaling  approximately  $54.6 million.  A
Request for Technical  Advice was filed with the IRS National  Office on January
15, 1999, with respect to the proposed adjustment.

      Management plans to vigorously  contest this issue.  PSCo has not recorded
any  provision  for  income tax or  interest  expense  related  to this  matter.
Management believes that the Company's tax deduction of interest expense on life
insurance  policy loans was in full compliance with IRS regulations and believes
that the  resolution of this matter will not have a material  adverse  impact on
PSCo's financial position, results of operations or cash flows.

Year 2000 Issue

      The  Year  2000  ("Y2K")  issue  is a result  of a  universal  programming
standard that records dates as six digits, e.g.,  mm/dd/yy,  using only the last
two digits for the year.  Any  automated  system  software or firmware that uses
two-digit fields could understand the year 2000 as the year 1900 if the issue is
not corrected.  This situation is not limited to computers; it has the potential
to affect many systems,  components  and devices,  which have embedded  computer
chips,  which may be,  date  sensitive.  The Y2K issue  could  result in a major
system failure or  miscalculations  and does impact many NCE systems  considered
critical or important to the Company's business  operations.  Systems posing the
greatest business risks to the Company include power generation and distribution
systems, telecommunications systems, energy trading systems and billing systems.
The Company is addressing  all potential  Y2K failure  points  identified in its
critical  automated systems to maintain service to its customers and to mitigate
legal and financial risks.

      In 1997,  the Company  established  the Y2K Program  Office to oversee all
corporate-wide  Y2K  initiatives.   These  initiatives  encompass  all  computer
software,  embedded systems, as well as contingency planning.  Teams of internal
and external  specialists  were  established  to  inventory  and assess and test
critical  computer programs and automated  operational  systems and modify those
that may not be Y2K  compliant.  The inventory  phase and  assessment  phase for
information  technology  ("IT")  systems were  completed in 1998.  Additionally,
approximately  77% of the  remediation  and  testing  phase for all  critical IT
systems was completed in 1998 with the remaining remediation and testing planned
to be completed by June 30, 1999. For non-IT  systems,  which exist primarily in
the  generation,  transmission  and  distribution  areas  of the  business,  the
inventory and assessment phases are complete. Remediation and testing for non-IT
systems were  approximately  46% complete at December 31, 1998; the remainder is
expected  to be  completed  by  September  30,  1999.  Systems  critical  to the
generation and delivery of energy are expected to be completed by June 30, 1999.

      The Company  has  identified  third  parties,  with which it has  material
business relationships including  interconnected  utilities,  telecommunications
service  providers,  fuel  and  water  suppliers,  equipment  suppliers,  leased
facilities  and  financial  institutions.  Subject  matter  experts,  along with
functional managers,  continue to evaluate the current list of third parties and
have ongoing discussions with these and other critical suppliers about their Y2K
readiness and contingency planning efforts.

                                       51
<PAGE>

      The Company  currently expects to incur costs of approximately $25 million
to modify its computer  software,  hardware and other automated  systems used in
operations enabling proper data processing relating to the year 2000 and beyond.
This includes approximately $19 million for inventory,  assessment,  remediation
and testing and approximately $6 million for the replacement of automated system
components.  Furthermore, the Company expects to spend approximately $15 million
in capital expenditures for the accelerated replacement of certain non-compliant
IT systems,  which are expected to be  implemented  by September  30, 1999.  The
majority  of all Y2K  costs  will be  incurred  by PSCo and SPS.  A  significant
portion of the costs incurred to address the Company's Y2K issues will represent
the redeployment of existing information  technology resources.  The table below
details the actual costs incurred  through  December 31, 1998, and the estimated
costs to be incurred during 1999 (in millions).

                                               Actual Costs  Estimated Estimated
                                               1998 and Prior  1999      Total
                                               --------------  ----      -----

      Operating expenses.......................     $  8.2   $ 11.1  $ 19.3
      Capital expenditures ....................        7.1     13.4    20.5

      Yorkshire Power has also undertaken  activities to address Y2K issues. The
estimated  proportionate share of Yorkshire Power's incremental Y2K costs (costs
which would not have been required in the normal  course of business)  that will
flow through to the  Company's  earnings as a result of such  activities  is not
expected  to have a material  impact on the  financial  condition  or results of
operations of the Company.

      The most  reasonably  likely  worst  case  scenario  resulting  during Y2K
critical  dates is a loss of  production  capacity from certain of the Company's
generating units, along with loss of a portion of the communication  system that
is critical to generation and distribution  control.  If this were to occur, the
Company's  operating  utilities  may be  required  to  "island"  (separate  from
neighboring  interconnected utilities) their generation and distribution systems
in their service  territories.  As part of this  scenario,  difficulty  could be
encountered with the restart of generating  units. The overall blackout recovery
plan for NCE is designed so that this most reasonably likely worst case scenario
would be addressed and electricity  restored.  Critical  components of this plan
have been and continue to be tested to provide  assurance  that the Company will
be prepared for risks which could result from the Y2K millennium change.

      If correction or replacement of non-compliant systems are not completed on
a timely basis,  the Y2K issues may have a material  impact on the operations of
the Company and its subsidiaries. Management, however, does not anticipate these
activities  will  have a  material  adverse  impact on the  financial  position,
results of operations or cash flows of the Company or its subsidiaries.

Leasing Program

      The Company's  subsidiaries lease various equipment and facilities used in
the  normal  course of  business,  some of which are  accounted  for as  capital
leases.  Expiration of the capital  leases range from 1999 to 2025. The net book
value of property  under capital  leases was $39.8 million and $39.6 million for
NCE and PSCo,  respectively  at December  31,  1998 and $44.7  million and $44.4
million for NCE and PSCo,  respectively,  at December 31, 1997.  Assets acquired
under capital leases are recorded as property at the lower of fair-market  value
or the present  value of future  lease  payments  and are  amortized  over their
actual  contract term in accordance  with practices  allowed by regulators.  The
related obligation is classified as long-term debt. Executory costs are excluded
from the minimum lease payments.

      The majority of the operating  leases are under a leasing program that has
initial  noncancellable  terms of one year,  while  the  remaining  leases  have
various terms. These leases may be renewed or replaced. No material restrictions
exist in these leasing  agreements  concerning  dividends,  additional  debt, or
further leasing. Rental expense for 1998, 1997 and 1996 was $15.5 million, $36.2
million and $26.9 million,  respectively,  for NCE; $12.2 million, $31.1 million
and $25.0 million,  respectively,  for PSCo; and $2.4 million,  $4.3 million and
$3.7 million,  respectively,  for SPS.  SPS's rental  expense for the Transition
Period was $1.2 million.

                                       52
<PAGE>

      Estimated  future  minimum  lease  payments at December 31,  1998,  are as
follows (in thousands):

Capital Leases
                                                          NCE        PSCo 
                                                          ---        ---- 
1999 ..............................................    $ 8,020     $ 7,890
2000...............................................      5,158       5,092
2001...............................................      5,035       5,035
2002...............................................      4,820       4,820
2003...............................................      4,646       4,646
All years thereafter...............................     71,711      71,711
                                                       -------     -------
    Total future minimum lease payments                 99,390      99,194
    Less amounts representing interest.............     59,639      59,639
                                                       -------     -------
    Present value of net minimum lease payments....    $39,751     $39,555
                                                       =======     =======

Operating Leases
                                              NCE        PSCo         SPS 
                                              ---        ----         --- 
1999..................................     $13,512     $10,451     $ 2,292
2000..................................      10,647       8,012       2,195
2001..................................       5,450       3,297       1,860
2002..................................         499         347          31
2003..................................         379         245          26
All years thereafter.................        7,752       7,313          52
                                           -------     -------     -------
    Total future minimum lease payments    $38,239     $29,665     $ 6,456
                                           =======     =======     =======

Employee Matters

      The Company and its subsidiaries are engaged in certain employment related
litigation and intend to contest, or are actively  contesting,  all such claims,
and believe that the ultimate outcome will not have a material adverse impact on
the  financial  position,  results of operations or cash flows of the Company or
its subsidiaries.

Union Contracts

PSCo

      The current  Collective  Bargaining  Agreement is a  three-year  agreement
extending  from June 1, 1997 through May 31, 2000 with wage  increases of 3%, 3%
and  3.25%  beginning  in each  year  of the  agreement  1997,  1998  and  1999,
respectively. Approximately 1,946 employees, or 62% of PSCo's total workforce at
December  31,  1998,  are  represented  by  the  International   Brotherhood  of
Electrical Workers, ("IBEW"), Local 111.

SPS

      The current  Collective  Bargaining  Agreement is a  three-year  agreement
extending from November 1, 1996 through  November 1, 1999 with wage increases of
3% in each year of the agreement.  Approximately 805 employees,  or 60% of SPS's
total workforce at December 31, 1998, are represented by the IBEW, Local 602.


                                       53
<PAGE>


11.  Jointly-Owned Electric Utility Plants (NCE and PSCo)

      The Company's investments in jointly-owned plants (PSCo participation) and
its ownership percentages as of December 31, 1998, are (in thousands):
                                   Plant                 Construction
                                    in      Accumulated     Work in
                                  Service  Depreciation    Progress  Ownership %
                                  -------  ------------    --------  -----------

   Hayden Unit 1................   $70,191     $31,785      $  2,841      75.50
   Hayden Unit 2................    58,257      35,518        11,191      37.40
   Hayden Common Facilities.....    23,411         720         1,350      53.10
   Craig Units 1 & 2............    57,660      25,985            50       9.72
   Craig Common Facilities 
     Units 1 & 2 ...............    10,990       3,388            30       9.72
   Craig Common Facilities
     Units 1,2 & 3 .............     8,773       3,698             1       6.47
   Transmission Facilities, 
     Including Substations .....    79,722       24,703           92   42.0-73.0
                                   -------     --------       ------

                                   $309,004    $125,797     $ 15,555
                                   ========    ========     ========

      These assets include  approximately  320 Mw of net  dependable  generating
capacity.  PSCo is responsible for its proportionate share of operating expenses
(reflected  in PSCo's and the Company's  consolidated  statements of income) and
construction  expenditures.  The  increase  in plant in  service in 1998 and the
construction  work in  progress  amounts  for Hayden  Unit 1,  Hayden Unit 2 and
Hayden  Common  Facilities  include  construction  expenditures  for  installing
emission control equipment for these facilities as discussed in Note 10.

12. Employee Benefits (NCE, PSCo and SPS)

      The FASB issued SFAS  No.132,  "Employers'  Disclosures  about  Pensions &
Other  Postretirement  Benefits",  effective  for 1998.  This  standard does not
change  the   measurement   or   recognition  of  costs  for  pension  or  other
postretirement plans but rather standardizes disclosures.

Pensions

      The Company and its  subsidiaries  maintain tax qualified  noncontributory
defined  benefit  pension  plans which cover  substantially  all  employees.  At
December  31,  1998,  there  were  5,839,  3,118,  and 1,276  NCE,  PSCo and SPS
employees, respectively, participating in these plans. NCE, as the plan sponsor,
has overall responsibility for directly allocating such costs of each individual
plan to each of the participating  employers.  This allocation was determined by
the plans' actuary based on benefit obligations for active participants.

      Plan  assets are held in a master  trust.  Plan  assets are stated at fair
value and are comprised  primarily of corporate  debt and equity  securities,  a
real estate fund and government securities held either directly or in commingled
funds. The Company's funding policy is to contribute annually, at a minimum, the
amount necessary to satisfy the IRS funding standards.

      A comparison  of the  actuarially  computed  benefit  obligation  and plan
assets at December 31, 1998 and 1997,  is presented in the  following  table (in
thousands).

Change in Benefit Obligation            1998        1997 
                                       ------      ------

Obligation at January 1............    $ 991,973   $919,452
Service cost.......................       23,902     18,418
Interest cost......................       66,735     68,327
Plan amendments *..................      (60,014)        -
Actuarial loss.....................       52,416     42,460
Benefit payments...................      (61,221)   (54,412)
Curtailment........................            -     (2,272)
                                         -------     ------
Obligation at December 31..........   $1,013,791   $991,973
                                      ==========   ========


                                       54
<PAGE>

Change in Fair Value of Plan Assets          1998          1997 
                                            ------         -----
Fair value of plan assets at 
  January 1 .......................     $1,131,270    $  996,085
Actual return on plan assets.......        168,872       189,597
Benefit payments...................        (61,221)      (54,412)
                                           -------       -------
Fair value of plan assets at 
  December 31 .....................     $1,238,921    $1,131,270
                                        ==========    ==========
Funded Status
Funded status at December 31.......       $255,130      $139,297
Unrecognized transition asset......        (30,871)      (38,109)
Unrecognized prior-service cost (credit)   (33,073)       26,477
Unrecognized gain..................       (120,838)     (111,190)
                                          --------      --------
NCE prepaid pension asset..........        $40,348       $16,475
                                           =======       =======
PSCo  prepaid pension asset........        $15,089        $9,925
                                           =======        ======
SPS  prepaid pension asset.........        $24,611        $7,243
                                           =======        ======

* Effective  July 1, 1998, a new cash balance plan was  established  by NCE. The
NCE board of directors approved amendments to the existing pension plans and the
plan  assets  and  obligation  for  all   non-bargaining   unit  employees  were
transferred into this plan.

                                        1998        1997 
                                        ----        ---- 
Significant assumptions:
  Discount rate                         6.75%        7.0%
  Expected long-term increase
   in compensation level                4.0%         4.0%

      Cumulative  variances  between actual experience and assumptions for costs
and returns on assets,  outside of a 10%  corridor of the greater of plan assets
and  obligations,  are  amortized  over the average  remaining  service lives of
employees in the plans.

      The  components  of net periodic  pension cost (credit) are as follows (in
thousands):

NCE                                           1998        1997     1996 
---                                          -----       ------   -----

Service cost...............................  $ 23,902   $18,418  $21,226
Interest cost..............................    66,735    68,327   66,503
Expected return on plan assets.............  (103,928)  (89,567) (75,723)
Curtailment................................         -       126        -
Amortization of transition asset...........    (7,238)   (7,238)  (7,238)
Amortization of prior-service cost (credit)      (464)    2,431    2,440
Amortization of net gain...................    (2,880)   (2,395)    (801)
                                             -------     ------   ------
NCE net periodic pension cost (credit).....  $(23,873)  $(9,898) $ 6,407
                                             ========   =======  =======
PSCo net periodic pension cost (credit)....  $ (5,093)  $ 2,318  $ 6,856
                                             ========   =======  =======
SPS net periodic pension cost (credit).....  $(15,175) $(10,968) $   855
                                             ========  ========  =======

                                                                  SPS
                                                               Transition
1996                                          PSCo       SPS     Period  
----                                         ------    ------   --------

Service cost...............................  $14,317   $ 6,846  $ 2,390
Interest cost..............................   46,497    20,266    7,066
Expected return on plan  assets............  (53,739)  (20,984)  (8,263)
Amortization of transition asset...........   (3,674)   (3,564)  (1,188)
Amortization of prior-service cost.........    2,304       136       45
Amortization of net loss (gain)............    1,151    (1,845)     (59)
                                             -------    ------   ------
Net periodic pension cost..................  $ 6,856   $   855   $   (9)
                                             =======   =======   ======

                                               1998     1997           1996    
                                             -------   ------      -----------
                                                                   PSCo    SPS
Significant assumptions:
  Discount rate............................     7.0%   7.5-8.0%   7.25%    8.0%
  Expected long-term increase in 
     compensation level ...................     4.0%  4.25-6.0%    4.0%    6.0%
  Expected weighted average long-term rate
     of return on assets ..................     9.5%   9.75%      9.75%    8.0%


                                       55
<PAGE>

      Additionally,   the  Company  maintains  noncontributory  defined  benefit
supplemental   retirement  income  plans   ("Supplemental   Plan")  for  certain
qualifying  executive  personnel.  The  Supplemental  Plan benefits are paid out
of/or funded through the Company's general fund.

Defined Contribution Plans

      The Company and its subsidiaries maintain defined contribution plans which
cover  substantially  all employees.  Total  contributions to these plans by the
Company and its subsidiaries  were  approximately $12 million in 1998, 1997, and
1996.

Postretirement Benefits Other Than Pensions

      The Company and its  subsidiaries  provide certain  postretirement  health
care and life  insurance  benefits for  substantially  all  employees  who reach
retirement  age while  working for the  Company.  PSCo,  SPS,  NCS and other NCE
affiliates  participate in these plans. NCE, as the plan sponsor,  will continue
to reflect the costs of these  plans in  accordance  with SFAS 106 and  directly
allocate such costs to each of the participating  employers.  Historically,  the
Company  recorded the cost of these benefits for these plans on a  pay-as-you-go
basis.  The  Company's  subsidiaries  have adopted  SFAS 106 which  requires the
accrual,  during the years that an employee  renders service to the Company,  of
the expected cost of providing  these  benefits to the employee.  The Company is
amortizing the transition obligations for these plans over a period of 20 years.

      Plan  assets  are  stated at fair  value and are  comprised  primarily  of
corporate debt and equity securities,  a real estate fund, government securities
and other short-term investments held either directly or in commingled funds.

      PSCo adopted SFAS 106 based on a level of expense determined in accordance
with the CPUC.  PSCo  transitioned  to full  accrual  accounting  for OPEB costs
between  January 1, 1993 and December 31, 1997,  consistent  with the accounting
requirements for rate regulated enterprises.  All OPEB costs deferred during the
transition period will be amortized on a straight line basis over the subsequent
15 years.

      Additionally, certain state agencies, which regulate the Company's utility
subsidiaries,  have issued guidelines related to the recovery or funding of OPEB
costs.  SPS is  required  to fund  SFAS  106  costs  for  Texas  and New  Mexico
jurisdictional  amounts collected in rates and PSCo and Cheyenne are required to
fund SFAS 106 costs in  irrevocable  external  trusts which are dedicated to the
payment of these postretirement benefits.

      A comparison  of the  actuarially  computed  benefit  obligation  and plan
assets at December 31, 1998 and 1997,  is presented in the  following  table (in
thousands):

Change in Benefit Obligation            1998        1997 
                                       ------      ------

Obligation at January 1............    $376,685    $350,354
Service cost.......................       4,917       6,120
Interest cost......................      26,503      26,537
Plan amendments....................     (14,346)          -
Actuarial loss.....................      20,310      16,627
Benefit payments...................     (16,874)    (21,253)
Curtailment........................           -      (1,700)
                                         ------      ------
Obligation at December 31..........    $397,195    $376,685
                                       ========    ========


                                       56
<PAGE>


Change in Fair Value of Plan Assets     1998        1997 
                                       ------      ------

Fair value of plan assets at 
  January 1 .......................  $112,324     $88,673
Actuarial return on plan assets....    14,158       1,423
Employer contributions.............    26,928      28,908
Employee contributions.............       535       1,886
Benefit payments...................    (7,717)     (8,566)
                                       ------      ------
Fair value of plan assets at 
  December 31 .....................  $146,228    $112,324
                                     ========    ========

Funded Status
Funded status at December 31.......  $250,967    $264,361
Unrecognized transition obligation.  (212,648)   (227,724)
Unrecognized prior-service credit..    13,588           -
Unrecognized gain..................     9,825      26,079
                                       ------      ------
NCE accrued benefit cost...........   $61,732     $62,716
                                      =======     =======
PSCo accrued benefit cost..........   $55,537     $58,695
                                      =======     =======
SPS accrued benefit cost...........    $5,941      $3,800
                                       ======      ======

                                        1998        1997 
                                        ----        ---- 
Significant assumptions:
  Discount rate                         6.75%        7.0%
  Expected long-term increase in
    compensation level                   4.0%        4.0%

      The components of net periodic  postretirement benefit cost are as follows
(in thousands):

NCE                                           1998        1997     1996 
---                                          -----        ----     -----

Service cost.............................   $ 4,917   $ 6,121   $ 8,191
Interest cost............................    26,503    26,537    27,998
Expected return on plan assets...........   (10,767)   (8,078)   (6,233)
Curtailment..............................         -     3,323         -
Amortization of transition obligation....    15,076    14,992    15,388
Amortization of prior-service cost (credit)    (757)        -         -
Amortization of net gain.................      (786)   (1,162)      (90)
                                            ------     ------   ------
Net periodic postretirement benefit costs   34,186     41,733    45,254
OPEB expense recognized in accordance with 
  current regulations ...................  (39,859)   (36,351)  (37,981)    
                                            ------     ------   ------- 
  
Increase (decrease) in regulatory asset
 (Note 1) ...............................   (5,673)     5,382     7,273
Regulatory asset at beginning of year....   63,023     57,641    50,368
                                           -------     ------    ------
Regulatory asset at end of period........  $57,350    $63,023   $57,641
                                           =======    =======   =======

                                                   1998             1997      
                                             ----------------   --------------
                                              PSCo        SPS      PSCo    SPS
                                              ----        ---      ----    ---

Net periodic postretirement benefit
  costs.. .............................      $26,044   $3,295   $29,025  $8,199
OPEB expense recognized in accordance
  with current regulations ............      (31,578)  (3,434)  (23,479) (8,363)
                                              ------   ------    ------  ------
Increase (decrease) in regulatory asset
  (Note 1) ............................       (5,534)    (139)    5,546    (164)
Regulatory asset at beginning of year..       59,995    3,028    54,449   3,192
                                             -------   ------   -------  ------
Regulatory asset at end of period......      $54,461   $2,889   $59,995  $3,028
                                             =======   ======   =======  ======

                                                                  SPS
                                                                Transition
1996                                          PSCo       SPS     Period  
----                                         ------    ------   --------

Service cost...........................      $ 6,928   $ 1,266   $  419
Interest cost..........................       22,982     5,109    1,608
Expected return on plan assets.........       (4,500)   (1,589)    (674)
Amortization of transition obligation..       12,710     2,674      892
Amortization of net gain...............            -         -      (87)
                                             -------   -------   ------
Net periodic postretirement benefit costs..   38,120     7,460    2,158
OPEB expense recognized in accordance
 with current regulations .............      (31,271)   (6,715)  (2,230)    
                                             -------    ------   ------
Increase in regulatory asset (Note 1)..        6,849       745      (72)
Regulatory asset at beginning of year..       47,600     2,519    3,264
                                             -------   -------   ------
Regulatory asset at end of period..........  $54,449   $ 3,264   $3,192
                                             =======   =======   ======


                                       57
<PAGE>

                                               1998     1997         1996    
                                             -------   ------    -----------
                                                                  PSCo    SPS   
Significant assumptions:
  Discount rate............................     7.0%   7.5-8.0%  7.25%    8.0%
  Expected long-term increase in 
   compensation level .....................     4.0%   4.0-6.0%   4.0%    6.0%
  Expected weighted average long-term rate
   of return on assets ....................     9.5%    9.75%    9.75%    8.0%

      The assumed  health care cost trend rate for 1998 is 8.5%,  decreasing  to
4.5% in 2007 in 0.5% annual increments. A 1% increase in the assumed health care
cost trend rate would have the following effects (in thousands):

<TABLE>
<CAPTION>
                                    NCE                     PSCo                    SPS       
                              ----------------       ----------------         ---------------
                         1% Increase  1% Decrease 1% Increase 1% Decrease 1% Increase  1% Decrease
                         -----------  ----------- ----------- ----------- -----------  -----------

<S>                        <C>          <C>          <C>         <C>         <C>         <C>
Effect on total 
  of service and interest
  cost components of net
  periodic postretirement
  benefit cost.........    $ 3,300      $ (2,600)    $ 2,364     $(1,911)    $   787     $  (634)

Effect on the accumulated
  postretirement
  benefit obligation...    $38,200      $(31,300)    $27,290     $(22,509)   $ 9,414     $(7,681)
</TABLE>

Postemployment Benefits

      The Company and its  subsidiaries  provide  certain  benefits to former or
inactive  employees  after  employment  but  before  retirement  (postemployment
benefits).  At December  31,  1998,  the Company  has  recorded a $31.3  million
liability on the consolidated  balance sheet,  using an assumed discount rate of
6.75%.  The costs of the benefit were  historically  recorded on a pay-as-you-go
basis  prior  to the  adoption  of SFAS  112 in  1994,  which  required  accrual
accounting.  PSCo and Cheyenne  recorded  regulatory assets upon the adoption of
SFAS 112 in anticipation  of obtaining  future rate recovery of these costs (see
Note 1.  Summary of  Significant  Accounting  Policies -  Regulatory  Assets and
Liabilities).  PSCo  received  FERC  approval  in 1997 to recover  the  electric
wholesale  jurisdictional  portion of its regulatory asset and Cheyenne received
WPSC  approval  in 1997 to  recover  its gas  jurisdictional  portion.  The CPUC
allowed  recovery  of  postemployment  benefit  costs  on an  accrual  basis  in
connection with PSCo's 1996 gas rate case, but denied PSCo's request to amortize
its approximately  $8.9 million regulatory asset (gas  jurisdictional)  portion.
PSCo has  appealed to the Denver  District  Court the  decision  related to this
issue.  A  final  determination  on  the  recovery  of  PSCo's  retail  electric
jurisdictional  portion  has not been made.  Management  believes it is probable
that the Company will receive the required regulatory approvals to recover these
costs in the future.

Incentive Compensation

      The  Company  and  its  subsidiaries  have  Incentive  Compensation  Plans
("Incentive Plans"), which provide for annual and long-term incentive awards for
key  employees.  Approximately  5  million  shares  of  common  stock  have been
authorized  for these  Incentive  Plans for the  issuance of  restricted  shares
and/or stock options,  with certain  vesting and/or exercise  requirements.  The
Company recognizes compensation expense for restricted stock awards based on the
fair value of the Company's  common stock on the date of grant,  consistent with
Statement of Financial Accounting Standards ("SFAS 123"). Cash, restricted stock
and stock option awards were made under these plans during 1998, 1997 and 1996.

      The Company  applies APB Opinion No. 25 in accounting for its  stock-based
compensation  and,  accordingly,  no  compensation  cost is  recognized  for the
issuance  of stock  options  as the  exercise  price of the  options  equals the
fair-market  value of the Company's common stock at the date of grant.  Assuming
compensation cost for the Company,  PSCo and SPS had been determined  consistent
with SFAS 123 using the fair-value based method,  the Company's net income would
have been  reduced by  approximately  $1.1  million and $2.8 million in 1998 and
1997, respectively, which would have reduced earnings per share by approximately
$0.01 and  $0.03,  respectively.  The net income  would have been  reduced by an
insignificant amount with no impact on earnings per share for 1996.



                                       58
<PAGE>

SFAS 123's method of accounting for stock-based  compensation plans has not been
applied to  options  granted  prior to January 1, 1995,  and as a result the pro
forma  compensation  cost may not be  representative  of that to be  expected in
future  years.  A summary of the  Company's  stock options at December 31, 1998,
1997 and 1996 and changes  during the years then ended is presented in the table
below:

<TABLE>
<CAPTION>
                              NCE*                     PSCo                           SPS     
                         ---------------           ---------------              ---------------
                                 Weighted-                  Weighted-                    Weighted-
                                 Average                    Average                      Average
                        Shares   Exercise Price    Shares   Exercise Price      Shares   Exercise Price
                        ------   --------------    ------   --------------      ------   --------------
<S>                   <C>         <C>               <C>           <C>            <C>         <C>
1998
Outstanding at
 beginning of year    2,085,632   $   41.10
Granted                 570,200       47.55
Exercised               187,198       34.61
Forfeited                38,607       45.10
                         ------
Outstanding at end
 of year              2,430,027       43.07
                      =========
Exercisable at end
 of year              1,650,088       40.99
                      =========
Weighted-average
 fair value
 of options granted                $   4.40

1997
Outstanding at
 beginning of year      477,783    $  31.46         441,227       $31.38         38,480      $  30.80
Granted               1,690,147       43.32          62,100        39.00          2,147         37.24
Exercised                78,647       30.34          40,404        29.57          3,666         30.81
Forfeited                 3,651       33.41           3,651        33.41              -             -
Converted to NCE
 options at
Merger date                   -           -         459,272        32.56         36,961         32.70
                         ------                     -------                      ------
Outstanding at end
 of year              2,085,632       41.10               -            -              -             -
                      =========                     =======                       =====
Exercisable at end
 of year                431,071       32.66               -            -              -             -
                        =======                     =======                       =====

Weighted-average
 fair value
 of options granted                 $  5.45                      $  4.23                       $ 3.70

1996
Outstanding at 
 beginning of year      407,117      $29.78         347,931       $29.33         62,301        $30.78
Granted                 158,270       35.13         158,270        35.13              -             -
Exercised                74,303       30.87          51,673        30.21         21,647         30.76
Forfeited                13,301       32.48          13,301        32.84              -             -
                         ------                      ------                       -----
Outstanding at year
 of year                477,783       31.46         441,227        31.38         40,654         30.79
                        =======                     =======                      ======
Exercisable at end
 of year                158,970       29.05         158,970        29.05              -             -
                        =======                     =======                       =====

Weighted-average
 fair value
 of options granted                 $  4.31                      $  4.31                       $    -

SPS Transition Period
Outstanding at beginning of year                                                 40,654        $30.79
Granted                                                                               -             -
Exercised                                                                         2,174         30.69
Forfeited                                                                             -             -
                                                                                  -----
Outstanding at year of year                                                      38,480         30.80
                                                                                 ======
Exercisable at end of year                                                            -
                                                                                  =====
</TABLE>

* For 1997 and 1996 the  amounts  reflect the  conversion  of SPS and PSCo stock
options to NCE stock options.

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   Option-Pricing   Model  with  the   following   weighted-average
assumptions:
                                                  1998        1997      1996    
                                                 ------       ----      ----

Expected  option life.....................       10 years   10 years  10 years
Stock volatility..........................          13.8%      13.3%    11.95%
Risk-free interest rate...................          5.08%      6.15%     6.21%
Dividend yield............................           5.4%       5.4%      5.8%

                                       59
<PAGE>

      Additionally,  NCE, PSCo and SPS have other plans,  which provide for cash
awards to all employees  based on the  achievement of corporate  goals, of which
certain  goals were met in each of the last three years.  The  expenses  accrued
under the  incentive  programs for the years 1998,  1997 and 1996 are as follows
(in millions):

                                               1998      1997     1996 
                                               ----      ----     ----

NCE........................................  $   11.3  $   4.2  $  10.9
PSCo.......................................       3.4      2.7      7.8
SPS........................................       1.9      1.1      3.1

     In accordance  with the terms of the  Company's  Incentive  Plans,  certain
unexercisable  stock options,  restricted stock awards and dividend  equivalents
became  exercisable  or  vested on the  effective  date of the  Merger.  The NCE
Omnibus Incentive Plan, which was adopted in 1997,  contains a change in control
provision  under which all  stock-based  awards,  such as options and restricted
shares, will vest 100% and all cash-based awards will be paid out immediately in
cash as if the performance  objectives have been achieved  through the effective
date of the change in control.

13.  Income Taxes (NCE, PSCo and SPS)

      The  provisions  for  income  taxes for NCE and PSCo for the  years  ended
December 31, 1998,  1997 and 1996,  and for SPS for the years ended December 31,
1998,  1997 and August 31, 1996 and for the four months ended  December 31, 1996
consist of the following (in thousands):

            1998                                NCE          PSCo        SPS
                                                ---          ----        ---
Current income taxes:
   Federal..........................         $126,122     $91,122     $71,954
   State............................            8,448       8,176       2,592
                                             --------     -------     -------
Total current income taxes..........          134,570      99,298      74,546
                                             --------     -------     -------
Deferred income taxes:
   Federal..........................            5,433       6,014      (8,266)
   State............................              815       1,078        (334)
                                             --------     -------     -------
   Total deferred income taxes......            6,248       7,092      (8,600)
                                             --------     -------     -------

Investment tax credits - net........           (5,222)     (4,896)       (250)
                                             --------     -------     -------

Total provision for income taxes....         $135,596     $101,494    $65,696
                                             ========     ========    =======


            1997                                NCE          PSCo        SPS
                                                ---          ----        ---
Current income taxes:
   Federal..........................         $ 82,337     $55,041     $43,401
   State............................            4,872       3,601       2,057
                                             --------     -------     -------
Total current income taxes..........           87,209      58,642      45,458
                                             --------     -------     -------
Deferred income taxes:
   Federal..........................           45,537      31,548       3,045
   State............................            6,674       5,842         542
                                             --------     -------     -------
   Total deferred income taxes......           52,211      37,390       3,587
                                             --------     -------     -------

Investment tax credits - net........           (5,501)     (5,219)       (250)
                                             --------     -------     -------

Total provision for income taxes....         $133,919     $90,813     $48,795
                                             ========     =======     =======



                                       60
<PAGE>


            1996                               NCE          PSCo        SPS
                                               ---          ----        ---
Current income taxes:
   Federal..........................         $ 79,365     $41,737     $46,435
   State............................            2,832         951       2,689
                                             --------     -------     -------
     Total current income taxes.....           82,197      42,688      49,124
                                             --------     -------     -------
Deferred income taxes:
   Federal..........................           70,964      53,612      15,776
   State............................            7,998       7,287         647
                                             --------     -------     -------
   Total deferred income taxes......           78,962      60,899      16,423
                                             --------     -------     -------

Investment tax credits - net........           (7,506)     (7,256)       (250)
                                             --------     -------     -------

Total provision for income taxes....         $153,653     $96,331     $65,297
                                             ========     =======     =======

                                          Four Months Ending December 31,
            SPS - Transition Period         1996            1995   
                                          --------        -------
                                                        (unaudited)
Current income taxes:
   Federal..........................      $  5,991        $14,799
   State............................           190            998
                                          --------        -------
     Total current income taxes.....         6,181         15,797
                                          --------        -------
Deferred income taxes:
   Federal..........................         4,697          3,117
   State............................           192            132
                                          --------        -------
   Total deferred income taxes......         4,889          3,249
                                          --------        -------

Investment tax credits - net........           (83)           (83)
                                          --------        -------

Total provision for income taxes....      $ 10,987        $18,963
                                          ========        =======

      A reconciliation  of the statutory U.S. income tax rates and the effective
tax rates follows (in thousands):

            1998
<TABLE>
<CAPTION>
                                           NCE             PSCo             SPS     
                                           ---             ----             ---     
<S>                                 <C>       <C>    <C>       <C>    <C>       <C>
Tax computed at U.S. statutory
  rate on pre-tax accounting
  income... ....................    $169,010  35.0%  $105,559  35.0%  $63,239   35.0%
Increase (decrease) in tax from:
  Allowance for funds used
   during construction.........       (6,072) (1.3)    (4,315) (1.4)   (1,730)  (1.0)
  Amortization of investment
    tax credits ...............       (5,221) (1.1)    (4,896) (1.6)     (250)  (0.1)
  State income taxes, net of
   Federal income tax  benefit         6,010   1.2      6,015   2.0     1,468    0.8
  Cash surrender value of life
   insurance policies..........      (14,553) (3.0)   (14,478) (4.8)      (76)     -
  Amortization of prior
   flow-through amounts .......       10,509   2.2     10,446   3.5         -      -
  Merger related costs -
    non-deductible ............        1,482   0.3          -     -        562    0.3
  Foreign tax credit...........      (15,457) (3.2)    (1,363) (0.5)         -      -
  International treaty tax relief    (12,806) (2.7)    (1,129) (0.4)         -      -
  Other-net....................        2,694   0.7      5,655   1.9      2,483    1.4
                                       -----  -----    ------   ---      -----   ----
   Total income taxes..........     $135,596  28.1%  $101,494  33.7%   $65,696  36.4%         
                                    ========  =====  ========  =====   =======  =====
</TABLE>


                                       61
<PAGE>


            1997
<TABLE>
<CAPTION>
                                        NCE           PSCo              SPS     
                                        ---           ----              ---     
<S>                                 <C>       <C>    <C>       <C>     <C>      <C>
Tax computed at U.S. statutory
  rate on pre-tax accounting
  income........................    $142,506  35.0%  $103,199  35.0%   $43,529  35.0%
Increase (decrease) in tax from:
  Allowance for funds used
   during construction.........       (2,220) (0.6)    (2,222) (0.8)        (2)    -
Amortization
  of investment tax credits.....      (5,501) (1.4)    (5,219) (1.8)      (250) (0.2)
  State income taxes, net of
   Federal income tax  benefit         6,617   1.6      5,250   1.8      1,689   1.4
  Cash surrender value of life
   insurance policies..........     (12,952)  (3.2)   (12,876) (4.4)       (76) (0.1)
  Amortization of prior
   flow-through amounts .......      10,509    2.6     10,483   3.6          -     -
  Merger related costs -
   non-deductible .............       8,274    2.0      4,921   1.7      3,352   2.7
  Foreign tax credit...........      (7,043)  (1.7)    (7,043) (2.4)         -     -
  International treaty tax relief    (6,309)  (1.4)    (6,309) (2.1)         -     -
  Other-net....................          38    0.0        629    .2        553   0.4
                                      -----   -----    ------  ----     ------  ----
   Total income taxes..........    $133,919   32.9%   $90,813  30.8%   $48,795  39.2%          
                                   ========   =====   =======  =====   =======  =====


            1996
                                        NCE           PSCo              SPS     
                                        ---           ----              ---     
Tax computed at U.S. statutory
  rate on pre-tax accounting
  income... ..................     $153,287   35.0%  $100,337  35.0%   $59,874  35.0%
Increase (decrease) in tax from:
  Allowance for funds used
   during construction........      (1,685)   (0.3)    (1,438) (0.5)      (248) (0.1)
  Amortization of investment 
   tax credits ...............      (7,506)   (1.7)    (7,256) (2.5)      (250) (0.1)
  State income taxes, net of
   Federal income tax benefit        6,579     1.5      5,356   1.9      1,748   0.9
  Cash surrender value of life
   insurance policies..........    (11,265)   (2.6)   (11,265) (3.9)       (76)    -
  Amortization of prior
   flow-through amounts .......     10,509     2.4     10,509   3.6          -     -
  Merger related costs -
    non-deductible ............      4,258     1.0      2,574   0.9      2,006   1.2
  Other-net....................       (524)   (0.2)    (2,486) (0.9)     2,243   1.3      
                                     -----   -----     ------  ----      -----  ----
   Total income taxes..........   $153,653    35.1%   $96,331  33.6%   $65,297  38.2%          
                                  ========    =====   =======  =====   =======  =====
</TABLE>

            SPS Transition Period      Four Months Ending December 31,
                                           1996             1995     
                                          -----             -----
                                                         (unaudited)
Tax computed at U.S. statutory
 rate on pre-tax accounting
 income... ....................        $10,544  35.0%  $17,468   35.0%
Increase (decrease) in tax from:
  Allowance for funds used
   during construction.........           (144) (0.5)     (180)  (0.4)
  Amortization of investment tax
   credits ....................            (83) (0.3)      (83)  (0.2)
  State income taxes, net of 
   Federal income tax benefit..            123   0.4       649    1.3
  Merger related costs - 
   non-deductible .............            488   1.6       620    1.2
  Other-net....................             59   0.3       489    1.1
                                         -----   ---       ---    ---
   Total income taxes..........        $10,987  36.5%  $18,963   38.0%
                                       =======  =====  =======   =====

      The Company and its regulated  subsidiaries have historically provided for
deferred income taxes to the extent allowed by their regulatory agencies whereby
deferred taxes were not provided on all differences  between financial statement
and taxable income (the flow-through method). At December 31, 1998, PSCo and SPS
are fully normalized for FERC jurisdictional  purposes. For state jurisdictional
purposes, PSCo is fully normalized in Colorado and Wyoming, respectfully and SPS
is fully normalized in Texas,  Oklahoma,  and New Mexico (see Note 9. Regulatory
Matters -SPS Electric Cost adjustment  Mechanisms).  SPS is fully  normalized to
the extent allowed by its regulators in Kansas,  with flow-through  treatment of
certain temporary differences. To give effect to temporary differences for which
deferred taxes were not previously  required to be provided,  a regulatory asset
was recognized.  The regulatory asset represents temporary differences primarily
associated with prior flow-through amounts and the equity component of allowance
for funds used during  construction,  net of  temporary  differences  related to
unamortized  investment tax credits and excess  deferred  income taxes that have
resulted  from  historical  reductions  in tax  rates  (see Note 1.  Summary  of
Significant Accounting Policies).

                                       62
<PAGE>

      The tax effects of significant temporary differences representing deferred
tax  liabilities  and assets as of December 31, 1998 and 1997 are as follows (in
thousands):

            1998                                NCE         PSCo          SPS
                                                ---         ----          ---
Deferred income tax liabilities:
  Accelerated depreciation and
    amortization ...................       $  762,538    $ 471,776    $ 280,949
  Plant basis differences (prior
    flow-through) ..................          150,210       98,208       52,383
  Allowance for equity funds used
    during construction ............           74,903       45,137       29,664
  Pensions..........................           29,915       35,053       (6,648)
  Other.............................          114,456       64,045       36,169
                                             --------      -------     --------
   Total............................        1,132,022      714,219      392,517
Deferred income tax assets:
  Investment tax credits............           61,912       58,315        2,925
  Contributions in aid of construction         87,685       84,720        2,172
  Other.............................           33,147       24,461       12,878
                                             --------      -------     --------
   Total............................          182,744      167,496       17,975
                                             --------      -------     --------
Net deferred income tax liability...         $949,278     $546,723     $374,542
                                             ========     ========     ========

            1997                                NCE          PSCo        SPS
                                                ---          ----        ---
Deferred income tax liabilities:
  Accelerated depreciation and
    amortization ..................        $  724,879     $432,453     $278,566
  Plant basis differences (prior
    flow-through) .................           173,523      118,332       54,384
  Allowance for equity funds used
    during construction ...........            77,925       46,715       31,103
  Pensions..........................           31,832       33,105       (1,693)
  Other.............................          116,912       75,143       39,424
                                             --------      -------     --------
   Total............................         1,125,071     705,748      401,784
Deferred income tax assets:
  Investment tax credits............           65,111       61,333        3,065
  Contributions in aid of construction         72,424       69,560        2,172
  Other.............................           37,804       20,737       13,360
                                             --------      -------     --------
   Total............................          175,339      151,630       18,597
                                             --------      -------     --------
Net deferred income tax liability...         $949,732     $554,118     $383,187
                                             ========     ========     ========

      As of  December  31,  1998,  the  consolidated  group  does  not  have any
cumulative  Federal  or state  tax  credits  which  have not  been  realized.  A
valuation  allowance  has not been  recorded  as the  Company  expects  that all
deferred  income  tax assets  will be  realized  in the  future.  The  Company's
management  intends to  reinvest  indefinitely,  its  earnings  from the foreign
operations of Yorkshire  Power.  According,  deferred income taxes have not been
provided on any cumulative amount of unremitted earnings.

Note 14.  Business Segment Information (NCE, PSCo and SPS)

NCE:
      NCE has three  reportable  segments:  electric  utility,  gas  utility and
international. The electric utility segment consists primarily of the activities
of the three  regulated  operating  companies that provide  wholesale and retail
electric service in the states of Colorado,  Texas, New Mexico,  Wyoming, Kansas
and Oklahoma.  The gas utility segment  consists  primarily of the activities of
three regulated operating companies providing retail gas service in the state of
Colorado and Wyoming.  The international  segment consists of equity investments
in foreign  operations held by NCI since 1997.  Revenues from operating segments
below the quantitative thresholds are included in the all other category.  Those
primarily  segments include a company  involved in  non-regulated  power and gas
marketing activities throughout the United States; a company that invests in and
develops  cogeneration and energy related projects; a company that is engaged in
engineering, design construction management and other miscellaneous services and
a  company  engaged  in  energy   consulting,   energy  efficiency   management,
conservation programs and mass market services.

      The accounting policies of the segments are the same as those described in
Note 1. Summary of Significant Accounting Policies. NCE evaluates performance by
each legal entity based on profit or loss  generated from the product or service
provided. NCE segment information is as follows (in thousands):


                                       63
<PAGE>


                      Electric     Gas                      All
1998                  Utility    Utility   International   Other        Total 
----                  -------    -------   -------------   -----        ----- 
Revenues:
 External customers. $2,626,644  $653,438    $      -    $330,823    $3,610,905
 Intersegment.......        316     5,281           -      75,209        80,806
Electric margin.....  1,339,201         -           -       1,087     1,340,288
Gas margin..........          -   265,971           -      12,722       278,693
Equity in earnings of
  nonconsolidated 
  subsidiaries .....          -         -      38,127      (2,026)       36,101
Interest charges and
 preferred dividend
 requirements           153,462    28,589         745      15,530       198,326
Income taxes........    164,189    14,273     (15,817)    (12,075)      150,570
Depreciation &
 amortization ......    216,288    43,889         121       8,445       268,743
Segment profit (loss)   278,726    29,859      51,978       9,396       369,959
Segment assets......  4,777,189   973,263     333,069     482,560     6,566,081
Construction 
 expenditures ......    412,005    99,038           -      97,929       608,972

                      Electric     Gas                      All
1997                  Utility    Utility   International   Other        Total 
----                  -------    -------   -------------   -----        ----- 
Revenues:
 External customers. $2,450,498  $640,248    $      -    $251,779    $3,342,525
 Intersegment.......        293     3,825           -      25,819        29,937
Electric margin.....  1,269,080         -           -         987     1,270,067
Gas margin..........          -   268,423           -       4,882       273,305
Equity in earnings of
  nonconsolidated
  subsidiaries .....          -         -      35,499      (1,333)       34,166
Interest charges and
 preferred dividend
 requirements ......    151,718    27,376         186      14,168       193,448
Income taxes........    146,621    18,555      (1,186)    (26,875)      137,115
Depreciation & 
 amortization ......    193,877    39,833          89       9,279       243,078
Segment profit (loss)   215,712    27,034      35,946       1,746       280,438
Segment assets......  4,770,091 1,060,633     290,845      90,401     6,211,970
Construction
 expenditures ......    365,219   105,894           -       4,384       475,497

                      Electric     Gas                      All
1996                  Utility    Utility   International   Other        Total 
----                  -------    -------   -------------   -----        ----- 
Revenues:
 External customers. $2,408,733  $571,329    $      -    $116,972    $3,097,034
 Intersegment.......        733         -           -       7,008         7,741
Electric margin.....  1,270,520         -           -         157     1,270,677
Gas margin..........          -   239,521           -       7,813       247,334
Equity in earnings of
  nonconsolidated
  subsidiaries .....          -         -           -         389           389
Interest charges and
 preferred dividend
 requirements ......    141,380    23,665           -      14,759       179,804
Income taxes........    163,657    12,913           -     (22,917)      153,653
Depreciation &
 amortization ......    182,667    34,166           -       8,032       224,865
Segment profit (loss)   239,442    17,356           -      13,862       270,660
Segment assets......  4,529,294   933,666           -     135,362     5,598,322
Construction 
 expenditures ......    357,201    96,842           -         925       454,968

Reconciliations:                            1998        1997        1996  
                                            ----        ----        ----
Revenues
     Total revenues for reportable
      segments ....................     $3,280,398  $3,090,746  $2,980,062
     Intersegment revenue..........         80,806      29,937       7,741
     Other revenues................        330,507     251,779     116,972
     Elimination of intersegment
      revenues ....................        (80,806)    (29,937)     (7,741)
                                          --------     -------    --------
        Total consolidated revenues     $3,610,905  $3,342,525  $3,097,034
                                        ==========  ==========  ==========

                                       64
<PAGE>


                                            1998        1997        1996  
                                          --------    --------    --------
Profit or Loss
     Total profit for reportable 
       segments ...................       $360,563    $278,692   $ 256,798
     Other profit (loss)...........          9,396       1,743      13,862
     Other unallocated amounts.....        (28,002)    (18,954)      3,643
     Elimination of intercompany profit          -           6      (1,962)
                                             -----       -----   ---------
        Income before extraordinary item  $341,957    $261,487   $ 272,341
                                          ========    ========   =========

Assets
     Total assets for reportable
       segments ...................     $6,083,521  $6,121,049  $5,462,960
     Other assets..................        482,559      90,401     135,362
     Unallocated assets............      1,105,884   1,109,696   1,019,120
                                         ---------   ---------   ---------
        Total consolidated assets..     $7,671,964  $7,321,146  $6,617,442
                                        ==========  ==========  ==========

                                           Segment  Consolidated
1998                                       Totals     Adjustments   Totals 
----                                      --------    ----------- ---------
Other Significant Items
     Interest charges & preferred
      dividends ...................       $198,326    $  6,473    $204,799
     Income taxes..................        150,570     (14,974)    135,596
     Depreciation and amortization.        268,743           -     268,743
     Equity in earnings of
       unconsolidated subsidiaries.         36,101           -      36,101
     Construction expenditures.....        608,972           -     608,972

1997
Other Significant Items
     Interest charges & preferred 
       dividends ..................       $193,448    $ 13,182    $206,630
     Income taxes..................        137,115      (3,196)    133,919
     Depreciation and amortization.        243,078           -     243,078
     Equity in earnings of
       unconsolidated subsidiaries.         34,166           -      34,166
     Construction expenditures.....        475,497           -     475,497

1996
Other Significant Items
     Interest charges & preferred
       dividends ..................       $179,804    $ (4,708)   $175,096
     Income taxes..................        153,653           -     153,653
     Depreciation and amortization.        224,865           -     224,865
     Equity in earnings of
       unconsolidated subsidiaries.            389           -         389
     Construction expenditures.....        454,968           -     454,968

PSCo:
      PSCo has three reportable  segments:  electric utility,  gas utility,  and
international.  During 1998, the electric utility segment consists  primarily of
the activities of PSCo's regulated  operations that provide wholesale and retail
electric service in the state of Colorado. For the years ended December 31, 1997
and 1996,  this segment also  included  Cheyenne's  regulated  operations in the
state of Wyoming. During 1998, the gas utility segment consists primarily of the
activities of PSCo's  regulated gas operations in Colorado.  For the years ended
December  31, 1997 and 1996,  this segment also  included  Cheyenne's  regulated
operations in the state of Wyoming and WGI's regulated  operations in the states
of Colorado and Wyoming. Revenues from operating segments below the quantitative
thresholds  are included in the all other  category.  Those  segments  primarily
include a real estate company which owns certain real estate  interests of PSCo,
a company which owns and manages  permanent life  insurance  policies on certain
past and present employees and a finance company that finances certain of PSCo's
current assets.

      The accounting policies of the segments are the same as those described in
Note 1. Summary of Significant  Accounting Policies.  PSCo evaluates performance
by each  legal  entity  based on profit or loss  generated  from the  product or
service provided. PSCo segment information is as follows (in thousands):

                                       65
<PAGE>


                      Electric     Gas                      All
1998                  Utility    Utility   International   Other        Total 
----                  -------    -------   -------------   -----        ----- 
Revenues from
 external customers. $1,635,573  $640,064    $      -    $  8,449    $2,284,086
Electric margin.....    833,752         -           -           -       833,752
Gas margin..........          -   259,509           -           -       259,509
Equity in earnings of
  Yorkshire Power...          -         -       3,446           -         3,446
Interest charges and
 preferred dividend
 requirements ......     93,579    27,745         192      14,291       135,807
Income taxes........     97,924    13,997         427     (10,854)      101,494
Depreciation &
 amortization ......    135,876    43,036          40       1,961       180,913
Segment profit......    166,066    29,207       2,799      15,015       213,087
Segment assets......  2,981,154   944,456           -     433,417     4,359,027
Construction 
 expenditures ......    313,825    95,692           -      95,211       504,728

                      Electric     Gas                      All
1997                  Utility    Utility   International   Other        Total 
----                  -------    -------   -------------   -----        ----- 
Revenues from
 external customers. $1,485,196  $733,091    $      -    $ 11,356    $2,229,643
Electric margin.....    792,588         -           -           -       792,588
Gas margin..........          -   265,346           -           -       265,346
Equity in earnings of
  Yorkshire Power...          -         -      34,926           -        34,926
Interest charges and
 preferred dividend
 requirements ......     92,684    26,980         186      13,885       133,735
Income taxes........     92,930    18,496      (1,186)    (19,427)       90,813
Depreciation &
 amortization ......    125,418    38,983          89       3,961       168,451
Segment profit......    137,899    25,813      35,946      14,091       213,749
Segment assets......  2,955,537 1,027,060     290,845      55,212     4,328,654
Construction 
 expenditures ......    246,015   103,957           -       2,301       352,273

                      Electric     Gas                      All
1996                  Utility    Utility   International   Other        Total 
----                  -------    -------   -------------   -----        ----- 
Revenues from
 external customers. $1,488,990  $640,497    $      -    $  7,951    $2,137,438
Electric margin.....    803,120         -           -           -       803,120
Gas margin..........          -   239,521           -       7,813       247,334
Interest charges and
 preferred dividend
 requirements ......     87,001    23,665           -      14,115       124,781
Income taxes........    106,615    12,913           -     (23,197)       96,331
Depreciation &
 amortization ......    116,802    34,166           -       3,663       154,631
Segment profit......    151,139    17,356           -      11,900       180,395
Segment assets......  2,840,481   930,474           -      71,109     3,842,064
Construction
 expenditures ......    223,395    96,842           -         925       321,162

Reconciliations:                            1998        1997        1996  
                                          --------    --------    --------
Revenues
     Total revenues for reportable
      segments ...................        $2,275,637  $2,218,287  $2,129,487
     Other revenues................            8,449      11,356       7,951
                                            --------    --------    --------
        Total consolidated revenues       $2,284,086  $2,229,643  $2,137,438
                                          ==========  ==========  ==========

Profit or Loss
     Total profit or loss for reportable
      segments ....................         $198,072    $199,658    $179,679
     Other profit or loss..........           15,015      14,091      11,926
     Other unallocated amounts.....          (18,316)    (21,458)    (13,107)
     Elimination of intersegment profit            -          (1)          -
                                               -----      ------      ------
        Income before extraordinary item    $194,771    $192,290    $178,498
                                            ========    ========    ========

                                       66
<PAGE>


                                            1998        1997        1996  
                                          --------    --------    --------
Assets
     Total assets for reportable
      segments ....................      $3,925,610   $4,273,442  $3,770,955
     Other assets..................         433,417       55,212      71,109
     Other unallocated amounts.....         818,609      666,079     730,584
                                           --------     --------    --------
        Consolidated total.........      $5,177,636   $4,994,733  $4,572,648
                                         ==========   ==========  ==========

                                          Segment   Consolidated
1998                                       Totals     Adjustments   Totals 
----                                      --------    ----------- ---------
Other Significant Items
     Interest charges & preferred
      dividends ...................       $135,807    $  7,839    $143,646
     Income taxes..................        101,494           -     101,494
     Depreciation and amortization.        180,913           -     180,913
     Equity in earnings of Yorkshire
      Power .......................          3,446           -       3,446
     Construction expenditures.....        504,727           -     504,727

1997
Other Significant Items
     Interest charges & preferred
      dividends ...................       $133,735    $ 14,219    $147,954
     Income taxes..................         90,813           -      90,813
     Depreciation and amortization.        168,451           -     168,451
     Equity in earnings of Yorkshire
      Power .......................         34,926           -      34,926
     Construction expenditures.....        352,273           -     352,273

1996
Other Significant Items
     Interest charges & preferred
      dividends ...................       $124,781    $ (3,213)   $121,568
     Income taxes..................         96,331           -      96,331
     Depreciation and amortization.        154,631           -     154,631
     Construction expenditures.....        321,162           -     321,162

SPS:
     SPS operates in the regulated electric utility industry providing wholesale
and  retail  electric  service in the states of Texas,  New  Mexico,  Kansas and
Oklahoma.  Revenues from external  customers  for this  reportable  segment were
$951.2 million,  $979.3  million,  $931.8  million,  $306.3 million,  and $278.5
million for the fiscal years ended  December 31, 1998,  1997 and August 31, 1996
and for the four months ended December 1996 and 1995,  respectively.  During the
fiscal  years ended  December 31, 1997 and August 31,  1996,  operating  results
included the  activities of Quixx and UE,  subsidiaries  that were  subsequently
transferred to NC Enterprises  in connection  with the Merger.  Neither of these
two segments has ever met any of the  quantitative  thresholds  for  determining
reportable segments.

15.  Transactions with Affiliates (PSCo and SPS)

      PSCo and SPS receive various administrative, management, environmental and
other  support  services  from NCS,  which began  operations  on May 1, 1997 and
construction services from UE. In addition, PSCo and SPS pay interest expense on
any short-term  borrowings from NCE.  Dividends on common stock declared by PSCo
and SPS are paid to NCE.

      PSCo sells firm and interruptible  transportation  services to e prime for
gas delivered into the Denver/Pueblo operating area. PSCo also receives interest
income from NC  Enterprises  on the note  receivable  related to the sale of NCI
effective  March 31, 1998 (see Note 2.  "Investment in Yorkshire  Power and U.K.
Windfall  Tax").  SPS receives  interest  income from NC Enterprises on the note
receivable  related to the sale of Quixx and UE as part of the Merger. The table
below  contains  the  various  significant  affiliate   transactions  among  the
companies and related parties for the years ended December 31, 1998 and 1997 (in
thousands).


                                       67
<PAGE>


                                        PSCo                      SPS        
                                 -------------------     --------------------
                                  1998        1997        1998        1997   
                                 -------     -------     -------     --------

Gas revenues.................    $ 5,281    $  3,825    $     -      $      -
Operating expenses...........    197,862     108,096     63,108        36,317
Interest income..............     14,188           -      8,630         3,618
Interest expenses............      1,714         156      1,390           747
Dividends paid to NCE........    188,845      76,093     75,157        45,092
Construction services........     68,744      16,934      6,465         3,832

There were no significant related party transactions for the year ended December
31, 1996.

16. Quarterly Financial Data (Unaudited) (NCE, PSCo and SPS)

      The  following  summarized  quarterly  information  for  1998  and 1997 is
unaudited,  but includes all adjustments  (consisting  only of normal  recurring
accruals) which the Company  considers  necessary for a fair presentation of the
results  for  the  periods.  Information  for any one  quarterly  period  is not
necessarily  indicative of the results which may be expected for a  twelve-month
period due to seasonal and other factors (in thousands, except per share data).

NCE                                        Three Months ended        
                                      --------------------------------
                1998               March 31   June 30  September 30  December 31
              -------              --------   -------  ------------  -----------


Operating revenues.............    $939,504   $859,621    $915,898    $895,882
Operating income ..............     181,837    146,666     164,173     157,825
Net income ....................      86,149     56,593      90,772     108,443
Earnings per share of common 
 stock outstanding:
  Basic........................       $0.78      $0.50       $0.82       $0.96
  Diluted......................       $0.78      $0.50       $0.82       $0.95

                1997 
Operating revenues.............     $890,011  $776,742    $793,472    $882,300
Operating income ..............      176,000   130,336     153,168     169,721
Net income (loss)..............       78,156    34,045     (47,225)     85,946
Basic and diluted earnings per
 share of common stock
 outstanding:
  Income before extraordinary
   item.... ...................        $0.75    $0.33       $ 0.61      $0.81
  Extraordinary item  (1) .....            -        -        (1.06)         -
  Net income (loss)............        $0.75    $0.33       $(0.45)     $0.81

PSCo                                                 Three Months ended        
                                             ----------------------------------
                1998               March 31   June 30  September 30  December 31
              -------              --------   -------  ------------  -----------

Operating revenues..............    $644,642  $504,598    $541,601    $593,245
Operating income ...............      99,846    63,266      76,834      92,072
Net income......................      68,897    30,908      44,015      56,283

                1997 
Operating revenues..............    $668,717  $533,520    $466,582    $560,824
Operating income ...............      95,981    73,271      70,372      97,729
Net income......................      62,881    30,607     (73,085)(1)  73,074

SPS                                           Three Months ended        
                                             ----------------------------------
                1998               March 31   June 30  September 30  December 31
              -------              --------   -------  ------------  -----------

Operating revenues..............   $199,732  $264,006     $284,648     $202,801
Operating income ...............     31,339    49,319       49,458       35,563
Net income......................     18,139    36,917       36,929       23,002
                1997 

Operating revenues..............   $221,295  $243,221     $284,156     $230,611
Operating income ...............     34,457    41,744       50,976       32,104
Net income......................     18,218     6,380(2)    31,111       19,866

(1) Includes the extraordinary U.K. windfall tax recognized in the third quarter
     1997.
(2) Includes the write-off of Quixx's & UE's investment in the Carolina Energy
     Project.

                                       68
<PAGE>


                                   DEFINITIONS

The  abbreviations  or acronyms  used in the  financial  statements  are defined
below:

Abbreviation or Acronym                                              Term
-----------------------                                              ----
AEP............................................American Electric Power Company
AFDC..............................Allowance for Funds Used During Construction
Arapahoe............................Arapahoe Steam Electric Generating Station
CERCLA ...Comprehensive Environmental Response, Compensation and Liability Act
Cherokee........................... Cherokee Steam Electric Generating Station
Cheyenne ...............................Cheyenne Light, Fuel and Power Company
Company or NCE........................New Century Energies, Inc., a registrant
CPUC .....................Public Utilities Commission of the State of Colorado
Craig..................................Craig Steam Electric Generating Station
Denver District Court..District Court in and for the City and County of Denver
DOE..................................................U.S. Department of Energy
DSM.....................................................Demand Side Management
DSMCA...................................Demand Side Management Cost Adjustment
Dth..................................................................Dekatherm
e prime.........................................e prime, inc. and subsidiaries
ECA.....................................................Energy Cost Adjustment
EPA.......................................U.S. Environmental Protection Agency
FASB......................................Financial Accounting Standards Board
FERC......................................Federal Energy Regulatory Commission
Fort St. Vrain..................... Fort St. Vrain Electric Generating Station,
                                         formerly a nuclear generating station
Fuelco .......Fuel Resources Development Co., a dissolved Colorado corporation
GCA .......................................................Gas Cost Adjustment
Hayden ...............................Hayden Steam Electric Generating Station
ICA..................................................Incentive Cost Adjustment
IRS...................................................Internal Revenue Service
Kwh..............................................................kilowatt-hour
Merger...................... the business combination between the PSCo and SPS
Mw....................................................................Megawatt
NMPRC........................New Mexico Public Regulation Commission formerly,
                                      the New Mexico Public Utility Commission
Natural Fuels .......................................Natural Fuels Corporation
NC Enterprises............................................NC Enterprises, Inc.
NCI............................................New Century International, Inc.
NCS.................................................New Century Services, Inc.
New Century Cadence..................................New Century Cadence, Inc.
NOx.............................................................Nitrogen Oxide
OCC .......................................Colorado Office of Consumer Counsel
OPEB ...................................Other Postretirement Employee Benefits
PCB...................................................Polychlorinated biphenyl
Pawnee ...............................Pawnee Steam Electric Generating Station
Pawnee 2...........Pawnee Steam Electric Generating Station, Unit 2 (proposed)
Planergy..............................................The Planergy Group, Inc.
PRPs ..........................................Potentially Responsible Parties
PSCCC...........................................PS Colorado Credit Corporation
PSCo..........................Public Service Company of Colorado, a registrant
PSRI ....................................................PSR Investments, Inc.
PUHCA ..............................Public Utility Holding Company Act of 1935
PUCT........................................Public Utility Commission of Texas
QF.........................................................Qualifying Facility

                                       69
<PAGE>

Abbreviation or Acronym                                              Term
-----------------------                                              ----
QSP....................................................Quality of Service Plan
Quixx.......................................Quixx Corporation and subsidiaries
SFAS...............................Statement of Financial Accounting Standards
SFAS 106................Statement of Financial Accounting Standards No. 106 -
       "Employers' Accounting for Postretirement Benefits Other Than Pensions"
SFAS 112................Statement of Financial Accounting Standards No. 112 -
                           "Employers' Accounting for Postemployment Benefits"
SFAS 123................Statement of Financial Accounting Standards No. 123 -
                                     "Accounting for Stock-Based Compensation"
SO2.............................................................Sulfur Dioxide
SPS..........................Southwestern Public Service Company, a registrant
TNP.............................................Texas-New Mexico Power Company
TOG.......................................................Texas-Ohio Gas, Inc.
TOP..................................................Texas-Ohio Pipeline, Inc.
Transition Period..........................Four month period September 1, 1996
                                                     through December 31, 1996
UE............................Utility Engineering Corporation and subsidiaries
U.K. ...........................................................United Kingdom
WGI ..................................................WestGas InterState, Inc.
WPSC......................................Public Service Commission of Wyoming
Young Storage..................................Young Gas Storage Company, Ltd.
YGSC.................................................Young Gas Storage Company
Yorkshire Electricity..........................Yorkshire Electricity Group plc
Yorkshire Power.....................................Yorkshire Power Group Ltd.


                                       70
<PAGE>




                                                                       EXHIBIT B

                         CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

      As independent public accountants,  we hereby consent to the incorporation
by reference of our report included in this Current Report on Form 8-K, into New
Century Energies, Inc.'s previously filed Registration Statement (Form S-8, File
No.  333-28639)  pertaining to the Omnibus Incentive Plan; New Century Energies,
Inc.'s Registration  Statement (Form S-3, File No. 333-28637)  pertaining to the
Dividend  Reinvestment  and Cash  Payment  Plan;  New Century  Energies,  Inc.'s
Registration  Statement (Form S-3, File Nos. 333-40361 and 333-6407)  pertaining
to the  registration  of NCE  Common  Stock  and New  Century  Energies,  Inc.'s
Registration  Statement  (Form S-8,  File No.  333-58117)  pertaining to the NCE
Employee Investment Plan and NCE Employees' Savings and Stock Ownership Plan and
to all references to our firm included in this Current Report on Form 8-K.

      As independent public accountants,  we hereby consent to the incorporation
by reference of our report  included in this  Current  Report on Form 8-K,  into
Public Service Company of Colorado's  previously  filed  Registration  Statement
(Form S-3, File No. 33-62233) pertaining to the Automatic Dividend  Reinvestment
and  Common  Stock   Purchase  Plan;   Public  Service   Company  of  Colorado's
Registration  Statement (Form S-3, File No.  33-37431) as amended on December 4,
1990,  pertaining  to the  shelf  registration  of  Public  Service  Company  of
Colorado's   First  Mortgage   Bonds;   Public  Service  Company  of  Colorado's
Registration  Statement (Form S-8, File No. 33-55432)  pertaining to the Omnibus
Incentive  Plan;  Public Service  Company of Colorado's  Registration  Statement
(Form S-3, File No.  33-51167)  pertaining to the shelf  registration  of Public
Service Company of Colorado's  First  Collateral  Trust Bonds and Public Service
Company of  Colorado's  Registration  Statement  (Form S-3,  File No.  33-54877)
pertaining to the shelf  registration  of Public  Service  Company of Colorado's
First  Collateral  Trust  Bonds  and  Cumulative  Preferred  Stock  and  to  all
references to our firm included in this Current Report on Form 8-K.

      As independent public accountants,  we hereby consent to the incorporation
by reference of our report  included in this  Current  Report on Form 8-K,  into
Southwestern  Public Service Company's  previously filed Registration  Statement
(Form  S-3,  File No.  333-05199)  pertaining  to  Southwestern  Public  Service
Company's  Preferred  Stock and Debt  Securities;  Southwestern  Public  Service
Company's  Registration  Statement (Form S-8, File No.  33-27452)  pertaining to
Southwestern Public Service Company's 1989 Stock Incentive Plan and Southwestern
Public Service  Company's  Registration  Statement (Form S-8, File No. 33-57869)
pertaining to Southwestern Public Service Company's Employee Investment Plan and
Non-Qualified Salary Deferral Plan and to all references to our firm included in
this Current Report on Form 8-K.


                                                         ARTHUR ANDERSEN LLP

Denver, Colorado
February 23, 1999




<PAGE>


                                                                       EXHIBIT C
                         CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

We consent to the  incorporation  by reference  in  Registration  Statement  No.
333-05199 on Form S-3 and  Registration  Statements No. 33-27452 and 33-57869 on
Form S-8 of Southwestern Public Service Company and Registration  Statements No.
333-28637 and 333-40361 on Form S-3 and Registration  Statement No. 333-28639 on
Form S-8 of New Century  Energies,  Inc. of our report  dated  February 28, 1997
(June 19, 1997,  as to the Carolina  Energy  Limited  Partnership  in Note 3) on
Southwestern  Public Service  Company,  appearing in this Current Report on Form
8-K of New Century Energies,  Inc. and Southwestern Public Service Company dated
February 23, 1999.


                                                DELOITTE & TOUCHE  LLP
Dallas, Texas
February 23, 1999

<PAGE>

                                                                       EXHIBIT D

       -------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                            -------------------------

                                    FORM T-1

                            STATEMENT OF ELIGIBILITY
                    UNDER THE TRUST INDENTURE ACT OF 1939 OF
                   A CORPORATION DESIGNATED TO ACT AS TRUSTEE
                   -------------------------------------------
               CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
                A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________
                    ----------------------------------------

                            THE CHASE MANHATTAN BANK
               (Exact name of trustee as specified in its charter)


New York                                                     13-4994650
(State of incorporation                                (I.R.S. employer
if not a national bank)                             identification No.)

270 Park Avenue
New York, New York                                                10017
(Address of principal executive offices)                     (Zip Code)

                               William H. McDavid
                                 General Counsel
                                 270 Park Avenue
                            New York, New York 10017
                               Tel: (212) 270-2611
            (Name, address and telephone number of agent for service)
                  --------------------------------------------
                       Southwestern Public Service Company
               (Exact name of obligor as specified in its charter)


New Mexico                                                    75-057540
(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)

                            Unsecured Debt Securities
                       (Title of the indenture securities)


<PAGE>




                                     GENERAL

Item 1. General Information.

       Furnish the following information as to the trustee:

       (a)Name and address of each  examining  or  supervising  authority  to
          which it is subject.

          New York State Banking Department, State House, Albany,New York 12110.

          Board of Governors of the Federal Reserve System, Washington, 
           D.C., 20551

          Federal Reserve Bank of New York, District No. 2, 33 Liberty Street,
           New York, N.Y.

          Federal Deposit Insurance Corporation, Washington, D.C., 20429.


      (b) Whether it is authorized to exercise corporate trust powers.

         Yes.


Item 2.  Affiliations with the Obligor.

      If  the  obligor  is an  affiliate  of the  trustee,  describe  each  such
affiliation.

      None.















                                      - 2 -

<PAGE>

Item 16.    List of Exhibits

        List  below  all  exhibits   filed  as  a  part  of  this  Statement  of
Eligibility.

        1. A copy  of the  Articles  of  Association  of the  Trustee  as now in
effect, including the Organization Certificate and the Certificates of Amendment
dated February 17, 1969, August 31, 1977, December 31, 1980,  September 9, 1982,
February 28, 1985, December 2, 1991 and July 10, 1996 (see Exhibit 1 to Form T-1
filed  in  connection  with  Registration  Statement  No.  333-06249,  which  is
incorporated by reference).

        2. A copy of the  Certificate  of  Authority  of the Trustee to Commence
Business  (see  Exhibit  2 to Form T-1  filed in  connection  with  Registration
Statement No. 33-50010, which is incorporated by reference. On July 14, 1996, in
connection  with the  merger  of  Chemical  Bank and The  Chase  Manhattan  Bank
(National  Association),  Chemical Bank, the surviving corporation,  was renamed
The Chase Manhattan Bank).

        3.  None,   authorization  to  exercise  corporate  trust  powers  being
contained in the documents identified above as Exhibits 1 and 2.

        4. A copy of the existing  By-Laws of the Trustee (see Exhibit 4 to Form
T-1 filed in connection  with  Registration  Statement No.  333-06249,  which is
incorporated by reference).

        5. Not applicable.

        6. The consent of the Trustee required by Section 321(b) of the Act (see
Exhibit  6 to Form T-1  filed in  connection  with  Registration  Statement  No.
33-50010,  which is incorporated  by reference.  On July 14, 1996, in connection
with  the  merger  of  Chemical  Bank and The  Chase  Manhattan  Bank  (National
Association),  Chemical Bank, the surviving  corporation,  was renamed The Chase
Manhattan Bank).

        7. A copy of the latest  report of condition  of the Trustee,  published
pursuant to law or the requirements of its supervising or examining authority.

        8. Not applicable.

        9. Not applicable.

                                    SIGNATURE

      Pursuant  to the  requirements  of the  Trust  Indenture  Act of 1939  the
Trustee,  The Chase Manhattan  Bank, a corporation  organized and existing under
the laws of the State of New York, has duly caused this statement of eligibility
to be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of New York and State of New York, on the 22nd day of February, 1999.

                            THE CHASE MANHATTAN BANK

                                      By _/s/_W.B. Dodge_______________
                                         /s/   W.B. Dodge
                                               Vice President

                                      - 3 -

<PAGE>



                              Exhibit 7 to Form T-1


                                Bank Call Notice

                             RESERVE DISTRICT NO. 2
                       CONSOLIDATED REPORT OF CONDITION OF

                            The Chase Manhattan Bank
                  of 270 Park Avenue, New York, New York 10017
                     and Foreign and Domestic Subsidiaries,
                     a member of the Federal Reserve System,

                 at the close of business September 30, 1998, in
         accordance with a call made by the Federal Reserve Bank of this
         District pursuant to the provisions of the Federal Reserve Act.


                                                                 Dollar Amounts
               ASSETS                                             in  Millions


Cash and balances due from depository institutions:
   Noninterest-bearing balances and
   currency and coin.....................................          $  11,951
   Interest-bearing balances.............................              4,551
Securities:..............................................
Held to maturity securities..............................              1,740
Available for sale
 securities..............................................             48,537
Federal funds sold and securities purchased under
   agreements to resell..................................             29,730
Loans and lease financing receivables:
   Loans and leases, net of unearned income    $127,379
   Less: Allowance for loan and lease losses      2,719
   Less: Allocated transfer risk reserve .....        0
                                               --------
   Loans and leases, net of unearned income,
   allowance, and reserve................................           124,660
Trading Assets
 .........................................................            51,549
Premises and fixed assets (including capitalized
 leases).................................................             3,009
Other real estate owned..................................               272
Investments in unconsolidated subsidiaries and
   associated companies..................................               300
Customers' liability to this bank on acceptances
   outstanding...........................................             1,329
Intangible assets........................................             1,429
Other assets.............................................            13,563
                                                                     ------ 
TOTAL ASSETS.............................................          $292,620
                                                                   ========


                                      - 4 -



<PAGE>


                                   LIABILITIES

Deposits
   In domestic offices....................................         $ 98,760
   Noninterest-bearing...................... $39,071
   Interest-bearing.........................  59,689
                                              ------
   In foreign offices, Edge and Agreement,
    subsidiaries and IBF's.................................           75,403
   Noninterest-bearing ....................................        $   3,877
   Interest-bearing........................................           71,526

Federal funds purchased and securities sold under agree-
 ments to repurchase.......................................           34,471
Demand notes issued to the U.S. Treasury...................            1,000
Trading liabilities........................................           41,589

Other borrowed money (includes mortgage indebtedness
   and obligations under capitalized leases):
   With a remaining maturity of one year or less ..........            3,781
   With a remaining maturity of more than one year.
        through three years................................              213
       With a remaining maturity of more than three years..              104
Bank's liability on acceptances executed and outstanding               1,329
Subordinated notes and debentures..........................            5,408
Other liabilities..........................................           12,041

TOTAL LIABILITIES..........................................          274,099
                                                                     -------
                                 EQUITY CAPITAL

Perpetual preferred stock and related surplus                              0
Common stock...............................................            1,211
Surplus  (exclude all surplus related to preferred stock)..           10,441
Undivided profits and capital reserves.....................            6,287
Net unrealized holding gains (losses)
 on available-for-sale securities..........................              566
Cumulative foreign currency translation adjustments........               16

TOTAL EQUITY CAPITAL.......................................           18,521
                                                                      ------
TOTAL LIABILITIES AND EQUITY CAPITAL.......................         $292,620
                                                                    ========

I, Joseph L. Sclafani,  E.V.P. & Controller of the  above-named  bank, do hereby
declare that this Report of Condition has been prepared in conformance  with the
instructions issued by the appropriate Federal regulatory  authority and is true
to the best of my knowledge and belief.

                               JOSEPH L. SCLAFANI

We, the  undersigned  directors,  attest to the  correctness  of this  Report of
Condition  and declare  that it has been  examined by us, and to the best of our
knowledge  and belief has been  prepared in  conformance  with the  instructions
issued by the appropriate Federal regulatory authority and is true and correct.

                        WALTER V. SHIPLEY       )
                        THOMAS G. LABRECQUE     )DIRECTORS
                        WILLIAM B. HARRISON, JR.)
                                       -5-
<PAGE>

                                                                       EXHIBIT E




                     LeBoeuf, Lamb, Greene & MacRae, L.L.P.
                              125 West 55th Street
                            New York, N.Y. 10019-5389



                                                             February 23, 1999


Southwestern Public Service Company
P.O. Box 1261
Amarillo, TX 79170


Dear Sirs:

      In connection  with the  Registration  Statement  No.333-05199 on Form S-3
relating  to  the  registration  of  Debt  Securities  and  Preferred  Stock  of
Southwestern  Public Service Company,  we hereby consent to any reference to our
firm in such Registration Statement and any amendments or prospectus supplements
thereto under the caption "Legal Opinions".



                                Very truly yours,



         LEBOEUF, LAMB, GREENE & MACRAE, L.L.P.
[{"type": "8-K", "sequence": "1", "description": "2/23/99 8-K FOR NCE,PSCO&SPS FIN. STMTS & EXHIBITS", "secsgml_size_bytes": 311699}]
{"company-data": {"conformed-name": "NEW CENTURY ENERGIES INC", "cik": "0001004858", "assigned-sic": "4931", "irs-number": "841334327", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "8-K", "act": "34", "file-number": "001-12927", "film-number": "99547855"}, "business-address": {"street1": "1225 17TH ST", "city": "DENVER", "state": "CO", "zip": "80202", "phone": "3035717511"}, "mail-address": {"street1": "1225 17TH ST", "city": "DENVER", "state": "CO", "zip": "80202"}}
SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 8-K

                                 CURRENT REPORT
                     PURSUANT TO SECTION 13 or 15(d) of the
                         SECURITIES EXCHANGE ACT OF 1934

             Date of report (Date of earliest event reported) February 23, 1999

             Exact name of registrant as specified in its charter,
             State or other jurisdiction of incorporation or 
             organization, Address of principal executive offices and 
Commission   Registrant's Telephone Number,                         IRS Employer
File Number  including area code                              Identification No.
-----------  -------------------                              ------------------

1-12927      NEW CENTURY ENERGIES, INC.                            84-1334327
             (a Delaware Corporation)
             1225 17th Street
             Denver, Colorado  80202
             Telephone (303) 571-7511

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

1-3789       SOUTHWESTERN PUBLIC SERVICE COMPANY                   75-0575400
             (a New Mexico Corporation)
             Tyler at Sixth
             Amarillo, Texas  79101
             Telephone (303) 571-7511
This combined Form 8-K is separately filed by New Century Energies Inc.,  Public
Service Company of Colorado and Southwestern Public Service Company. Information
contained herein relating to any individual  company is filed by such company on
its own behalf.  Each  registrant  makes  representations  only as to itself and
makes no other  representations  whatsoever  as to  information  relating to the
other registrants.

Item 5.  OTHER EVENTS

Reference  is made to the exhibits  filed in Item 7.  FINANCIAL  STATEMENTS  AND
EXHIBITS.

Item 7.  FINANCIAL STATEMENTS AND EXHIBITS

  (c) Exhibits

     Exhibit A.   Audited financial statements of New Century Energies, Inc. and
                  subsidiaries, Public Service Company of Colorado and
                  subsidiaries and Southwestern Public Service Company for the
                  year ended December 31, 1998.

     Exhibit B.   Consent of Arthur Andersen LLP

     Exhibit C.   Consent of Deloitte & Touche LLP

     Exhibit D.   Securities and Exchange Commission Form T-1 with The Chase
                  Manhattan Bank as trustee for Southwestern Public Service
                  Company

     Exhibit E.   Consent of LeBoeuf, Lamb, Greene and MacRae, LLP 

     Exhibit 27.1 NCE Financial Data Schedule

     Exhibit 27.2 PSCo Financial Data Schedule

     Exhibit 27.3 SPS Financial Data Schedule

                                       1
SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

                                         NEW CENTURY ENERGIES, INC.

                                             /s/Richard C. Kelly
                                          -----------------------------
                                              Richard C. Kelly
                                          Executive Vice President and
                                           Chief Financial Officer

                                         PUBLIC SERVICE COMPANY OF COLORADO

                                             /s/Brian P. Jackson
                                          -----------------------------
                                              Brian P. Jackson
                                     Senior Vice President, Finance and
                                          Administrative Services,
                                          Chief Financial Officer and Treasurer

                                         SOUTHWESTERN PUBLIC SERVICE COMPANY

                                             /s/Brian P. Jackson
                                          -----------------------------
                                              Brian P. Jackson
                                     Senior Vice President, Finance and
                                          Administrative Services,
                                          Chief Financial Officer and Treasurer

Dated:   February 23, 1999

                                       2
Exhibit A

                         Audited Financial Statements of
                  New Century Energies, Inc. and Subsidiaries,
             Public Service Company of Colorado and Subsidiaries and
                       Southwestern Public Service Company

                                Table of Contents

                                                                         Page
                                                                        Number

Report of Independent Public Accountants - New Century Energies, Inc.      1

New Century Energies, Inc and Subsidiaries
   Consolidated Balance Sheets for the years ended 
     December 31, 1998 and 1997, Consolidated Statements of Income,
     Consolidated Statements of Shareholders' Equity and 
     Consolidated Statements of Cash Flows for the years ended 
     December 31, 1998, 1997 and 1996................................      2

Report of Independent Public Accountants - 
     Public Service Company of Colorado .............................      7

Public Service Company of Colorado and Subsidiaries
   Consolidated Balance Sheets and Consolidated Statements of
     Capitalization for the years ended December 31, 1998 and 1997,
     Consolidated Statements of Income, Consolidated Statements of
     Shareholder's Equity and Consolidated Statements of Cash Flows
     for the years ended December 31, 1998, 1997 and 1996 ............     8

Reports of Independent Public Accountants - Southwestern Public
 Service Company .....................................................     15

Southwestern Public Service Company
   Balance Sheets and Statements of Capitalization for the years ended
   December 31, 1998 and 1997, Statements of Income, Statements of
   Shareholder's Equity and Statements of Cash Flows for the years
   ended December 31, 1998 and 1997 and August 31, 1996 and for the
   four months ended December 31, 1996 and 1995.......................     17

Notes to Consolidated Financial Statements of New Century Energies, Inc.,
 and subsidiaries, Public Service Company of Colorado and subsidiaries
 and Southwestern Public Service Company as of December 31, 1998......     25

Definitions...........................................................     69
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO NEW CENTURY ENERGIES, INC.:

We have audited the consolidated balance sheets of New Century Energies, Inc. (a
Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated  statements of income,  shareholders' equity and cash flows
for each of the  three  years in the  period  ended  December  31,  1998.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our  audits.  We  did  not  audit  the  consolidated   financial  statements  of
Southwestern  Public  Service  Company  for the year ended  December  31,  1996,
included in the consolidated financial statements of New Century Energies, Inc.,
which statements reflect total revenues constituting 31% in 1996, of the related
consolidated  totals.  Those  statements  were audited by other  auditors  whose
report  thereon  has been  furnished  to us, and our opinion  expressed  herein,
insofar as it relates to the amounts  included for  Southwestern  Public Service
Company, is based solely upon the report of the other auditors.

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 and the report of other auditors provide a reasonable
basis for our opinion.

In our  opinion,  based upon our audits  and the report of other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material respects, the financial position of New Century Energies,  Inc. and its
subsidiaries  as of  December  31,  1998  and  1997,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.

                                                        ARTHUR ANDERSEN LLP
Denver, Colorado
February 23, 1999

                                       1
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                                CONSOLIDATED BALANCE SHEETS
                                   (Thousands of Dollars)
                                 December 31, 1998 and 1997

                                           ASSETS

                                                             1998       1997 
                                                             ----       ---- 

Property, plant and equipment, at cost:
   Electric ..........................................   $7,097,070  $6,703,863
   Gas................................................    1,210,605   1,136,231
   Steam and other....................................      111,620     120,322
   Common to all departments..........................      423,287     437,636
   Construction in progress...........................      391,100     318,124
                                                            -------     -------
                                                          9,233,682   8,716,176
   Less: accumulated depreciation ....................    3,351,659   3,182,800
                                                          ---------   ---------
     Total property, plant and equipment..............    5,882,023   5,533,376
                                                          ---------   ---------

Investments, at cost:
   Investment in Yorkshire Power and other 
     unconsolidated subsidiaries (Note 2).............      340,874     299,458
   Other..............................................       64,562      71,411
                                                            -------      ------
    Total investments.................................      405,436     370,869
                                                            -------     -------

Current assets:
   Cash and temporary cash investments................       56,667      72,623
   Accounts receivable, less reserve for uncollectible
     accounts ($4,842 at December 31, 1998; $5,355 
     at December 31, 1997)............................      319,145     315,539
   Accrued unbilled revenues..........................      130,455     110,877
   Recoverable purchased gas and electric energy 
     costs - net .....................................       66,154     129,292
   Materials and supplies, at average cost............       69,298      68,411
   Fuel inventory, at average cost....................       24,653      23,162
   Gas in underground storage, at cost (LIFO).........       52,624      47,394
   Prepaid expenses and other.........................       83,561      56,868
                                                            -------      ------
    Total current assets..............................      802,557     824,166
                                                            -------     -------

Deferred charges:
   Regulatory assets (Note 1).........................      381,632     430,475
   Unamortized debt expense ..........................       27,408      20,833
   Other..............................................      172,908     141,947
                                                            -------     -------
    Total deferred charges............................      581,948     593,255
                                                            -------     -------
                                                         $7,671,964  $7,321,666
                                                         ==========  ==========

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

                                       2
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Thousands of Dollars)
                           December 31, 1998 and 1997

                             CAPITAL AND LIABILITIES

                                                           1998       1997 
                                                           ----       ---- 
                                                         

Common stock (Note 4)................................   $1,866,386  $1,694,195
Retained earnings....................................      740,677     659,050
Accumulated comprehensive income.....................        7,764       4,142
                                                           -------      ------
    Total common equity..............................    2,614,827   2,357,387

Preferred stock of subsidiaries (Note 4):
   Not subject to mandatory redemption...............            -     140,002
   Subject to mandatory redemption at par............            -      39,253
PSCo and SPS obligated mandatorily redeemable
   preferred securities of subsidiary trusts holding
   solely subordinated debentures of SPS and PSCo
   (Note 5)..........................................      294,000     100,000
Long-term debt of subsidiaries (Note 6)..............    2,205,545   1,987,955
                                                         ---------   ---------
                                                         5,114,372   4,624,597

Noncurrent liabilities:
   Employees' postretirement benefits other than
   pensions (Note 12) ................................      61,732      62,716
   Employees' postemployment benefits (Note 12).......      31,326      27,953
                                                           -------      ------
    Total noncurrent liabilities......................      93,058      90,669
                                                           -------      ------

Current liabilities:
   Notes payable and commercial paper (Note 7)........      524,394    588,343
   Long-term debt due within one year.................      138,165    257,469
   Preferred stock subject to mandatory redemption 
     within one year .................................            -      2,576
   Accounts payable...................................      285,080    298,469
   Dividends payable..................................       69,271     68,296
   Recovered electric energy costs - net..............       18,760          -
   Customers' deposits................................       30,793     27,993
   Accrued taxes......................................       85,384     66,587
   Accrued interest...................................       50,229     52,615
   Current portion of accumulated deferred income 
     taxes (Note 13) .................................        2,031     27,391
   Other..............................................      120,716     94,623
                                                            -------     ------
    Total current liabilities.........................    1,324,823  1,484,362
                                                          ---------  ---------

Deferred credits:
   Customers' advances for construction...............       55,400     53,041
   Unamortized investment tax credits ................      100,925    106,147
   Accumulated deferred income taxes (Note 13)........      947,247    922,341
   Other..............................................       36,139     40,509
                                                            -------     ------
    Total deferred credits............................    1,139,711  1,122,038
                                                          ---------  ---------

Commitments and contingencies (Notes 9 and 10)........
                                                         $7,671,964 $7,321,666
                                                         ========== ==========

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

                                       3
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                  (Thousands of Dollars, Except per Share Data)
                  Years ended December 31, 1998, 1997 and 1996

                                                      1998     1997      1996 
                                                      ----     ----      ----

Operating revenues:
   Electric................................    $2,697,486 $2,473,359 $2,416,539
   Gas.....................................       841,276    816,596    640,497
   Other...................................        72,143     52,570     39,998
                                                  -------   -------      ------
                                                3,610,905  3,342,525  3,097,034

Operating expenses:
   Fuel used in generation...................     644,311    671,805    635,280
   Purchased power...........................     712,887    531,487    510,582
   Cost of gas sold..........................     562,583    543,291    393,163
   Other operating and maintenance expenses..     637,743    594,359    568,581
   Depreciation and amortization.............     268,743    243,078    224,865
   Taxes (other than income taxes) ..........     134,137    129,280    128,980
                                                  -------    -------    -------
                                                2,960,404  2,713,300  2,461,451
                                                ---------  ---------  ---------
Operating  income............................     650,501    629,225    635,583

Other income and deductions:
   Merger expenses...........................        (790)   (34,088)   (21,107)
   Write-off of investments in cogeneration 
     projects (Note 3) ......................           -    (16,052)   (15,546)
   Equity in earnings of Yorkshire Power and 
     other unconsolidated subsidiaries (Note 2)    36,101     34,166        389
   Miscellaneous income and deductions - net..     (3,460)   (11,215)     1,771
                                                   ------    -------     ------
                                                   31,851    (27,189)   (34,493)

Interest charges and preferred dividends 
  of subsidiaries:
   Interest on long-term debt.................    168,184    165,560    144,067
   Other interest.............................     31,069     32,389     23,479
   Allowance for borrowed funds used during 
     construction ............................    (17,347)   (10,921)    (5,945)
   Dividends on PSCo and SPS obligated 
     mandatorily redeemable preferred
     securities of subsidiary trusts holding
     solely subordinated debentures of PSCo
     and SPS .................................     17,561      7,850      1,526
   Dividend requirements and redemption premium
     on preferred stock of subsidiaries ......      5,332     11,752     11,969
                                                    -----     ------     ------
                                                  204,799    206,630    175,096
                                                  -------    -------    -------
Income before income taxes and 
  extraordinary item .........................    477,553    395,406    425,994

Income taxes (Note 13)........................    135,596    133,919    153,653
                                                  -------    -------    -------

Income before extraordinary item..............    341,957    261,487    272,341
Extraordinary item - U.K. windfall tax (Note 2).        -   (110,565)         -
                                                  -------    --------    ------
Net income....................................   $341,957   $150,922   $272,341
                                                 ========   ========   ========

Weighted average common shares outstanding:
   Basic......................................    111,859    104,805    103,059
   Diluted....................................    112,008    104,872    103,102

Earnings per share of common stock outstanding
  - Basic:
   Income before extraordinary item...........      $3.06     $2.50       $2.64
   Extraordinary item.........................          -     (1.06)          -
                                                     ----     -----       -----
   Net income.................................      $3.06     $1.44       $2.64
                                                    =====     =====       =====
Earnings per share of common stock outstanding
  - Diluted:
   Income before extraordinary item...........       $3.05    $2.50       $2.64
   Extraordinary item.........................           -    (1.06)          -
                                                     -----    -----       -----
   Net income.................................       $3.05    $1.44       $2.64
                                                     =====    =====       =====

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

                                       4
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                (Thousands of Dollars, Except Share Information)
                  Years ended December 31, 1998, 1997 and 1996
Accumulated
                                                                                        Other
                              Common Stock, $1 par value       Paid       Retained    Comprehensive
                                   Shares         Amount     in Capital   Earnings      Income        Total 
                                   ------         ------     ----------   --------      ------        -----
Balance at January 1, 1996..     102,230,141    $  102,230   $1,243,278     $ 726,065   $      -    $2,071,573
Net income/Comprehensive
  income ...................               -             -            -       272,341          -       272,341
Dividends declared on common
  stock ....................               -             -            -      (225,130)         -      (225,130)
Issuance of common stock:
  Employees' Savings Plan ..         274,934           275        9,519             -          -         9,794
  Dividend Reinvestment Plan         809,603           810       27,818             -          -        28,628
  Incentive Compensation Plans        58,346            58        1,661             -          -         1,719
  Acquisitions (Note 3) ....         317,748           318       10,882             -          -        11,200
Other.......................               -             -            -           (85)         -           (85)
                                     -------        ------      -------       -------    -------       -------

Balance at December 31, 1996     103,690,772       103,691    1,293,158        773,191         -     2,170,040
Comprehensive income:
  Net income................               -             -            -        150,922         -       150,922
  Foreign currency translation
    adjustment .............               -             -            -              -     4,142         4,142
                                                                                                         -----
      Comprehensive income
       (Note 1) ............                                                                           155,064
Dividends declared on common
   stock ...................               -             -            -       (264,957)        -      (264,957)
Issuance of common stock:
  Employees' Savings Plan ..         250,058           250        9,518              -         -         9,768
  Dividend Reinvestment Plan         818,783           819       32,512              -         -        33,331
  Incentive Compensation Plans        89,688            89        2,765              -         -         2,854
  Stock offering proceeds, net
   (Note 4) ..................     5,900,000         5,900      245,493              -         -       251,393
Other.........................             -             -            -           (106)        -          (106)
                                     -------        ------      -------        -------   -------       -------

Balance at December 31, 1997     110,749,301       110,749    1,583,446        659,050     4,142     2,357,387
Comprehensive income:
  Net income..........                     -             -            -        341,957         -       341,957
  Foreign currency translation 
    adjustment                             -             -            -              -     3,622         3,622
                                                                                                         -----
     Comprehensive income (Note 1)                                                                     345,579
Dividends declared on common stock         -             -            -       (260,330)        -      (260,330)
Issuance of common stock:
  Employees' Savings Plan            222,387           222       10,146              -         -        10,368
  Dividend Reinvestment Plan         825,005           825       37,198              -         -        38,023
  Incentive Compensation Plans       194,079           195        6,605              -         -         6,800
  Stock offering proceeds, net
   (Note 4)                        2,500,000         2,500      114,500              -         -       117,000
                                   ---------         -----      -------          -----     -----       -------
Balance at December 31, 1998     114,490,772    $  114,491   $1,751,895      $ 740,677    $7,764    $2,614,827
                                 ===========    ==========   ==========      =========    ======    ==========
Authorized  shares of common stock were 260 million at December  31, 1998,  1997
and 1996.

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

                                       5
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Thousands of Dollars)
                  Years ended December 31, 1998, 1997 and 1996

                                                      1998      1997      1996
                                                      ----      ----     -----

Operating activities:
   Net income...................................    $341,957  $150,922 $272,341
   Adjustments to reconcile net income to net
    cash provided by operating activities:
     Extraordinary item - U.K. windfall tax 
       (Note 2) ................................           -   110,565        -
     Depreciation and amortization..............     279,829   253,263  225,264
     Amortization of investment tax credits.....      (5,222)   (5,501)  (7,506)
     Deferred income taxes......................       6,248    52,211   78,962
     Write-off of investments in cogeneration 
       projects (Note 3) .......................           -    16,052   15,546
     Equity in earnings of Yorkshire Power and
       other unconsolidated subsidiaries, net        (34,199)  (31,168)    (389)
     Allowance for equity funds used during
      construction .............................           -         1     (936)
     Change in accounts receivable..............       2,026   (29,627) (92,600)
     Change in inventories......................      (7,485)   (2,334)  23,479
     Change in other current assets.............      16,965   (97,063) (47,226)
     Change in accounts payable.................     (13,704)  (18,791) 141,771
     Change in other current liabilities........      69,908   (15,356) (85,321)
     Change in deferred amounts.................         740   (46,134) (34,617)
     Change in noncurrent liabilities...........       2,389     4,567   (9,725)
     Other......................................          87     2,832    2,139
                                                     -------   -------  -------
       Net cash provided by operating activities     659,539   344,439  481,182

Investing activities:
   Construction expenditures....................    (608,972) (475,497)(454,968)
   Allowance for equity funds used during 
     construction ..............................           -        (1)     936
   Proceeds from disposition of property, plant
     and equipment .............................       9,369     2,117   24,292
   Payment for purchase of companies, net of 
     cash acquired (Note 3) ....................     (13,725)        -    3,649
   Investment in Yorkshire Power (Note 2).......           -  (362,342)       -
   Purchase of other investments................      (6,131)  (32,560) (17,790)
   Sale of other investments....................       5,466    11,844      664
                                                     -------   -------  -------
       Net cash used in investing activities....    (613,993) (856,439)(443,217)

Financing activities:
   Proceeds from sale of common stock (Note 4)..     161,823   286,869   30,115
   Proceeds from sale of long-term debt (Note 6)     250,497   419,819  359,715
   Proceeds from sale of PSCo and SPS obligated 
    mandatorily redeemable preferred securities
    of subsidiary trusts holding solely 
    subordinated debentures of PSCo 
    and SPS (Note 6)............................     187,700         -  100,000
   Redemption of long-term debt.................    (159,323) (227,577)(175,298)
   Short-term borrowings - net..................     (63,949)  289,782 (105,739)
   Redemption of preferred stock of subsidiaries    (181,824)    (665)   (1,636)
   Dividends on common stock....................    (256,426) (233,620)(223,413)
                                                    --------  --------   ------
       Net cash (used in) provided by financing
         activities ............................     (61,502)  534,608  (16,256)
                                                     -------   -------   ------

       Net (decrease) increase in cash and 
          temporary cash investments ...........     (15,956)   22,608   21,709
       Cash and temporary cash investments at
          beginning of year                           72,623    50,015   51,553
       Net decrease in cash and temporary cash 
          investments for SPS for the
          transition period (Note 1)...........            -         -  (23,247)
                                                       -----     -----  -------
       Cash and temporary cash investments at 
          end of year .........................     $ 56,667  $ 72,623  $50,015
                                                    ========  ========  =======

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

                                       6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO PUBLIC SERVICE COMPANY OF COLORADO:

We have audited the accompanying  consolidated  balance sheets and statements of
capitalization  of Public Service  Company of Colorado (a Colorado  corporation)
and subsidiaries as of December 31, 1998 and 1997, and the related  consolidated
statements of income,  shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these 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,  the financial  statements  referred to above present fairly, in
all material  respects,  the  financial  position of Public  Service  Company of
Colorado and  subsidiaries  as of December 31, 1998 and 1997, and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 1998,  in  conformity  with  generally  accepted  accounting
principles.

                                                        ARTHUR ANDERSEN LLP
Denver, Colorado
February 23, 1999

                                       7
PUBLIC SERVICE COMPANY OF COLORADO
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Thousands of Dollars)
                           December 31, 1998 and 1997

                                     ASSETS

                                                             1998      1997 
                                                             ----      ---- 

Property, plant and equipment, at cost:
   Electric ..........................................    $4,369,134 $4,088,447
   Gas................................................     1,171,198  1,100,003
   Steam and other....................................        71,986     78,740
   Common to all departments..........................       418,484    432,840
   Construction in progress...........................       264,752    170,503
                                                             -------    -------
                                                           6,295,554  5,870,533
   Less: accumulated depreciation ....................     2,241,165  2,145,673
                                                           ---------  ---------
     Total property, plant and equipment..............     4,054,389  3,724,860
                                                           ---------  ---------

Investments, at cost:
   Investment in Yorkshire Power (Note 2).............             -    290,845
   Note receivable from affiliate (Note 2)............       192,620          -
   Other..............................................        22,664     43,311
                                                             -------     ------
    Total investments.................................       215,284    334,156
                                                             -------    -------

Current assets:
   Cash and temporary cash investments................        19,926     18,909
   Accounts receivable, less reserve for uncollectible
     accounts ($2,254 at December 31, 1998;
     $2,272  at December 31, 1997) ...................       172,587    183,063
   Accrued unbilled revenues .........................       119,856     94,284
   Recoverable purchased gas and electric energy costs
    - net ............................................        62,761    103,197
   Materials and supplies, at average cost............        47,881     48,030
   Fuel inventory, at average cost....................        22,361     20,862
   Gas in underground storage, at cost (LIFO).........        51,779     46,576
   Prepaid expenses and other.........................        46,523     47,686
                                                             -------     ------
    Total current assets..............................       543,674    562,607
                                                             -------    -------

Deferred charges:
   Regulatory assets (Note 1).........................       269,112    310,658
   Unamortized debt expense ..........................        17,874     10,800
   Other..............................................        77,303     55,794
                                                             -------     ------
    Total deferred charges............................       364,289    377,252
                                                              -------   -------
                                                          $5,177,636 $4,998,875
                                                          ========== ========== 

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

                                       8
PUBLIC SERVICE COMPANY OF COLORADO
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Thousands of Dollars)
                           December 31, 1998 and 1997

                             CAPITAL AND LIABILITIES

                                                               1998      1997 
                                                               ----      ---- 

Common stock......................................       $1,302,119  $1,302,119
Retained earnings.................................          325,213     319,280
Accumulated comprehensive income..................                -       4,142
                                                            -------     -------
    Total common equity...........................        1,627,332   1,625,541

Preferred stock (Note 4):
   Not subject to mandatory redemption............                -     140,002
   Subject to mandatory redemption at par.........                -      39,253
PSCo obligated mandatorily redeemable preferred 
  securities of subsidiary trust holding solely
  subordinated debentures of PSCo (Note 5) .......          194,000           -
Long-term debt (Note 6)...........................        1,643,130   1,338,138
                                                          ---------   ---------
                                                          3,464,462   3,142,934
                                                          ---------   ---------
Noncurrent liabilities:
   Employees' postretirement benefits other than
    pensions (Note 12) ...........................           55,537      58,695
   Employees' postemployment benefits (Note 12)...           27,195      25,031
                                                            -------     -------
    Total noncurrent liabilities..................           82,732      83,726
                                                            -------     -------

Current liabilities:
   Notes payable and commercial paper (Note 7).....         402,795     348,555
   Long-term debt due within one year..............          44,481     257,160
   Preferred stock subject to mandatory redemption 
     within one year ..............................               -       2,576
   Accounts payable................................         226,712     189,998
   Dividends payable...............................          46,461      40,975
   Customers' deposits.............................          23,902      21,888
   Accrued taxes...................................          57,848      42,549
   Accrued interest................................          36,729      39,177
   Current portion of accumulated deferred income 
     taxes (Note 13) .............................            8,142      19,872
   Other...........................................          68,729      88,655
                                                            -------     -------
    Total current liabilities......................         915,799   1,051,405
                                                            -------   ---------

Deferred credits:
   Customers' advances for construction............          54,260      51,830
   Unamortized investment tax credits .............          94,459      99,355
   Accumulated deferred income taxes (Note 13).....         538,581     534,246
   Other...........................................          27,343      35,379
                                                            -------     -------
    Total deferred credits.........................         714,643     720,810
                                                            -------     -------

Commitments and contingencies (Notes 9 and 10).....      ----------  ---------- 
                                                         $5,177,636  $4,998,875
                                                         ==========  ==========

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

                                       9
PUBLIC SERVICE COMPANY OF COLORADO
                                AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CAPTALIZATION
                (Thousands of Dollars, Except Share Information)
                           December 31, 1998 and 1997

                                                               1998      1997 
                                                               ----      ---- 
Common shareholder's equity:
   Common stock, $0.01 par value, authorized and
    outstanding 100 shares in 1998 and 1997                 $      -  $       -
   Paid in capital...................................      1,302,119  1,302,119
   Retained earnings.................................        325,213    319,280
   Accumulated comprehensive income..................              -      4,142
                                                             -------    -------
    Total common shareholder's equity................      1,627,332  1,625,541
                                                           ---------  ---------

Preferred stock (Note 4):
                         Shares Issued and Outstanding 
                         ----------------------------- 
                                   1998       1997 
                                   ----       ---- 
$100 Par Value, 
  Authorized 3,000,000 Shares
   Not subject to mandatory
    redemption
     4.20% series                    -      100,000                -     10,000
     4.25% series (includes
       $7,500 premium)               -      174,997                -     17,507
     4.50% series                    -       65,000                -      6,500
     4.64% series                    -      159,950                -     15,995
     4.90% series                    -      150,000                -     15,000
     4.90% 2nd series                -      150,000                -     15,000
     7.15% series                    -      250,000                -     25,000
                                ------      -------          -------     ------
                                     -    1,049,947                -    105,002
                                ------    ---------          -------    -------
   Subject to mandatory 
     redemption
     7.50% series                    -      216,000                -     21,600
     8.40% series                    -      202,294                -     20,229
                                ------      -------           ------     ------
                                     -      418,294                -     41,829
   Less:  Preferred stock 
     subject to mandatory
     redemption within
      one year                       -      (25,760)               -     (2,576)
                                ------      -------           ------     ------
                                     -      392,534                -     39,253
                                ------      -------           ------     ------
$25 Par Value, Authorized 
   4,000,000 Shares
   Not subject to mandatory
     redemption
     8.40% series                    -    1,400,000                -     35,000
                                ------    ---------          -------     ------

$0.01 Par Value, Authorized
   10,000,000 Shares                 -            -                -          -
                                ------       ------          -------     ------
   Total preferred stock             -    2,842,481                -    179,255
                                ------    ---------          -------    -------

PSCo obligated mandatorily redeemable preferred
 securities of subsidiary trust holding solely
 subordinated debentures of PSCo (Note 5) ...........        194,000          -

Long-term debt (Note 6):
Public Service Company of Colorado:
   First Mortgage Bonds
    6-3/4% retired July 1, 1998......................              -     25,000
    6% due January 1, 2001...........................        102,667    102,667
    6% due April 15, 2003............................        250,000          -
    8-1/8% due March 1, 2004.........................        100,000    100,000
    Pollution Control Series A and B, 5-7/8% due
      March 1, 2004 .................................         21,500     22,000
    6-3/8% due November 1, 2005......................        134,500    134,500
    7-1/8% due June 1, 2006..........................        125,000    125,000
    Pollution Control Series G, 5-5/8%
      due April 1, 2008 .............................         18,000     18,000
    Pollution Control Series F, 7-3/8% 
      due November 1, 2009 ..........................         27,250     27,250
    Pollution Control Series G, 5-1/2% 
      due June 1, 2012. .............................         50,000     50,000
    Pollution Control Series G, 5-7/8% 
      due April 1, 2014 .............................         61,500     61,500
    9-7/8% due July 1, 2020..........................         75,000     75,000
    8-3/4% due March 1, 2022.........................        150,000    150,000
    7-1/4% due January 1, 2024.......................        110,000    110,000
   Secured Medium-Term Notes, Series A and B, 
     6.02% - 9.25%, due March 4, 1998 - March 5, 2007        296,500    423,500
   Unamortized premium...............................              -          4
   Unamortized discount..............................         (4,616)    (4,670)
   Capital lease obligations, 6.68% -11.21% due in 
     installments through May 31, 2025 ..............         39,555     44,392
                                                              ------     ------
                                                          $1,556,856 $1,464,143
                                                          ---------- ----------
         The accompanying notes to consolidated financial statements are
                 an integral part of these financial statements.

                                       10
PUBLIC SERVICE COMPANY OF COLORADO
                                AND SUBSIDIARIES
              CONSOLIDATED STATEMENTS OF CAPTALIZATION (continued)
                (Thousands of Dollars, Except Share Information)
                           December 31, 1998 and 1997

                                                               1998      1997 
                                                               ----      ---- 
Long-term debt (continued)

PS Colorado Credit Corporation, Inc.:
   Unsecured Medium-Term Notes, Series A,
    5.86% - 6.14%, due October 13, 1998 - May 30, 2000      $100,000   $100,000

1480 Welton, Inc.:
   13.25% secured promissory note, due in installments
   through October 1, 2016 ...........................        30,755     31,155
                                                              ------     ------
                                                           1,687,611  1,595,298
Less:  maturities due within one year.................        44,481    257,160
                                                              ------    -------
    Total long-term debt..............................     1,643,130  1,338,138
                                                           ---------  ---------

Total capitalization..................................    $3,464,462 $3,142,934
                                                          ========== ==========

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

                                       11
PUBLIC SERVICE COMPANY OF COLORADO
                                AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                             (Thousands of Dollars)
                  Years ended December 31, 1998, 1997 and 1996

                                                  1998       1997        1996
                                                  ----       ----        ----

Operating revenues:
   Electric.................................  $1,635,573  $1,485,196 $1,488,990
   Gas......................................     640,064     733,091    640,497
   Other....................................       8,449      11,356      7,951
                                                 -------      ------      -----
                                               2,284,086   2,229,643  2,137,438

Operating expenses:
   Fuel used in generation..................     212,184      198,706   195,442
   Purchased power..........................     589,637      493,902   490,428
   Gas purchased for resale.................     380,554      467,745   393,163
   Other operating and maintenance expenses.     403,292      391,177   400,008
   Depreciation and amortization............     180,913      168,451   154,631
   Taxes (other than income taxes) .........      83,994       81,496    82,899
   Income taxes (Note 13) ..................     101,494       90,813    96,331
                                                 -------      -------   -------
                                               1,952,068    1,892,290 1,812,902
                                               ---------    --------- ---------
Operating income............................     332,018      337,353   324,536

Other income and deductions:
   Merger expenses..........................         418      (18,661)  (11,210)
   Equity in earnings of Yorkshire 
     Power (Note 2) ........................       3,446       34,926         -
   Miscellaneous income and deductions -
      net (Note 15) ........................       2,535      (13,374)  (13,260)
                                                   -----      -------   -------
                                                   6,399        2,891   (24,470)

Interest charges:
   Interest on long-term debt...............     120,082      118,438    95,826
   Other interest...........................      20,849       24,117    17,238
   Allowance for borrowed funds used during
     construction ..........................     (12,328)      (6,353)   (3,344)
   Dividends on PSCo obligated mandatorily
     redeemable  preferred securities of
     subsidiary trust holding solely
     subordinated debentures of PSCo (Note 5)      9,711            -         -
                                                   -----        -----      ----
                                                 138,314      136,202   109,720
                                                 -------      -------   -------

Income before extraordinary item............     200,103      204,042   190,346
Extraordinary item - U.K. windfall tax (Note 2)        -     (110,565)        -
                                                   -----     --------   -------
Net income...................................    200,103       93,477   190,346
Dividend requirements and redemption premium
 on preferred stock .........................      5,332       11,752    11,848
                                                   -----       ------    ------
Earnings available for common stock.........    $194,771      $81,725  $178,498
                                                ========      =======  ========

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

                                       12
PUBLIC SERVICE COMPANY OF COLORADO
                                AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
                (Thousands of Dollars, Except Share Information)
                  Years ended December 31, 1998, 1997 and 1996
Accumulated
                                                                                        Other
                              Common Stock, $1 par value       Paid       Retained   Comprehensive
                                   Shares         Amount     in Capital   Earnings      Income        Total 
                                   ------         ------     ----------   --------      ------        -----
Balance at January 1, 1996       63,358,128     $316,791     $680,315       $346,539   $       -    $ 1,343,645
Net income/Comprehensive income           -            -            -        190,346           -        190,346
Dividends declared:
  Common stock........                    -            -            -       (135,111)          -       (135,111)
  Preferred stock, $100 par value         -            -            -         (8,889)          -         (8,889)
  Preferred stock $25 par value           -            -            -         (2,940)          -         (2,940)
Issuance of common stock:
  Employees' Savings Plan           274,934        1,374        8,420              -           -          9,794
  Dividend Reinvestment Plan        809,603        4,048       24,580              -           -         28,628
  Management Incentive Plan          58,346          292        1,427              -           -          1,719
  Acquisitions (Note 4)             317,748        1,589        9,611              -           -         11,200
Other.................                    -            -            -           (104)          -           (104)
                                    -------       ------        -----         ------     -------         ------

Balance at December 31, 1996     64,818,759      324,094      724,353        389,841           -      1,438,288
Comprehensive income:
  Net income..........                    -            -            -         93,477           -         93,477
  Foreign currency translation
    adjustment                            -            -            -              -       4,142          4,142
                                                                                                          -----
    Comprehensive income (Note 1)                                                                        97,619
Dividends declared:
  Common stock, prior to
    August 1, 1997 Merger                 -            -            -        (76,202)          -       (76,202)
  Common stock, to NCE                    -            -            -        (76,093)          -       (76,093)   
  Preferred stock, $100 par value         -            -            -         (8,803)                   (8,803)
  Preferred stock, $25 par value          -            -            -         (2,940)                   (2,940)
Issuance of common stock:
  Employees' Savings Plan           250,058         1,250       8,518              -           -         9,768
  Dividend Reinvestment Plan        488,224         2,441      16,899              -           -        19,340
  Management Incentive Plan          40,404           202         993              -           -         1,195
Merger with SPS:
  Exchange of common stock for
    NCE stock.........          (65,597,345)     (327,987)    327,987              -           -             -
  Dividend of subsidiaries'
    stock to NCE............              -             -     (49,912)             -           -       (49,912)
Contribution of capital by 
    NCE (Note 4)                          -             -     273,300              -           -       273,300
Other.................                    -             -         (19)             -           -           (19)
                                     ------        ------        ----        -------     -------          ----

Balance at December 31, 1997            100             -   1,302,119        319,280       4,142     1,625,541
Comprehensive income:
  Net income..........                    -             -           -        200,103           -       200,103
  Foreign currency translation
    adjustment                            -             -           -              -       5,260         5,260
  Sale of NCI to NC Enterprises           -                                               (9,402)       (9,402)
                                                                                                        ------
      Comprehensive income (Note 1)                                                                    195,961
Dividends declared
  Common stock, to NCE                    -             -           -       (188,845)          -      (188,845)
  Preferred stock, $100 par value         -             -           -         (4,166)          -        (4,166)
  Preferred stock, $25 par value          -             -           -         (1,166)          -        (1,166)
  Other...............                    -             -           -              7           -             7
                                    -------        ------     -------         ------     -------         -----

Balance at December 31, 1998            100       $     -  $1,302,119      $ 325,213     $     -    $1,627,332    
                                        ===       =======  ==========      =========     =======    ==========
(1)Authorized  shares of common stock were 100 at December 31, 1998 and 1997 and
160  million  at  December  31,  1996.  Common  stock,  par value was $5 through
September 18, 1997.  Effective  September 19, 1997,  common stock, par value was
changed to $0.01.
         The accompanying notes to consolidated financial statements are
                 an integral part of these financial statements.

                                       13
PUBLIC SERVICE COMPANY OF COLORADO
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Thousands of Dollars)
                  Years ended December 31, 1998, 1997 and 1996

                                                     1998       1997     1996
                                                    -----       ----     ----
Operating activities:
   Net income...................................    $200,103  $ 93,477 $190,346
   Adjustments to reconcile net income to net
    cash provided by operating activities:
     Extraordinary item - U.K. windfall tax
      (Note 2) .................................           -   110,565        -
     Depreciation and amortization..............     186,620   173,047  159,400
     Amortization of investment tax credits.....      (4,896)   (5,219)  (7,256)
     Deferred income taxes......................       7,092    37,390   60,899
     Equity in earnings of Yorkshire Power......      (3,446)  (34,926)       -
     Allowance for equity funds used during
      construction .............................           -         6     (757)
     Change in accounts receivable..............      21,540   (15,378) (88,680)
     Change in inventories......................      (6,553)   (2,163)  20,542
     Change in other current assets.............       7,937   (52,914) (31,169)
     Change in accounts payable.................       9,148    (5,413)  88,473
     Change in other current liabilities........      22,957   (15,870) (36,615)
     Change in deferred amounts.................     (18,289)  (21,913) (19,550)
     Change in noncurrent liabilities...........        (995)    3,367   (9,779)
     Other......................................           -      (144)   1,760
                                                     -------   -------  -------
       Net cash provided by operating activities     421,218   263,912  327,614

Investing activities:
   Construction expenditures....................    (504,727) (352,273)(321,162)
   Allowance for equity funds used during
     construction ..............................           -        (6)     757
   Proceeds from disposition of property, plant 
     and equipment .............................       9,102     3,187   20,454
   Investment in Yorkshire Power (Note 2).......           -  (362,342)       -
   Payment received on note receivable from NC 
     Enterprises (Note 2) ......................     100,000         -        -
   Payment for purchase of companies, net of 
     cash acquired (Note 3) ....................           -         -    3,649
   Transfer of subsidiaries to NCE (Note 1).....           -    (2,229)       -
   Purchase of other investments................      (1,345)  (19,224) (11,485)
   Sale of other investments....................       4,101    11,162      664
                                                     -------   -------  -------
       Net cash used in investing activities....    (392,869) (721,725)(307,123)

Financing activities:
   Proceeds from sale of common stock (Note 4)..           -    20,517   30,115
   Contribution of capital by NCE...............           -   273,300        -
Proceeds from sale of PSCo obligated mandatorily
   redeemable preferred securities (Note 5).....     187,700         -        -
   Proceeds from sale of long-term debt (Note 6)     247,025   412,220  217,415
   Redemption of long-term debt.................    (157,737) (205,550) (83,356)
   Short-term borrowings - net..................      66,195   127,530  (43,325)
   Redemption of preferred stock................    (181,824)     (665)  (1,376)
   Dividends on common stock (Notes 4 and 15)...    (180,430) (148,279)(133,394)
   Dividends and redemption premium on preferred
     stock .....................................      (8,261)  (11,757) (11,857)
                                                      ------   -------  ------- 

       Net cash (used in) provided by financing
        activities .............................     (27,332)   467,316 (25,778)
                                                     -------    ------- -------

       Net increase (decrease) in cash and 
         temporary cash investments ............       1,017      9,503  (5,287)
       Cash and temporary cash investments at
         beginning of year .....................      18,909      9,406  14,693
                                                      ------      -----  ------
       Cash and temporary cash investments at
           end of year .........................     $19,926    $18,909 $ 9,406
                                                     =======    ======= =======

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

                                       14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO SOUTHWESTERN PUBLIC SERVICE COMPANY:

We have audited the accompanying balance sheets and statements of capitalization
of Southwestern Public Service Company (a New Mexico corporation) as of December
31, 1998 and 1997, and the related  statements of income,  shareholder's  equity
and cash flows for each of the two years in the period ended  December 31, 1998.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these 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,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Southwestern  Public Service
Company as of December 31, 1998 and 1997,  and the results of its operations and
its cash flows for each of the two years in the period ended  December 31, 1998,
in conformity with generally accepted accounting principles.

                                                        ARTHUR ANDERSEN LLP
Denver, Colorado
February 23, 1999

                                       15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Southwestern Public Service Company:

We have audited the consolidated statements of income,  shareholder's equity and
cash flows for the four months ended December 31, 1996 and the year ended August
31,  1996  of  Southwestern  Public  Service  Company  and  subsidiaries.  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 results of  operations  and cash flows of  Southwestern
Public  Service  Company  and  subsidiaries  for the above  stated  periods,  in
conformity with generally accepted accounting principles.

                                                  DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 1997
(June 19, 1997, as to the Carolina
 Energy Limited Partnership in Note 3)

                                       16
SOUTHWESTERN PUBLIC SERVICE COMPANY
                                 BALANCE SHEETS
                             (Thousands of Dollars)
                           December 31, 1998 and 1997

                                     ASSETS

                                                         1998          1997 
                                                         ----          ---- 

Property, plant and equipment, at cost:
   Electric .......................................   $2,665,115     $2,557,579
   Construction in progress........................      121,407        144,452
                                                         -------        -------
                                                       2,786,522      2,702,031
   Less: accumulated depreciation .................    1,057,183        987,487
                                                       ---------        -------
    Total property, plant and equipment............    1,729,339      1,714,544
                                                       ---------      ---------

Investments, at cost:
   Notes receivable from affiliate (Note 4)........      119,036        119,036
   Other...........................................        5,591          5,832
                                                           -----        -------
    Total investments..............................      124,627        124,868
                                                         -------        -------

Current assets:
   Cash and temporary cash investments.............        1,350            986
   Accounts receivable, less reserve for 
     uncollectible accounts ($1,695 at
     December 31, 1998; $2,442 at December 31, 1997)      76,190         96,548
   Accrued unbilled revenues ......................        9,373         15,468
   Recoverable electric energy costs - net.........            -         23,086
   Materials and supplies, at average cost.........       16,970         16,337
   Fuel inventory, at average cost.................        2,293          2,301
   Current portion of accumulated deferred income
      taxes (Note 13) .............................        6,113              -
   Prepaid expenses and other......................        5,248          3,367
                                                           -----        -------
    Total current assets...........................      117,537        158,093
                                                         -------        -------

Deferred charges:
   Regulatory assets (Note 1)......................      111,971        119,244
   Unamortized debt expense .......................        8,767          9,395
   Other...........................................       37,623         62,592
                                                          ------        -------
    Total deferred charges.........................      158,361        191,231
                                                         -------        -------
                                                      $2,129,864     $2,188,736
                                                      ==========     ==========

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

                                       17
SOUTHWESTERN PUBLIC SERVICE COMPANY
                                 BALANCE SHEETS
                             (Thousands of Dollars)
                           December 31, 1998 and 1997

                             CAPITAL AND LIABILITIES

                                                         1998          1997 
                                                         ----          ---- 

Common stock.......................................   $  348,402     $  348,402
Retained earnings..................................      389,818        349,988
                                                         -------        -------
    Total common equity............................      738,220        698,390

SPS obligated mandatorily redeemable preferred 
 securities of subsidiary trust holding solely
 subordinated debentures of SPS (Note 5) ..........      100,000        100,000
Long-term debt (Note 6)............................      530,618        620,598
                                                         -------        -------
                                                       1,368,838      1,418,988
                                                       ---------      ---------

Noncurrent liabilities:
   Employees' postretirement benefits other than 
     pensions (Note 12) ...........................        5,941          3,800
   Employees' postemployment benefits (Note 12)....        3,571          2,446
                                                           -----          -----
    Total noncurrent liabilities...................        9,512          6,246
                                                           -----          -----

Current liabilities:
   Notes payable and commercial paper (Note 7).....       85,162        154,244
   Notes payable to affiliates (Note 7)............        9,000         25,160
   Long-term debt due within one year..............       90,113            173
   Accounts payable................................       64,275        107,465
   Dividends payable...............................       20,007         22,546
   Recovered electric energy costs - net...........       18,760              -
   Customers' deposits.............................        5,904          5,471
   Accrued taxes...................................       37,646         28,051
   Accrued interest................................       12,273         12,715
   Current portion of accumulated deferred income
      taxes (Note 13) .............................            -         10,740
   Other...........................................       18,011         14,658
                                                          ------        -------
    Total current liabilities......................      361,151        381,223
                                                         -------        -------

Deferred credits:
   Unamortized investment tax credits .............        5,219          5,469
   Accumulated deferred income taxes (Note 13).....      380,655        372,447
   Other...........................................        4,489          4,363
                                                           -----        -------
    Total deferred credits.........................      390,363        382,279
                                                         -------        -------

Commitments and contingencies (Notes 9 and 10).....   ----------     ----------
                                                      $2,129,864     $2,188,736
                                                      ==========     ==========

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

                                       18
SOUTHWESTERN PUBLIC SERVICE COMPANY
                          STATEMENTS OF CAPITALIZATION
              (Thousands of Dollars, Except Per Share Information)
                           December 31, 1998 and 1997

                                                               1998      1997 
                                                               ----      ---- 

Common shareholder's equity:
   Common stock, $1 par value, authorized 200 shares 
     in 1998 and in 1997, outstanding 100 shares in
     1998 and in 1997........ ........................       $      -  $      -
   Paid in capital....................................        348,402   348,402
   Retained earnings..................................        389,818   349,988
                                                              -------   -------
    Total common shareholder's equity.................        738,220   698,390
                                                              -------   -------

Preferred stock (Note 4):
   $1 par value, 10 million shares authorized; no
    shares outstanding ...............................              -         -
                                                              -------   -------

SPS obligated mandatorily redeemable preferred securities
 of subsidiary trust holding solely subordinated 
 debentures of SPS, 4 million shares outstanding,
 7.85% (Note 5) ......................................        100,000   100,000
                                                              -------   -------
Long-term debt (Note 6):
First Mortgage Bonds:
   6-7/8% due December 1, 1999........................         90,000    90,000
   7-1/4% due July 15, 2004...........................        135,000   135,000
   6-1/2% due March 1, 2006...........................         60,000    60,000
   8-1/4% due July 15, 2022...........................         40,000    40,000
   8-1/5% due December 1, 2022........................        100,000   100,000
   8-1/2% due February 15, 2025.......................         70,000    70,000
Pollution control obligations, securing pollution 
   control revenue bonds:
   Not collateralized by First Mortgage Bonds:
    variable rate (4.30% at December 31, 1998 and 1997)
    due July 1, 2011 .................................         44,500    44,500
    variable rate (6.435% effective December 31, 1998
    and 1997) due July 1, 2016 .......................         25,000    25,000
    5-3/4% series, due September 1, 2016..............         57,300    57,300
   Less: funds held by Trustee........................           (168)     (161)
Other.................................................            112       286
Unamortized discount and premium-net..................         (1,013)   (1,154)
                                                              -------   -------
                                                              620,731   620,771
Less: maturities due within one year..................         90,113       173
                                                              -------   -------
    Total long-term debt..............................        530,618   620,598
                                                              -------   -------

Total capitalization..................................     $1,368,838 $1,418,988
                                                           ========== ==========

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

                                       19
SOUTHWESTERN PUBLIC SERVICE COMPANY
                              STATEMENTS OF INCOME
                             (Thousands of Dollars)
        Years ended December 31, 1998, 1997 and August 31, 1996 (Note 1)

                                                      1998     1997      1996 
                                                    -------   -------  -------

Operating revenues:
   Electric.....................................    $951,187  $960,355 $899,397
   Other........................................           -    18,928   32,403
                                                     -------   -------  -------
                                                     951,187   979,283  931,800

Operating expenses:
   Fuel used in generation......................     432,127   473,099  417,023
   Purchased power..............................      23,155    14,501   18,010
   Other operating & maintenance expenses.......     138,679   166,761  165,129
   Depreciation and amortization................      78,592    70,331   69,781
   Taxes (other than income taxes) .............      47,259    46,515   45,518
   Income taxes (Note 13) ......................      65,696    48,795   65,297
                                                     -------   -------  -------
                                                     785,508   820,002  780,758
                                                     -------   -------  -------
Operating income................................     165,679   159,281  151,042

Other income and deductions:
   Merger expenses..............................      (1,208)  (15,427)  (7,878)
   Write-off of investment in Carolina Energy
     Project (Note 3) ..........................           -   (16,052)       -
   Miscellaneous income and deductions - net
     (Notes 3 and 15) ..........................       8,819     4,877   13,226
                                                       -----     -----   ------
                                                       7,611   (26,602)   5,348

Interest charges:
   Interest on long-term debt...................      46,471    46,356   47,045
   Other interest...............................       8,925     7,444    6,088
   Allowance for borrowed funds used during 
     construction ..............................      (4,943)   (4,546)  (2,516)
   Dividends on SPS obligated  mandatorily
    redeemable  preferred  securities of
    subsidiary trust holding solely subordinated
    debentures of SPS ..........................       7,850     7,850        -
                                                       -----     -----   ------
                                                      58,303    57,104   50,617
                                                     -------   -------  -------

Net income......................................     114,987    75,575  105,773
Dividend requirements on preferred stock........           -         -    2,494
                                                     -------   -------  -------
Earnings available for common stock.............    $114,987   $75,575 $103,279
                                                    ========   ======= ========

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

                                       20
SOUTHWESTERN PUBLIC SERVICE COMPANY
                              STATEMENTS OF INCOME
                             (Thousands of Dollars)
          For the four months ended December 31, 1996 and 1995 (Note 1)

                                                           1996          1995
                                                           ----          ----
                                                                     (Unaudited)
Operating revenues:
   Electric..........................................    $295,579      $267,427
   Other.............................................      10,701        11,055
                                                         --------       -------
                                                          306,280       278,482

Operating expenses:
   Fuel used in generation...........................     141,896       119,081
   Purchased power...................................       4,900         2,756
   Other operating & maintenance expenses............      55,582        52,134
   Depreciation and amortization.....................      23,782        23,329
   Taxes (other than income taxes)...................      15,152        14,590
   Income taxes (Note 13)............................      10,987        18,963
                                                         --------       -------
                                                          252,299       230,853
                                                          -------       -------
Operating income.....................................      53,981        47,629

Other income and deductions, net:
   Merger expenses...................................      (2,019)       (2,171)
   Write-off of investment in BCH project (Note 3)...     (15,546)            -
   Miscellaneous income and deductions - net.........         759           737
                                                         --------       -------
                                                          (16,806)       (1,434)
Interest charges:
   Interest on long-term debt........................      16,302        15,106
   Other interest....................................       1,102           950
   Allowance for borrowed funds used during 
     construction ...................................        (892)         (807)
   Dividends on SPS obligated mandatorily redeemable
     preferred securities of subsidiary trust holding
     solely subordinated debentures of SPS ..........       1,526             -
                                                            -----              
                                                           18,038        15,249
                                                           ------        ------

Net income...........................................      19,137        30,946
Dividend requirements on preferred stock.............           -         2,373
                                                         --------       -------
Earnings available for common stock..................    $ 19,137      $ 28,573
                                                         ========      ========

                 The accompanying notes to financial statements
               are an integral part of these financial statements
                                       21
SOUTHWESTERN PUBLIC SERVICE COMPANY
                       STATEMENTS OF SHAREHOLDER'S EQUITY
              (Thousands of Dollars, Except Share Information)
   Year ended December 31, 1998, 1997, four months ended December 31, 1996 and
                       year ended August 31, 1996 (Note 1)
Common Stock, $1 par value                         Retained
                               Shares        Amount          Paid in Capital      Earnings      Total
                               ------        ------          ---------------      --------      -----
Balance at August 31, 1995..  40,917,908     40,918             306,376           373,458      720,752
Net income..................           -          -                   -           105,773      105,773
Retirements of cumulative
 preferred stock ...........           -          -               1,108              (921)         187
Dividends declared
  Common stock..............           -          -                   -           (90,020)     (90,020)
  Cumulative preferred stock           -          -                   -            (1,573)      (1,573)
                                --------     ------             -------            ------      -------

Balance at August 31, 1996..  40,917,908     40,918             307,484           386,717      735,119
Net income .................           -          -                   -            19,137       19,137
Dividends declared on 
 common stock ..............           -          -                   -           (22,504)     (22,504)
                                  ------    -------              ------           -------      -------

Balance at December 31, 1996  40,917,908     40,918             307,484           383,350      731,752
Net income..................           -          -                   -            75,575       75,575
Dividends declared
  Common stock, prior to 
   August 1, 1997 Merger ...           -          -                   -           (63,845)     (63,845)
  Common stock, to NCE......           -          -                   -           (45,092)     (45,092)
Merger with PSCo
  Exchange of common shares
  for NCE stock ............ (40,917,808)   (40,918)             40,918                 -            -    
                             -----------    -------              ------           -------      -------

Balance at December 31, 1997         100          -             348,402           349,988      698,390
Net income..................           -          -                   -           114,987      114,987
Dividends declared
  Common stock, to NCE......           -          -                   -           (75,157)     (75,157)
                                --------     ------             -------           -------      -------

Balance at December 31, 1998         100   $      -          $  348,402         $ 389,818   $  738,220
                                  ======    =======          ==========         =========   ==========
Authorized shares of common stock were 200 at December 31, 1998 and 1997 and 100
million at December 31, 1996 and August 31, 1996.

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

                                       22
SOUTHWESTERN PUBLIC SERVICE COMPANY
                            STATEMENTS OF CASH FLOWS
             (Thousands of Dollars, Except Share Information) Years
           ended December 31, 1998, 1997, and August 31, 1996 (Note 1)

                                                      1998      1997     1996
                                                      ----      -----    ----

Operating activities:
   Net income...................................    $114,987  $75,575  $105,773
   Adjustments to reconcile net income to net
    cash provided by operating activities
     (Note 1):
     Depreciation and amortization..............      83,103    76,929   65,448
     Write-off of investment in Carolina Energy
       Project (Note 3).........................           -    16,052        -
     Amortization of investment tax credits.....        (250)     (250)    (250)
     Deferred income taxes......................      (8,600)    3,587   16,423
     Allowance for equity funds used during
      construction .............................           -       (5)      (60)
     Change in accounts receivable..............      20,358   (39,842)  (4,697)
     Change in inventories......................        (625)      301      134
     Change in other current assets.............      27,300    (3,061)  (7,688)
     Change in accounts payable.................     (43,190)   45,683   10,024
     Change in other current liabilities........      31,699   (10,000)  (7,271)
     Change in deferred amounts.................      30,309   (48,934) (11,381)
     Other......................................       3,358       276   13,571
                                                     -------   -------  -------
       Net cash provided by operating activities     258,449   116,311  180,026

Investing activities:
   Construction expenditures....................     (92,218) (118,550)(111,986)
   Allowance for equity funds used during
     construction ..............................           -         5       60
   Cost of disposition of property, plant and
     equipment .................................      (2,897)   (2,371)       -
   Proceeds from the sale of Quixx and UE, net
     of cash disposed (Note 1) .................           -   (29,567)       -
   Purchase of other investments................        (673)   (4,639)  (1,768)
   Sale of other investments....................         820         -        -
   Acquisition of TNP properties (Note 3).......           -         -  (29,200)
                                                     -------   -------  -------
       Net cash used in investing activities....     (94,968) (155,122)(142,894)

Financing activities:
   Proceeds from sale of long-term debt.........           -         -   60,000
   Redemption of long-term debt.................        (179)  (14,986)  (4,445)
   Short-term borrowings - net..................     (85,242)  100,564   69,624
   Retirement of preferred stock................           -         -  (75,434)
   Dividends on common stock (Notes 4 and 15)...     (77,696)  (86,391) (90,020)
   Dividends on preferred stock.................           -         -   (2,494)
                                                     -------   -------  -------
       Net cash used in financing activities....    (163,117)     (813) (42,769)
                                                    --------   -------  -------
       Net increase (decrease) in cash and 
          temporary cash investments ...........         364   (39,624)  (5,637)
       Cash and temporary cash investments at
          beginning of year ....................         986    40,610   36,860
                                                         ---    ------   ------
       Cash and temporary cash investments at
          end of year                                $ 1,350   $   986  $31,223
                                                     =======   =======  =======

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

                                       23
SOUTHWESTERN PUBLIC SERVICE COMPANY
                            STATEMENTS OF CASH FLOWS
                             (Thousands of Dollars)
              Four months ended December 31, 1996 and 1995 (Note 1)

                                                               1996     1995   
                                                               ----     ----
                                                                     (Unaudited)

Operating activities:
   Net income.........................................        $19,137   $30,946
   Adjustments to reconcile net income to net
    cash provided by operating activities (Note 1):
     Depreciation and amortization....................         22,289    21,873
     Write-off of investment in BCH Project (Note 3)..         15,546         -
     Deferred income taxes and  investment tax credits          4,806     3,166
     Allowance for equity funds used during construction         (179)      (60)
     Change in accounts receivable....................         10,180     9,402
     Change in inventories............................          1,417       928
     Change in other current assets...................         (5,674)    9,977
     Change in accounts payable.......................            628   (10,673)
     Change in other current liabilities..............        (12,487)  (11,021)
     Other............................................        (14,674)    7,627
                                                              -------   -------
       Net cash provided by operating activities......         40,989    62,165

Investing activities:
   Construction expenditures..........................        (66,031)  (44,950)
   Purchase of other investments......................         (2,297)   (3,741)
   Acquisition of TNP properties (Note 3).............              -   (29,200)
                                                              -------   -------
       Net cash used in investing activities..........        (68,328)  (77,891)

Financing activities:
   Proceeds from sale of long-term notes and bonds (Note 6)    82,300         -
   Proceeds from sale of SPS obligated mandatorily 
    redeemable preferred securities of subsidiary trust
    holding solely subordinated debentures of SPS             100,000         -
   Retirement of long-term notes and bonds............        (84,776)   (1,717)
   Short-term borrowings - net........................        (15,788)  116,250
   Retirement of preferred stock......................              -   (74,672)
   Dividends on common stock..........................        (45,010)  (45,010)
   Dividends on preferred stock.......................              -    (2,373)
                                                              -------   -------
       Net cash provided by (used in) financing activities     36,726    (7,522)
                                                               ------    ------ 
       Net increase (decrease) in cash and temporary
          cash investments ...........................          9,387   (23,248)
       Cash and temporary cash investments at beginning
          of period ..................................         31,223    36,860
                                                               ------    ------
       Cash and temporary cash investments at end of period   $40,610   $13,612
                                                              =======   =======

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

                                       24
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
               PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES
                       SOUTHWESTERN PUBLIC SERVICE COMPANY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1998

1.  Summary of Significant Accounting Policies (NCE, PSCo and SPS)

Business, Utility Operations and Regulation

      NCE is a registered  holding company under PUHCA and its domestic  utility
subsidiaries (PSCo, SPS and Cheyenne) are engaged principally in the generation,
purchase,  transmission,  distribution  and  sale  of  electricity  and  in  the
purchase, transportation, distribution and sale of natural gas. Both the Company
and its subsidiaries are subject to the regulatory  provisions of the PUHCA. The
utility  subsidiaries  are subject to  regulation  by the FERC and state utility
commissions in Colorado,  Texas, New Mexico,  Wyoming, Kansas and Oklahoma. Over
90% of the Company's revenues are derived from its regulated utility operations.

      Regulatory Assets and Liabilities

      The Company's regulated subsidiaries prepare their financial statements in
accordance  with the provisions of Statement of Financial  Accounting  Standards
("SFAS 71"), as amended.  SFAS 71 recognizes  that accounting for rate regulated
enterprises should reflect the relationship of costs and revenues  introduced by
rate  regulation.  A  regulated  utility  may  defer  recognition  of a cost  (a
regulatory  asset) or recognize an obligation (a regulatory  liability) if it is
probable that,  through the ratemaking  process,  there will be a  corresponding
increase or decrease in revenues.  The Company believes its utility subsidiaries
will continue to be subject to rate regulation. In the event that a portion of a
subsidiaries' operations is no longer subject to the provisions of SFAS 71, as a
result of a change in  regulation or the effects of  competition,  the Company's
subsidiaries could be required to write-off their regulatory  assets,  determine
any impairment to other assets  resulting from  deregulation  and write-down any
impaired  assets to their  estimated  fair  value,  which  could have a material
adverse  effect on  NCE's,  PSCo's  and SPS's  financial  position,  results  of
operations or cash flows.

      The   following   regulatory   assets  are   reflected  in  the  Company's
consolidated balance sheets (in thousands):

1998                                        NCE           PSCo            SPS 
                                          ------         ------         ------

Income taxes (Note 13)..............      $148,499       $ 69,868      $ 79,116
Nuclear decommissioning costs.......        69,490         69,490             -
Employees' postretirement benefits
  other than pensions (Note 12).....        57,350         54,461         2,889
Employees' postemployment benefits
 (Note 12) .........................        24,888         24,416             -
Demand-side management costs........        37,160         31,984         5,176
Unamortized debt reacquisition costs        33,138         15,769        16,808
Early retirement costs..............         1,000              -         1,000
Thunder Basin judgment (Note 9).....           548              -           548
Other...............................         9,559          3,124         6,434
                                            ------         ------        ------
  Total.............................      $381,632       $269,112      $111,971
                                          ========       ========      ========

                                       25
1997                                        NCE           PSCo            SPS 
                                          ------         ------         ------

Income taxes (Note 13)..............      $162,985       $ 84,356      $ 79,161
Nuclear decommissioning costs.......        76,881         76,881             -
Employees' postretirement benefits
  other than pensions (Note 12).....        63,023         59,995         3,028
Employees' postemployment benefits
 (Note 12) .........................        24,455         23,932             -
Demand-side management costs........        42,503         38,518         3,985
Unamortized debt reacquisition costs        36,717         17,791        18,344
Early retirement costs..............         8,008          6,645         1,363
Thunder Basin judgment (Note 9).....         5,912              -         5,912
Other...............................         9,991          2,540         7,451
                                            ------         ------        ------
  Total.............................      $430,475       $310,658      $119,244
                                          ========       ========      ========

      The regulatory  assets of the Company's  regulated  subsidiaries  that are
currently  being  recovered  as of December  31, 1998 and 1997 are  reflected in
rates charged to customers  over periods  ranging from two to thirty years.  The
recovery of  regulatory  assets over the next five years is  estimated to exceed
$200  million.  Refer  to the  discussion  below or the  Notes  to  Consolidated
Financial  Statements  as  identified  in the above  table  for a more  detailed
discussion regarding recovery periods.

      Effective  July 1, 1993,  PSCo began  collecting  from customers the costs
approved by the CPUC for the decommissioning of Fort St. Vrain. This recoverable
amount  totaled  approximately  $124.4 million (plus a 9% carrying  cost).  Such
amount,  which is being  collected over a twelve-year  period,  represented  the
inflation-adjusted  estimated  remaining cost of decommissioning  activities not
previously  recognized  as  expense  at the  time  of  CPUC  approval.  PSCo  is
recovering  approximately  $13.9 million per year from its customers,  including
carrying costs.

      On January  27,  1997,  the CPUC  issued its order on PSCo's 1996 gas rate
case. The CPUC allowed  recovery of  postemployment  benefit costs on an accrual
basis under SFAS 112 and denied  amortization of the approximately  $8.9 million
regulatory asset recognized upon the adoption of SFAS 112 (see Note 12. Employee
Benefits -  Postemployment  Benefits).  PSCo has appealed in the Denver District
Court  the  decision  related  to  this  issue.  PSCo  believes  that it will be
successful on appeal and that the associated regulatory asset is realizable.  On
April 1, 1998, in connection  with PSCo's annual  electric  department  earnings
test filing,  PSCo  requested  approval to recover its  electric  jurisdictional
portion  of  the   postemployment   benefits  cost  regulatory   asset  totaling
approximately  $15 million over three years. In December 1998, the CPUC approved
a settlement  agreement on this matter which deferred the final determination of
the  regulatory  treatment  of these  costs  pending  the outcome of the current
appeal of the decision on PSCo's gas rate case.  PSCo  believes  that it will be
allowed  recovery of SFAS 112 costs on an accrual  basis.  If PSCo is ultimately
unsuccessful  in its appeal of the gas rate case decision  and/or in its request
to recover its  electric  jurisdictional  regulatory  asset,  all  unrecoverable
amounts will be written off (see Note 9. Regulatory Matters).

      Certain  costs  associated  with  PSCo's DSM  programs  are  deferred  and
recovered in rates over five to seven-year periods through the DSMCA.  Non-labor
incremental  expenses,  carrying  costs  associated  with deferred DSM costs and
incentives  associated  with  approved DSM  programs are  recovered on an annual
basis.  Costs  associated with SPS's DSM programs are also deferred and, as part
of a negotiated  settlement  agreement reached in July 1995, will be included in
rate base and cost of service in future PUCT proceedings.

      Costs  incurred to reacquire  debt prior to scheduled  maturity  dates are
deferred  and  amortized  over  the  life of the  debt  issued  to  finance  the
reacquisition, or as approved by the applicable regulatory authority.

                                       26
Recovered/Recoverable Purchased Gas and Electric Energy Costs -Net

      The Company's  utility  subsidiaries  have adjustment  mechanisms in place
which currently  provide for the recovery of certain  purchased gas and electric
energy costs.  These cost adjustment  tariffs may increase or decrease the level
of  costs  recovered  through  base  rates  and  are  revised  periodically,  as
prescribed by the appropriate  regulatory  agencies,  for any difference between
the total amount collected under the clauses and the recoverable  costs incurred
(see Note 9. Regulatory Matters).

      Other Property

      Property,  plant and equipment  includes  approximately  $18.4 million and
$25.4 million, respectively, for costs associated with the engineering design of
the future  Pawnee 2  generating  station and certain  water  rights  located in
southeastern  Colorado,  also obtained for a future generating station.  PSCo is
earning a return on these investments based on its weighted average cost of debt
in accordance with a CPUC rate order.

Non-utility Subsidiaries and International Investments

      The  Company's  non-utility   subsidiaries  are  principally  involved  in
energy-related  businesses  including  the  following:  engineering,  design and
construction management,  non-regulated energy services, including gas and power
marketing,  the management of real estate and certain life  insurance  policies,
the financing of certain  current assets of PSCo and investments in cogeneration
facilities,  electric  wholesale  generators and a foreign utility company.  The
Company's  international  investments are subject to regulation in the countries
in which such  investments  are made (see Note 2.  Investment in Yorkshire Power
and U.K.  Windfall  Tax).  Financial  statements  of  foreign  subsidiaries  are
translated into U.S.  dollars at current rates,  except for revenues,  costs and
expenses,  which are  translated at average  current rates during each reporting
period.

Consolidation and Financial Statement Presentation

      The Company  follows the  practice of  consolidating  the  accounts of its
majority owned and controlled  subsidiaries.  The Company  recognizes  equity in
income from its unconsolidated investments accounted for under the equity method
of accounting.  All intercompany  items and  transactions  have been eliminated.
Certain  prior year  amounts  have been  reclassified  to conform to the current
year's presentation.

      Effective August 1, 1997,  following the receipt of all required state and
Federal  regulatory  approvals,  PSCo and SPS  merged in a  tax-free  "merger of
equals"   transaction  and  became   wholly-owned   subsidiaries  of  NCE.  Each
outstanding share of PSCo common stock was canceled and converted into the right
to receive  one share of NCE common  stock,  and each  outstanding  share of SPS
common stock was canceled  and  converted  into the right to receive 0.95 of one
share of NCE  common  stock.  The  Merger  was  accounted  for as a  pooling  of
interests.   Effective  with  the  Merger,   certain   utility  and  non-utility
subsidiaries were transferred within NCE's common controlled  subsidiaries.  The
common stock of Quixx and UE, former SPS subsidiaries,  were transferred through
the sale by SPS of the  common  stock of such  subsidiaries  at net book  value,
aggregating  approximately  $119.0  million,  to NC  Enterprises in exchange for
notes payable of NC Enterprises.  Subsidiaries  of PSCo (Cheyenne,  WGI, e prime
and  Natural  Fuels)  were  transferred  by a  declaration  of a dividend of the
subsidiaries' stock, at net book value, aggregating approximately $49.9 million,
to NCE. NCE subsequently made a capital  contribution of the e prime and Natural
Fuels common stock, at net book value, aggregating  approximately $29.5 million,
to NC Enterprises.

     On April 22, 1997, SPS changed its fiscal year from a twelve-month period
ending  August  31 to  twelve-month  period  ending  December  31.  SPS  filed a
Transition  report on Form 10-K for the period September 1, to December 31, 1996
("Transition  Period"). The fiscal year periods presented in SPS's statements of
income and cash flows are for the  twelve-months  ending  December  31, 1998 and
1997 and August 31, 1996.

                                       27
Revenue Recognition

      The Company's utility  subsidiaries accrue for estimated unbilled revenues
for services  provided  after the meters were last read on a cycle billing basis
through the end of each year.

Risk Management

      The Company and its  subsidiaries  have  initiated  the  utilization  of a
variety of energy  contracts,  both financial and commodity based, in the energy
trading and energy non-trading  operations to reduce their exposure to commodity
price risk.  These  contracts  consist mainly of commodity  futures and options,
index or fixed price swaps and basis swaps.

      Energy contracts entered into for the trading operations are accounted for
using the mark-to-market method of accounting.  Under mark-to-market accounting,
natural gas and power trading  contracts,  including both physical  transactions
and  financial  instruments,  are  recorded at fair value and  recognized  as an
increase  or  decrease  to  purchased  power or cost of gas sold  upon  contract
execution.  Changes in the market value of the portfolio are recognized as gains
or losses in the period of change and the resulting  unrealized gains and losses
are  recorded  as  other  current  assets  and  liabilities.  Such  amounts  are
recognized  as net  positions  in the  consolidated  balance  sheets  and income
statements as NCE and its subsidiaries  have master netting  agreements in place
with counterparties.

      Energy  contracts are also  utilized in the Company and its  subsidiaries'
non-trading  operations  to reduce  commodity  price risk.  Hedge  accounting is
applied only if the  contract  reduces the price risk of the  underlying  hedged
item and is designated as a hedge at its inception.  Gains and losses related to
qualifying  hedges of firm commitments or anticipated  transactions are deferred
and  recognized  as a  component  of  purchased  power or cost of gas sold  when
settlement occurs. If, subsequent to being hedged,  underlying  transactions are
no longer likely to occur, the related gains and losses are recognized currently
in income  (see Note 8.  Financial  Instruments  - Risk  Management  for further
discussion of the Company's risk management activities).

Comprehensive Income

      The  Company  and  its  subsidiaries  adopted  SFAS  No.  130,  "Reporting
Comprehensive  Income,"  effective  January 1, 1998. This statement  establishes
standards for the reporting and display of comprehensive income (net income plus
all other changes in net assets from  non-owner  sources) and its  components in
financial  statements.  Other comprehensive income for NCE and PSCo was reported
in the consolidated  Statements of Shareholders'  Equity and consists of foreign
currency translation adjustments related to the investment in Yorkshire Power.

Basic and Diluted Earnings Per Share

      Effective in calendar year 1997,  the FASB issued SFAS No. 128,  "Earnings
per Share" ("SFAS 128") requiring presentation of basic and diluted earnings per
share. Basic earnings per share is based upon the weighted average common shares
outstanding  during the year.  Diluted earnings per share reflects the potential
dilution  that could occur if  securities  or other  agreements  to issue common
stock were exercised or converted into common stock.  Diluted earnings per share
is  based  upon  the  weighted  average  common  and  common  equivalent  shares
outstanding  during each year.  Employee  stock options are the  Company's  only
common stock equivalents. There are no other potentially dilutive securities (in
thousands, except per share data).

                                       28
For the year ended December 31, 1998
                                            ------------------------------------
                                           Income       Shares        Per Share
                                        (Numerator)  (Denominator)      Amount
                                        -----------  -------------      ------
Basic EPS
  Net income..........................   $341,957      111,859        $  3.06
                                                                      =======

Effect of Dilutive Securities:
  Common stock options................          -          149
                                         --------      -------

Diluted EPS
  Net income and assumed conversion...   $341,957        112,008      $  3.05
                                         ========        =======      =======

     SFAS 128 had no effect on the Company's 1997 and 1996 reported earnings per
share information.

      Approximately  780,000 common stock options were outstanding  during 1998,
but were not included in the  computation of diluted  earnings per share because
the options'  exercise  prices were greater than the average market price of the
common stock.

Income Taxes

      The  Company  and  its   subsidiaries   file   consolidated   Federal  and
consolidated  and separate state income tax returns.  Income taxes are allocated
to the subsidiaries based on separate company  computations of taxable income or
loss. Investment tax credits have been deferred and are being amortized over the
service lives of the related property.  Deferred taxes are provided on temporary
differences  between  the  financial  accounting  and tax  bases of  assets  and
liabilities  using the tax rates which are in effect at the  balance  sheet date
(see Note 13. Income Taxes).

Stock-based Compensation

      The Company uses the intrinsic  value based method of  accounting  for its
stock-based  compensation  plan  (see Note 12.  Employee  Benefits  -  Incentive
Compensation).

Temporary Cash Investments and Statements of Cash Flows

      For purposes of the consolidated statements of cash flows, the Company and
its subsidiaries consider all temporary cash investments to be cash equivalents.
These temporary cash  investments are securities  having original  maturities of
three  months or less or having  longer  maturities  but with put dates of three
months or less.  At  December  31,  1998,  approximately  $14.3  million of cash
balances are  restricted  for  operational  uses as they have been committed for
investments in cogeneration projects.

     Income  Taxes  and  Interest  (Excluding  Amounts   Capitalized)  Paid  (in
thousands):

NCE                                              1998        1997        1996 
                                               -------     -------     -------

Income taxes ...............................   $135,776    $99,938     $117,121
Interest....................................   $249,405    $230,507    $197,073

PSCo                                             1998        1997        1996 
                                               -------     -------     -------

Income taxes, including amounts paid to NCE    $114,340    $ 75,439    $ 66,871
Interest....................................   $188,443    $172,470    $144,533

                                       29
SPS                                              1998        1997        1996 
                                               -------     -------     -------

Income taxes, including amounts paid to NCE    $69,111     $37,752     $50,250
Interest....................................   $55,739     $56,486     $52,540

      Non-cash Transactions:

      Shares of NCE's common  stock in 1998 and PSCo's  common stock in 1997 and
1996  (222,387  in 1998,  250,058 in 1997 and  274,934  in 1996),  valued at the
market price on date of issuance (approximately $10 million for each year), were
issued to a savings  plan of the Company.  The  estimated  issuance  values were
recognized in other operating expenses during the respective preceding years.

      Effective March 31, 1998, PSCo sold its common stock  investment in NCI to
NC  Enterprises,  an NCE  subsidiary.  PSCo received as  consideration a 20-year
promissory  note  from NC  Enterprises  in the  amount of  approximately  $292.6
million (see Note 2. Investment in Yorkshire Power and U.K. Windfall Tax).

      Stock issuances and the dividend of subsidiaries' stock in connection with
the Merger discussed above were non-cash financing and investing  activities and
are not reflected in the consolidated statements of cash flows.

      During 1996, PSCo exchanged  shares of its common stock in connection with
the acquisition of TOG and TOP (see Note 3. Acquisitions and Divestitures).

Property and Depreciation

      Property, plant and equipment is stated at original cost. Replacements and
capital   improvements,   representing  units  of  property,   are  capitalized.
Maintenance  and  repairs of  property  and  replacements  of items of  property
determined  to be less than a unit of  property  are  charged to  operations  as
maintenance expense.  The cost of units of property retired,  together with cost
of removal, less salvage, is charged to accumulated depreciation.

      Depreciation  expense, for financial  accounting purposes,  is computed on
the  straight-line  basis  based on the  estimated  service  lives  and costs of
removal of the various classes of property. Depreciation expense, expressed as a
percentage of average  depreciable  property,  for NCE, PSCo and SPS ranged from
approximately  2.7%-2.9% for the years ended  December 31, 1998,  1997 and 1996.
For income tax  purposes,  the  Company  and its  subsidiaries  use  accelerated
depreciation and other elections provided by the tax laws.

Allowance for Funds Used During Construction

      AFDC,  as  defined  in the  system  of  accounts  prescribed  by the FERC,
represents the net cost during the period of construction of borrowed funds used
for  construction  purposes  and a reasonable  rate on funds  derived from other
sources. AFDC does not represent current cash earnings.  The Company's regulated
subsidiaries capitalize AFDC as a part of the cost of utility plant.

Gas in Underground Storage (NCE and PSCo)

      Gas in underground  storage is accounted for under the last-in,  first-out
("LIFO")  cost method.  The  estimated  replacement  cost of gas in  underground
storage at December 31, 1998 and 1997,  exceeded the LIFO cost by  approximately
$13.0 million and $36.0 million, respectively.

                                       30
Cash Surrender Value of Life Insurance Policies (NCE and PSCo)

      The following amounts related to  corporate-owned  life insurance ("COLI")
contracts, issued by one major insurance company, are recorded as a component of
Investments, at cost, on the consolidated balance sheets (in thousands):

                                                             1998        1997 
                                                             ----        ----
Cash surrender value of contracts.....................     $461,752    $408,425
Borrowings against contracts..........................      458,104     405,285
                                                            -------     -------
   Net investment in life insurance contracts.........     $  3,648     $ 3,140
                                                           ========     =======

     Refer  to Note 10.  "Commitments  and  Contingencies",  for  discussion  of
certain tax matters.

Management 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 the
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

2. Investment in Yorkshire Power and U.K. Windfall Tax (NCE and PSCo)

Acquisition

      During  the second  quarter  of 1997,  Yorkshire  Power,  a joint  venture
initially  equally  owned  by  PSCo  and  AEP,  acquired  indirectly  all of the
outstanding   ordinary  shares  of  Yorkshire   Electricity,   a  U.K.  regional
electricity  company.  NCI accounts for its investment in Yorkshire  Power using
the equity  method.  Yorkshire  Power's  results of  operations  include 100% of
Yorkshire  Electricity's results since the April 1, 1997 acquisition date. NCI's
equity in earnings of Yorkshire Power is 50%, the same as its ownership share.

      Effective March 31, 1998, PSCo sold its common stock  investment in NCI to
NC Enterprises, an NCE subsidiary.  NCI's primary investment is Yorkshire Power.
PSCo received as consideration a 20-year  promissory note from NC Enterprises in
the  amount of  approximately  $292.6  million.  Annual  interest  payments  are
required for the first three years  followed by principal and interest  payments
for the remaining  seventeen  years. The interest rate on the note is 7.02%. NCE
intends to make additional  capital  contributions  to NC Enterprises to provide
the necessary cash flow  requirements to make payments on the promissory note to
PSCo. In October 1998, NCE contributed $100 million to NC Enterprises, which was
used to reduce the principle balance of the promissory note to PSCo.

U.K. Windfall Tax

      In July  1997,  the U.K.  government  enacted a  windfall  tax on  certain
privatized  business  entities,  payable in two  installments  with the first in
December  1997  and  the  second  in  December  1998.  The  windfall  tax  was a
retroactive  adjustment to the privatization  value based on  post-privatization
profits  during  the 1992 to 1995  period.  During  the third  quarter  of 1997,
Yorkshire Power recorded an extraordinary  charge of approximately  $221 million
(135 million pounds sterling) for this windfall tax. The Company's share of this
tax was approximately $110.6 million.

Investment in Ionica

     During the second quarter of 1998, Yorkshire Electricity recognized a $54.7
million   after-tax   impairment  of  its  investment  in  Ionica,   a  wireless
telecommunications  company, upon the May 22, 1998,  announcement by Ionica that
negotiations  for release of lines of credit  from  existing  providers  of bank
facilities had been  unsuccessful.  In November of 1998,  Ionica was placed into
receivership and an administrator was appointed to

                                       31
oversee  its  operations  and  distribute  its  remaining  assets.  Due  to  the
complexity of Ionica  operations it may take  considerable time to complete this
process.  Yorkshire  Electricity  continues to assess the  recoverability of the
remaining book value of this  investment  (approximately  $7 million at December
31, 1998).

Generation Sale

      In the fourth quarter of 1998,  Yorkshire Power recognized a $42.1 million
after-tax gain on the sale of its generation  assets.  This included the sale of
its 75% interest in Regional Power Generators,  Ltd., which owned a 272-megawatt
combined cycle, gas fired plant located in North  Lincolnshire,  England and the
sale of other generation capacity. Proceeds from these sales were used to reduce
the debt of Yorkshire Power. Yorkshire Electricity is focusing its main business
on the distribution and supply of electricity and the supply of natural gas.

      Summarized  income  statement  information for the year ended December 31,
1998 and from the date of  acquisition,  April 1, 1997 to December 31, 1997,  is
presented below (in millions):

                                                   1998            1997 
                                            ------------------   -------
                                              Year     3 Months
                                              Ended      Ended     (NCE
                                           December 31, March 31,   and
                                              (NCE)       (PSCo)    PSCo)    
    Yorkshire Power:
      Operating revenues...............     $2,281.7  $  663.2   $1,492.9
                                            --------  --------   --------

      Operating income.................        324.9      65.5      202.3
                                            --------  --------   --------

      Income before extraordinary item.         76.9       6.9       69.8
                                            --------  --------   --------

      Extraordinary item - U.K. windfall
        tax ...........................                      -     (221.1)
                                             --------   ------   --------

      Net income (loss)................     $   76.9  $    6.9   $ (151.3)
                                            ========  ========   ========

    NCI's equity in earnings (losses):
      Equity in earnings of Yorkshire Power     38.5       3.5       34.9
      Extraordinary item - U.K. windfall tax       -         -     (110.6)
                                            --------  -------    --------
                                            $   38.5  $    3.5   $  (75.7)
                                            ========  ========   ========

      NCI's  investment  in  Yorkshire  Power at December  31, 1998 and 1997 was
approximately  $333 million and $290 million,  respectively.  Summarized balance
sheet  information  for  Yorkshire  Power as of December  31, 1998 and 1997,  is
presented below (in millions):
                                                    1998     1997
                                                    ----     ----
    Assets:
      Property, plant and equipment............    $1,602   $1,645
      Current assets...........................       552      602
      Goodwill (net)...........................     1,547    1,602
      Other assets.............................       295      293
                                                   ------   ------
                                                   $3,996   $4,142
                                                   ======   ======    
    Capitalization and Liabilities:
      Common shareholders' equity..............    $  655   $  542
      Long-term debt...........................     2,121      704
      Other non-current liabilities............       413      489
      Current liabilities......................       807    2,407
                                                   ------   ------
                                                   $3,996   $4,142
                                                   ======   ======

      The  unaudited pro forma  financial  information  presented  below for NCE
assumes  that  Yorkshire  Power was  acquired on January 1, 1997.  The pro forma
adjustments include recognition of equity in the estimated earnings of Yorkshire
Power, an adjustment for interest expense on debt associated with the investment

                                       32
in Yorkshire Power and related income taxes. The estimated earnings of Yorkshire
Power were based on historical earnings of Yorkshire  Electricity,  prior to its
acquisition by Yorkshire Power,  adjusted for the estimated  effects of purchase
accounting (including the amortization of goodwill), conversion to United States
generally  accepted  accounting  principles,  interest expense on debt issued by
Yorkshire Power associated with the acquisition and related income taxes.  Sales
of electricity are affected by seasonal  weather  patterns and,  therefore,  the
results of Yorkshire Power/Yorkshire  Electricity will not be distributed evenly
during  the year.  Equity  in  earnings  (losses)  of  Yorkshire  Power has been
converted at the average exchange rates for the year ended December 31, 1997 and
December 31, 1996, of $1.639/pound and $1.561/pound, respectively.

      Based on the  above  assumptions,  shown  below  is  unaudited  pro  forma
financial  information  for the  years  ended  December  31,  1997  and 1996 (in
millions, except per share amounts):

                                                      NCE Earnings         
                                             Available for
                                             common stock     EPS-Basic (1)  
                                              1997   1996     1997    1996
                                              ----   ----     ----    ----

Net income before extraordinary item...      $261.5 $272.3    $2.50   $2.64
                                                              =====   =====

Pro forma adjustments:

  Equity in earnings of
   Yorkshire Power, net of
   U.S. tax benefits (2)...............      (10.1)   19.3

  Interest expense, net of tax.........       (3.5)  (13.8)
                                             -----  ------

Pro forma result.......................      $247.9 $ 277.8   $2.37   $2.70
                                             ====== =======   =====   =====

  (1) Based on the weighted average number of common shares  outstanding for the
      period.
  (2) The years ending  December 31, 1997 and 1996 amounts  include $24.0
      million and $18.9 million ($17.9 million and $11.7 million after-tax),
      respectively, of write-offs related to certain computer development costs,
      acquisition expenses and costs incurred for the preparation for 
      deregulation.

      The unaudited pro forma  financial  information  presented  below for PSCo
assumes that NCI was sold to NC Enterprises  effective  January 1, 1997. NCI was
formed  in  connection  with  the  investment  in  Yorkshire  Power  and  had no
operations  during the first  three  months of 1997.  The pro forma  adjustments
represent  the  removal  of NCI's  net  income  from PSCo and the  inclusion  of
interest  income,  net of  tax,  from  the  promissory  note  to  PSCo  from  NC
Enterprises.

      Based  upon the above  assumptions,  shown  below is  unaudited  pro forma
financial  information  for the  years  ended  December  31,  1998  and 1997 (in
millions):
                                                               PSCo Earnings
                                                              1998    1997
                                                              ----    ----

Net income before extraordinary item.....................     $200.1  $204.0

Pro forma adjustments:

  NCI's net income before extraordinary item.............      (2.8)  (35.9)
  Interest income from promissory note, net of tax.......       3.2     9.5
                                                              -----   -----

Pro forma result.........................................     $200.5  $177.6
                                                              ======  ======

                                       33
3. Acquisitions and Divestitures

Acquisition of Planergy (NCE)

      Effective  April 1, 1998,  the  Company  acquired  all of the  outstanding
common stock of Falcon Seaboard Energy Services,  Inc.  ("Planergy") and assumed
other outstanding debt.  Planergy includes Planergy,  Inc. and Planergy Services
and is primarily engaged in energy  consulting,  energy  efficiency  management,
conservation programs and mass-market services..  Such acquisition was accounted
for using the  purchase  method and the  acquired  assets and  liabilities  were
valued at their  estimated  fair  market  values as of the date of  acquisition.
Planergy  has  been  consolidated  as a  subsidiary  of NC  Enterprises  in  the
Company's consolidated financial statements.

Carolina Energy Limited Partnership Investment (NCE and SPS)

      The Carolina Energy Partnership, a waste-to-energy  cogeneration facility,
was  originally  scheduled to be completed  in 1997,  but was halted  pending an
independent analysis of the project's  engineering and financial viability.  The
banks  providing  debt  financing to the project  withheld  funds for  continued
construction.   Quixx,  UE,  other  equity  owners,  senior  creditors  and  the
construction  contractor  were  unable to  restructure  the  project on mutually
agreeable  terms and the senior  creditors took  possession of the assets of the
facility.  In June 1997, Quixx wrote-off its investment of  approximately  $13.6
million in the Carolina Energy Partnership.  Additionally,  UE wrote-off its net
investment of approximately $2.4 million in this same partnership. Quixx holds a
one-third ownership interest,  including a 1% general partnership  interest,  in
the  partnership.  UE's net  investment  in the  partnership  was  comprised  of
subordinated  debt,  the  related  interest  receivable,  as well  as  fees  for
engineering services.

BCH Energy Limited Partnership Investment (NCE and SPS)

      Quixx  holds a 49%  limited  partnership  interest  in BCH Energy  Limited
Partnership  which owned a  waste-to-energy  cogeneration  facility located near
Fayetteville,  North Carolina.  Limited commercial  operation of the BCH project
began  in June  1996;  however,  the  facility  did  not  achieve  the  expected
performance  level. An effort was made to restructure the project but it was not
possible to achieve the required  improvements on economically  viable terms. In
late 1996,  senior  creditors took possession of the assets of the facility.  In
December 1996,  Quixx wrote-off its investment of  approximately  $16 million in
this project.

Quixx Underground Water Rights (NCE and SPS)

      During  1996,  Quixx sold a portion of its  underground  water  rights for
approximately  $14 million.  Quixx  recognized an after-tax  gain on the sale of
these water  rights of  approximately  $11.7  million,  which is  reflected,  in
Miscellaneous income and deductions net for the year ended December 31, 1996.

Acquisition of Texas-Ohio Gas, Inc. and Texas-Ohio Pipeline, Inc. (NCE and PSCo)

      Effective September 1, 1996, e prime acquired all of the outstanding stock
of TOG and TOP in exchange for a  combination  of common stock of PSCo and cash.
Such  acquisitions were accounted for using the purchase method and the acquired
assets and  liabilities  were valued at their estimated fair market values as of
the date of acquisition.  These companies are primarily engaged in gas brokering
and marketing activities and interstate gas transmission and are subsidiaries of
e prime.

Acquisition of TNP Properties (SPS)

      In September  1995,  SPS purchased  properties of TNP located in the Texas
Panhandle  area for  $29.2  million.  The  purchase  added  approximately  8,000
customers and was accounted for using the purchase method. Cost recovery of this
amount was allowed by the PUCT through a rate surcharge over a ten-year period.

                                       34
4. Capital Stock (NCE, PSCo and SPS)

Shareholder Rights

      On April 30, 1997, the Board of Directors  declared that a dividend of one
right  for each  Common  Share  be paid on the  effective  date of the  business
combination  among the Company,  PSCo and SPS to  shareholders  of record of the
common shares issued and  outstanding at the close of business on the day before
the effective date of the business combination.  Each right represents the right
to  purchase  one  one-hundredth  of a share of  Series  A Junior  Participating
Preferred Stock at a price of $100 per one  one-hundredth  share.  Additionally,
the Board of Directors created a Series A Junior Participating  Preferred Stock,
$1 par value,  and reserved 2.6 million shares for issuance upon exercise of the
Rights.  In the event any person or group  acquires 10% or more of the Company's
common stock,  the holders of the rights  generally will be entitled to receive,
upon exercise, common stock of the Company having a value equal to two times the
exercise  price of the right.  In addition,  the Board of Directors  may, at its
option  after a person or group  acquires  10% or more of the  Company's  common
stock,  exchange  all or part of the rights for shares of the  Company's  common
stock.  In the event that the Company is acquired in a merger or other  business
combination  or 50% or more of the Company's  assets or earning power is sold or
transferred, the holders of the rights have the right to receive, upon exercise,
common  stock of the  acquiring  company  having a value  equal to two times the
exercise  price of the right.  The  Company  may redeem the rights at a price of
$0.001  per  right at any time  prior to the tenth  day  following  the date any
person or group acquires 10% or more of the Company's  common stock.  The rights
expire 10 years after the record date,  unless earlier  redeemed or exchanged by
the Company.

Common Stock Issuances

      In November 1998,  NCE issued 2.5 million shares of common stock.  The net
proceeds  totaling $117.0 million were used for general  corporate  purposes and
the  retirement of short-term  debt.  In December  1997,  NCE issued 5.9 million
shares of common  stock,  resulting in net proceeds  (after  deducting  issuance
costs)  totaling  approximately  $251.4  million.  The proceeds from the sale of
stock  were  used  for  general  corporate  purposes,  including  retirement  of
short-term  debt and a capital  contribution to PSCo. PSCo used such proceeds to
retire short-term debt.

                                       35
Preferred Stock of NCE

      NCE has 20 million shares of preferred stock  authorized.  At December 31,
1998, the Company has not issued any of the preferred stock.

Preferred Stock of Subsidiaries
                                          December 31, 1998    December 31, 1997
                                          Shares     Amount    Shares    Amount
                                                 (Thousands          (Thousands
                                                 of Dollars)         of Dollars)
PSCo cumulative preferred stock, $100
 par value, 3 million shares authorized:
  Issued and outstanding:
   Not subject to mandatory redemption (1):
     4.20% series...................           -         -    100,000  $ 10,000
     41/4% series (includes $7,500 premium)    -         -    174,997    17,507
     41/2% series....................          -         -     65,000     6,500
     4.64% series...................           -         -    159,950    15,995
     4.90% series...................           -         -    150,000    15,000
     4.90% 2nd series...............           -         -    150,000    15,000
     7.15% series...................           -         -    250,000    25,000
                                          ------   -------    -------   -------

     Total..........................           -         -  1,049,947  $105,002
                                          ======   ======= ==========  ========

   Subject to mandatory redemption (2):
     7.50% series ..................           -         -    216,000  $ 21,600
     8.40% series...................           -         -    202,294    20,229
                                          ------   -------    -------  --------
                                               -         -    418,294    41,829
   Less: Preferred stock subject to 
     mandatory redemption within one year      -         -    (25,760)   (2,576)
                                          ------   -------   --------  --------
       Total........................           -         -    392,534  $ 39,253
                                          ======   =======   ========  ========

PSCo cumulative preferred stock, $25 
 par value, 4 million shares authorized:
  Issued and outstanding:
  Not subject to mandatory redemption (1):
     8.40% series...................           -         -  1,400,000  $ 35,000
                                          ======   =======  =========  ========

PSCo cumulative preferred stock, $0.01
 par value, 10 million shares authorized
 with no shares outstanding (3)                -         -          -  $      -
                                             ===   =======     ======   =======
SPS cumulative preferred stock, $1 
 par value, 10 million shares authorized
 with no shares outstanding (4)                -        -           -  $      -
                                             ===   =======     ======  ========

(1) On June 10, 1998, PSCo redeemed all of the preferred stock,  $100 par value,
at a value of $101 per share plus  accrued  dividends  and all of the  preferred
stock, $25 par value, at a value of $25.25 per share plus accrued dividends.

(2) On June 10, 1998, PSCo redeemed all  outstanding  shares of the 7.50% series
subject to mandatory redemption for $101.50 per share plus accrued dividends and
all of the 8.40% series  subject to mandatory  redemption  for $101.75 per share
plus accrued  dividends.  In 1997,  PSCo  repurchased  6,598 shares of the 8.40%
cumulative  preferred  series  subject to mandatory  redemption.  In 1996,  PSCo
repurchased  13,760 shares of the 8.40%  cumulative  preferred series subject to
mandatory redemption.

(3) On July 10,  1998,  the  shareholders  of PSCo  approved an amendment to the
Restated Articles of Incorporation to replace the existing authorized  preferred
stock and to provide for a class of 10 million  authorized  shares of  preferred
stock,  $0.01 par value. This preferred stock may be issued from time to time in
such series and having such designations,  preferences, limitations and relative
rights as the Board of Directors may determine.

(4) On January 31, 1996,  the  shareholders  of SPS approved an amendment to the
Restated Articles of Incorporation to replace the existing authorized  preferred
stock and to provide for a class of 10 million  authorized  shares of  preferred
stock,  $1.00 par value. This preferred stock may be issued from time to time in
such series and having such designations,  preferences, limitations and relative
rights as the Board of Directors may determine.

                                       36
5. Obligated  Mandatorily  Redeemable  Preferred Securities of Subsidiary Trusts
Holding Solely Subordinated Debentures (NCE, PSCo and SPS)

      In May 1998,  PSCo Capital Trust I, a wholly-owned  trust of PSCo,  issued
7,760,000  shares of its 7.60% Trust  Originated  Preferred  Securities for $194
million.  The sole asset of the trust is $200 million principal amount of PSCo's
7.60% Deferrable Interest Subordinated Debentures, due June 30, 2038. Holders of
the securities are entitled to receive quarterly  dividends at an annual rate of
7.60% of the liquidation  preference value of $25. The securities are redeemable
at the option of PSCo on and after May 11, 2003 at 100% of the principal  amount
outstanding plus accrued interest.  In addition to PSCo's  obligations under the
Subordinated Debentures,  PSCo has agreed, pursuant to a guarantee issued to the
trust and the provisions of the trust  agreement  establishing  the trust,  on a
subordinated  basis,  payment of distributions on the preferred  securities (but
not if the trust does not have sufficient funds to pay such  distributions)  and
to  pay  all  of  the  expenses  of  the  trust   (collectively,   the  "Back-up
Undertakings").  Considered together, the Back-up Undertakings constitute a full
and unconditional guarantee by PSCo of the trust obligations under the preferred
securities.  The proceeds from the sale of the 7.60% Trust Originated  Preferred
Securities  were  used to  redeem  all  $181.8  million  of  PSCo's  outstanding
preferred stock on June 10, 1998, and for general corporate purposes.

      In October 1996,  Southwestern  Public  Service  Capital I, a wholly-owned
trust of SPS,  issued  $100  million of its 7.85%  Trust  Preferred  Securities,
Series A. The sole asset of the trust is $103 million  principal amount of SPS's
7.85% Deferrable  Interest  Subordinated  Debentures,  Series A due September 1,
2036.  The  securities  are redeemable at the option of SPS on and after October
21, 2001 at 100% of the principal amount plus accrued  interest.  In addition to
SPS's obligations under the Subordinated Debentures, SPS has agreed, pursuant to
a  guarantee  issued  to  the  trust,  the  provisions  of the  trust  agreement
establishing  the trust and a  related  expense  agreement  to  guarantee,  on a
subordinated  basis,  payment of distributions on the preferred  securities (but
not if the trust does not have sufficient funds to pay such  distributions)  and
to pay all of the  expenses  of the  trust.  Considered  together,  the  Back-up
Undertakings  constitute a full and unconditional  guarantee by SPS of the trust
obligations under the preferred securities. The proceeds from the sale were used
to reduce short-term debt.

                                       37
6. Long-Term Debt of Subsidiaries (NCE, PSCo and SPS)
                                                              1998       1997
                                                              ----       ----
                                                          (Thousands of Dollars)
   First Mortgage Bonds:
     6-3/4% retired July 1, 1998........................    $    -      $25,000
     6-7/8% due December 1, 1999........................     90,000      90,000
     6.00% due January 1, 2001..........................    102,667     102,667
     7-7/8% due April 1, 2003...........................      4,000       4,000
     6.00% due April 15, 2003...........................    250,000           -
     8-1/8% due March 1, 2004...........................    100,000     100,000
     5-7/8% due March 1, 2004...........................     21,500      22,000
     7-1/4% due July 15, 2004...........................    135,000     135,000
     6-3/8% due November 1, 2005........................    134,500     134,500
     6-1/2% due March 1, 2006...........................     60,000      60,000
     7-1/8% due June 1, 2006............................    125,000     125,000
     5-5/8% due April 1, 2008...........................     18,000      18,000
     7-3/8% due November 1, 2009........................     27,250      27,250
     5-1/2% due June 1, 2012............................     50,000      50,000
     5-7/8% due April 1, 2014...........................     61,500      61,500
     9-7/8% due July 1, 2020............................     75,000      75,000
     Variable rate (4.05% and 3.80% at December 31, 1998
      and 1997) due September 1, 2021 ..................      7,000       7,000
     8-3/4% due March 1, 2022...........................    150,000     150,000
     8-1/4% due July 15, 2022...........................     40,000      40,000
     8.20% due December 1, 2022.........................    100,000     100,000
     7-1/4% due January 1, 2024.........................    110,000     110,000
     7.50% due January 1, 2024..........................      8,000       8,000
     8.50% due February 15, 2025........................     70,000      70,000
     Variable rate (2.90% and 3.80% at December 31, 1998
      and 1997) due March 1, 2027 ......................     10,000      10,000
     Secured Medium-Term Notes, 6.02% - 9.25%, due 
       March 4, 1998 - March 5, 2007 ...................    296,500     423,500
   Other secured long-term debt 13.25%, due in 
     installments through October 1, 2016 ..............     30,755      31,155
   Pollution control obligations, securing pollution
      control revenue bonds:
     Not collateralized by First Mortgage Bonds:
       Variable rate (4.30% at December 31, 1998 and 
         1997), due July 1, 2011 .......................     44,500      44,500
       Variable rate (6.435% effective at December 31, 
         1998 and 1997), due July 1, 2016 ..............     25,000      25,000
       5-3/4% series, due September 1, 2016.............     57,300      57,300
     Less: funds held by Trustee:.......................       (168)       (161)
   Unsecured Medium-Term Notes:
       5.86% - 6.14% due October 13, 1998 - May 30, 2000    100,000     100,000
   Capital lease obligations, 4.21% - 11.21% due in
     installments through May 31, 2025 .................     39,751      44,747
   Other................................................      6,284         286
   Unamortized discount and premium - net...............     (5,629)     (5,820)
                                                             ------      ------
                                                          2,343,710   2,245,424
Less: maturities due within one year....................    138,165     257,469
                                                            -------     -------
                                                         $2,205,545  $1,987,955
                                                         ==========  ==========

      The First  Mortgage  Bonds include all debt  (including  First  Collateral
Trust Bonds) issued by the Company's utility subsidiaries under various mortgage
indentures.  Substantially all properties of the Company's utility subsidiaries,
other than expressly  excepted  property,  are subject to the liens securing the
First  Mortgage  Bonds.  Additionally,  the SPS  Indenture  provides for certain
restrictions on the payment of dividends by SPS.

      The Red River Authority of Texas has issued certain obligations,  based on
long-term  installment  sale  agreements  executed  by SPS,  that  relate to the
pollution control  facilities  installed at SPS's coal-fueled  generating units.
SPS's payments under the pollution control obligations are pledged to secure the
Red River Authority Pollution Control Revenue Bonds.

                                       38
The annual maturities and sinking fund requirements  during the five years
subsequent to December 31, 1998 are (in thousands of dollars):

          Year           Maturities     Sinking Fund Requirements       Total
          ----           ----------     -------------------------       -----
NCE       1999             $138,165              $  560               $138,725
          2000              131,721               1,310                133,031
          2001              140,969               1,310                142,279
          2002               16,806               2,810                 19,616
          2003              281,848               2,810                284,658

PSCo      1999             $ 44,481              $  500               $ 44,981
          2000              131,656               1,250                132,906
          2001              140,969               1,250                142,219
          2002               16,806               2,750                 19,556
          2003              281,848               2,750                284,598

SPS       1999             $ 90,113              $    -               $ 90,113
          2000                    -                   -                      -
          2001                    -                   -                      -
          2002                    -                   -                      -
          2003

      The sinking fund requirements  relate to PSCo and Cheyenne and they expect
to satisfy  substantially  all of their sinking fund  obligations  in accordance
with  the  terms of their  respective  indentures  through  the  application  of
property additions. SPS has no significant sinking fund requirements.

7. Short-term Borrowing Arrangements (NCE, PSCo and SPS)

Notes Payable and Commercial Paper

       Information  regarding  notes payable and commercial  paper for the years
ended December 31, 1998 and 1997 is as follows (in thousands of dollars,  except
interest rates):

                                                             1998        1997 
                                                             ----        ---- 
NCE
   Notes payable to banks...............................   $ 36,437    $147,500
   Commercial paper.....................................    487,957     440,843
                                                           -------      -------
                                                           $524,394    $588,343

Weighted average interest rate at year end..............      5.57%       5.74%

PSCo
   Notes payable to banks...............................   $      -    $ 50,000
   Commercial paper.....................................    402,795     286,599
   Note payable to affiliates (by NCI to Quixx).........          -      11,956
                                                           --------    --------
                                                           $402,795    $348,555

Weighted average interest rate at year end..............      5.72%       5.78%

SPS
   Commercial paper.....................................   $85,162     $154,244
   Note payable to affiliates (UE)......................     9,000        9,000
   Note payable to affiliates (Quixx)...................         -       16,160
                                                           -------     -------
                                                           $94,162     $179,404

Weighted average interest rate at year end..............     5.50%       5.60%

                                       39
Bank Lines of Credit and Compensating Bank Balances

      In August  1997,  NCE entered  into a $225 million  credit  facility  with
several  banks.  Originally,  the credit  facility  provided for $100 million of
direct  borrowings  by NCE  until  the  outstanding  common  stock of  PSCCC,  a
wholly-owned  subsidiary of PSCo, was  transferred to NCE. On June 30, 1998, the
credit facility was amended to eliminate the PSCCC common stock  restriction and
to provide for $200 million of direct  borrowings by NCE. In addition,  Cheyenne
was added as a borrower of up to $25 million  with an NCE  guaranty.  The credit
facility  expires  August 11, 2002.  As of December  31, 1998,  NCE had used $37
million.

      PSCo and its subsidiaries have entered into a credit facility with several
banks  providing  $300  million in  committed  bank lines of credit.  The credit
facility, which is used primarily to support the issuance of commercial paper by
PSCo and PSCCC,  alternatively provides for direct borrowings  thereunder.  1480
Welton,  Inc. and PSRI are provided  access to the credit  facility  with direct
borrowings   guaranteed  by  PSCo.  The  facility  expires  November  17,  2000.
Additionally,  PSCo  has a  credit  facility  which  provides  $150  million  in
committed  lines  of  credit  and  expires  on June 25,  1999.  SPS has a credit
facility  which  provides  $200  million in  committed  bank lines of credit and
expires  February 26, 1999. As of December 31, 1998,  PSCo had used $404 million
and SPS had used $86 million.

      Borrowings permitted under the committed bank lines of credit totaled $705
million at December 31, 1998.  Arrangements by the Company and its  subsidiaries
for committed  lines of credit are  maintained by a combination  of fee payments
and compensating balances.

      PSCo and SPS may borrow under uncommitted preapproved lines of credit upon
request;  however,  the  banks  have no firm  commitment  to  make  such  loans.
Individual PSCo  arrangements  for uncommitted  bank lines of credit totaled $50
million  at  December  31,  1997,  of which  all were  used.  None  were used or
outstanding as of December 31, 1998.

8.  Financial Instruments (NCE, PSCo and SPS)

Fair Value of Financial Instruments

      The following  tables present the carrying  amounts and fair values of the
Company's and subsidiaries'  significant  financial  instruments at December 31,
1998  and  1997.  The  carrying  amount  of  all  other  financial   instruments
approximates  fair  value.  SFAS  No.  107,  "Disclosures  about  Fair  Value of
Financial  Instruments," defines the fair value of a financial instrument as the
amount at which  the  instrument  could be  exchanged  in a current  transaction
between willing parties, other than in a forced or liquidation sale.

                                             1998                  1997     
                                        ----------------     -----------------
                                        Carrying     Fair    Carrying    Fair
                                        Amount       Value   Amount      Value
                                        ------       -----   ------      -----
                                               (Thousands of Dollars)
NCE
Investments, at cost................    $35,885   $ 35,256    $36,936   $ 36,072
Preferred stock of subsidiaries
 subject to mandatory redemption ...          -          -     41,829     42,893
PSCo and SPS obligated mandatorily
 redeemable preferred securities
 of subsidiary trust holding solely
 subordinated debentures of SPS
 and PSCo...........................    294,000    308,250    100,000    104,752
Long-term debt of subsidiaries......  2,343,710  2,434,249  2,245,424  2,251,523

PSCo
Investments, at cost................  $  30,355  $  31,324  $  36,936 $   36,072
Preferred stock subject to mandatory
 redemption ........................          -          -     41,829     42,893
PSCo obligated mandatorily redeemable
 preferred securities of
 subsidiary trust holding solely 
 subordinated debentures of PSCo        194,000    204,000          -          -
Long-term debt......................  1,687,611  1,590,226  1,595,298  1,604,160

                                       40
1998                  1997     
                                        ----------------     -----------------
                                        Carrying     Fair    Carrying    Fair
                                        Amount       Value   Amount      Value
                                        ------       -----   ------      -----
                                               (Thousands of Dollars)
SPS
Investments, at cost................    $  5,530   $  3,932   $      - $    -
SPS obligated mandatorily redeemable
 preferred securities of subsidiary
 trust holding solely subordinated 
 debentures of SPS ................      100,000    104,250    100,000  104,752
Long-term debt.....................      620,731    661,823    620,771  625,348

      The fair value of the debt and equity securities  included in Investments,
at cost,  is  estimated  based on quoted  market  prices for the same or similar
investments.  The debt  securities  are classified as  held-to-maturity  and the
equity securities are classified as  available-for-sale.  The unrealized holding
gains and losses for these debt and equity securities are not significant.

      The PSCo and SPS obligated mandatorily redeemable preferred securities and
long-term  debt are  based  on  quoted  market  prices  of the  same or  similar
instruments.  Since PSCo, SPS and Cheyenne are subject to regulation,  any gains
or losses  related to the  difference  between the carrying  amount and the fair
value of these  financial  instruments  would not be realized  by the  Company's
shareholders.

      The  fair  value  estimates   presented  herein  are  based  on  pertinent
information available to management as of December 31, 1998 and 1997. 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.

Off-Balance-Sheet Financial Instruments

      NCE has entered in to a  construction  contract  guarantee  which  assures
Quixx's  performance  under  its  engineering,   procurement,  and  construction
contract with Borger Energy Associates,  L.P. ("BEA").  Quixx, which owns 45% of
BEA, is constructing a 230 Mw cogeneration facility at a Phillips Petroleum site
near Borger,  Texas. The maximum  aggregate amount of this guarantee at December
31, 1998 was $88.4 million.  This maximum  amount  decreases to $25.0 million at
commercial  operation of the facility,  currently  estimated in March 1999,  and
remains  in effect  for a period of no longer  than 24 months  before  expiring.
Based upon the current state of construction of the facility,  this guarantee is
not expected to have any financial impact on NCE.

      As of December 31, 1998,  NCE had $59.9 million of guarantees  outstanding
to e prime.  These guarantees were made to facilitate e prime's energy marketing
and trading activities.  Also, e prime, inc. has guaranteed obligations relating
to the sale and  purchase  of energy  and  capacity  for TOG.  These  guarantees
totaled $13.3 million at December 31, 1998.

      In  connection  with an  agreement  for the sale of  electric  power,  SPS
guaranteed  certain  obligations  of a  customer  totaling  $48  million.  These
obligations related to the construction of certain utility property that, in the
event of default by the customer, would revert to SPS.

      NCE and YGSC have  guaranteed 50% of amounts  financed under a $32 million
Credit  Agreement among Young Storage and various lending  institutions  entered
into on June 27, 1995. This debt financing is for the development,  construction
and operation of an  underground  natural gas storage  facility in  northeastern
Colorado. (see Note 3.
Acquisition and Divestiture of Investments).

      NC Enterprises has guarantees  totaling $10 million of New Century Cadence
as of December 31, 1998. These guarantees relate to the capital requirements and
operations  of Cadence  Network  LLC,  in which New  Century  Cadence is a 33.3%
partner.

                                       41
Risk Management

Energy Financial Contracts - Trading

      The  Company  and  its  subsidiaries  use  the  mark-to-market  method  of
accounting  for energy  trading  activities  and  recognized a gain related to e
prime's  power  trading  activities  and a loss related to e prime's gas trading
activities.  These gains and losses were  recognized as part of purchased  power
and gas purchased for resale, respectively,  and totaled less than $500,000. The
following  table  displays  the  mark-to-market  values  of the  energy  trading
financial  instruments of the Company and its  subsidiaries at December 31, 1998
and the average value for the period then ended.
                                       Assets                Liabilities     
                  Net Notional   Average  Dec. 31, 1998  Average  Dec. 31, 1998
                     Amount       Value       Value       Value       Value
                     ------       -----       -----       -----       -----
                              (in thousands of dollars)(in thousands of dollars)
Natural Gas (Mmbtus) 30,000       $ 335       $ 467      $ 344        $ 489
Power (Mwhs)         61,800         149         426        256          795

      In  addition,  PSCo  and SPS did not  hold any  energy  trading  financial
instruments  at  December  31,  1998.  There  were no energy  trading  financial
instruments held by NCE and its subsidiaries at December 31, 1997.

Energy Financial Contracts - Other than Trading

      Various energy financial  instruments are used by NCE and its subsidiaries
as hedging mechanisms against future contractual energy related obligations. The
weighted  average  maturity  of these  instruments  is less  than one  year.  At
December  31,  1998,  the  Company,  as part of e prime's  retail gas  marketing
business,  held notional long volumetric positions of approximately 14.2 million
Mmbtus of natural gas related to these financial  instruments  which had related
unrealized losses of approximately  $6.4 million.  At December 31, 1997, e prime
held notional long volumetric  positions of approximately $5.2 million Mmbtus of
natural gas related to these financial  instruments which had related unrealized
losses of approximately $0.7 million. In addition, PSCo and SPS did not hold any
energy financial instruments at December 31, 1998.

Financial Derivatives - Interest Rates

      SPS has an  interest  rate swap  agreement,  which,  in effect,  fixes the
interest  rate on a $25  million  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.
SPS is  exposed  to  interest  rate  risk  in the  event  of  nonperformance  by
counterparties; however, SPS does not anticipate such nonperformance.

Credit Risk

      In addition to the risks discussed  above,  NCE and its  subsidiaries  are
exposed to credit risk in its risk management activities. Credit risk relates to
the risk of loss resulting  from the  nonperformance  of a  counterparty  of its
contractual  obligations.  As the Company  continues to expand its gas and power
marketing  and trading  activities,  the  Company's  exposure to credit risk and
counterparty  default may increase.  NCE and its  subsidiaries  maintain  credit
policies intended to minimize overall credit risk.

      NCE and its  subsidiaries  conduct  standard  credit review for all of its
counterparties.  The Company employs  additional credit risk control  mechanisms
when  appropriate,   such  as  letters  of  credit,   parental   guarantees  and
standardized master netting agreements 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.

                                       42
Concentration of Credit Risk - Accounts Receivable

      No individual customer or group of customers engaged in similar activities
represents  a  material  concentration  of credit  risk to the  Company  and its
subsidiaries.

9. Regulatory Matters (NCE, PSCo and SPS)

Electric Utility Matters

PSCo Performance Based Regulatory Plan

      PSCo's  base  electric  rates are  based on  traditional  cost of  service
ratemaking principles.  The CPUC established a performance based regulatory plan
in  connection  with the  CPUC's  decision  to  approve  the  Merger.  The major
components of this regulatory plan include the following:

-     an annual electric  department  earnings test with the sharing of earnings
      in excess of an 11% return on equity for the calendar years 1997-2001;
-     a Quality of Service Plan ("QSP")  designed with  performance  measures to
      effectively  penalize  or reward  PSCo  based on the  quality  of  service
      provided to retail customers; and
-     an Incentive  Cost  Adjustment  ("ICA") which  provides for the sharing of
      energy costs and savings relative to an annual target cost/delivered Kwh.

      The  sharing  of  earnings  in excess of an 11%  return on equity  for the
calendar years 1997-2001 are as follows:
                  Electric Department            Sharing of Excess Earnings
                  Return on Equity             Customers      Shareholders
                  ----------------             ---------      ------------
                       11-12%                   65%              35%
                       12-14%                   50%              50%
                       14-15%                   35%              65%
                      over 15%                 100%               0%

      The QSP  provides  for  bill  credits  if PSCo  does not  achieve  certain
performance measures relating to electric  reliability,  customer complaints and
telephone response to inquiries. For 1997, the QSP provided for up to $3 million
of rewards for its  performance  and PSCo's actual reward totaled  approximately
$1.5  million.  During the third  quarter  of 1998,  PSCo  reached a  settlement
agreement  with  the CPUC  Staff  and the OCC  which  modified  the bill  credit
structure for 1998 electric  reliability and eliminated the reward structure for
the years 1999  through  2001.  Approval of this  modification  was  obtained in
November 1998.

      In April 1998,  PSCo filed with the CPUC its  proposed  Performance  Based
Regulatory Plan adjustment for calendar year 1997. This adjustment  provides the
means for  implementing  the sharing  mechanism  for the  customers'  portion of
earnings over PSCo's  authorized  return on equity threshold  resulting from the
1997  earnings  test,  net of QSP  rewards.  PSCo  recorded  a  customer  refund
obligation of $15.1 million for the 1997 earnings test. In July 1998, PSCo began
refunding a portion of this amount to  customers  through  bill  credits.  As of
December 31, 1998, PSCo recorded an estimated refund obligation of approximately
$8.1 million for the 1998 earnings test.

      Additionally,  a $6 million annual  electric rate reduction was instituted
October 1, 1996,  followed by an  additional  $12 million  annual  electric rate
reduction  effective with the implementation of new retail gas rates on February
1, 1997.  PSCo  agreed to freeze  base  electric  rates  after the  Merger  rate
reductions for the period through December 31, 2001 with the flexibility to make
certain other rate changes,  including  those necessary for the recovery of DSM,
QF capacity costs and  decommissioning  costs. The freeze in base electric rates
does not  prohibit  PSCo from  filing a general  rate case or deny any party the
opportunity to initiate a complaint or show cause proceeding.

                                       43
PSCo FERC Rate Case

      PSCo filed a rate case with the FERC on December  29,  1995,  requesting a
slight  overall  rate  increase  (less  than  1%) from  its  wholesale  electric
customers.  This filing, among other things,  requested approval for recovery of
OPEB costs under SFAS 106,  postemployment  benefit costs under SFAS 112 and new
depreciation  rates based on the Company's most recent  depreciation  study.  In
March 1997, the FERC issued an order accepting for filing and suspending certain
proposed rate changes.  Settlement  agreements were reached with all parties and
filed with the FERC,  which,  resulted in a slight decrease in rates overall.  A
final order accepting the settlement agreements was received in June 1997.

SPS Merger Related Rate Reductions

      Under the  various  regulatory  commission  approvals,  SPS is required to
provide  credits to  customers  over five  years for  one-half  of the  measured
non-fuel  operation and maintenance  expense savings associated with the Merger.
SPS will provide  guaranteed  minimum annual  credits to retail  customers of $3
million in Texas, $100,000 in Oklahoma and $10,000 in Kansas and $1.5 million to
wholesale customers.

      Under a settlement  reached with the NMPRC,  effective  December 30, 1998,
SPS  discontinued  the merger  savings  credit of $1.2 million per year with the
implementation of new retail rates in New Mexico as discussed below.

SPS Electric Cost Adjustment Mechanisms

      Substantially  all fuel and  purchased  power costs are  recoverable  from
utility customers,  as determined on a jurisdictional basis, using approved cost
adjustment  mechanisms.  As a result  of  amendments  during  1998 to  contracts
between the coal  supplier  to SPS and the  railroad  company it  employs,  coal
transportation costs are projected to decline  significantly for the period from
November  1998  through  December  2002.  These  savings  will be  passed  on to
customers.

Texas

      The PUCT's  regulations  require  periodic  examination  of SPS's fuel and
purchased  power costs,  the  efficiency  of the use of such fuel and  purchased
power, fuel acquisition and management  policies and purchase power commitments.
SPS is required to file an  application  for the  Commission to  retrospectively
review,  at least every three years,  the operations of a utility's  electricity
generation  and  fuel  management  activities.  In  June  1998,  SPS  filed  its
reconciliation  for the  generation  and  fuel  management  activities  totaling
approximately  $690 million,  for the period from January 1995 through  December
1997.   For  this  same  period,   SPS  had   approximately   $21.4  million  in
underrecovered  fuel costs  associated with the Texas retail  jurisdiction.  The
Company has also  requested the  prospective  sharing of margins from  wholesale
non-firm sales.  The outcome of this fuel  reconciliation  proceeding is pending
and a hearing has been set for June 1999.

      SPS was named as a defendant in a case entitled Thunder Basin Coal Co. vs.
Southwestern  Public Service Co. In November,  1994, the jury returned a verdict
in favor of Thunder Basin and awarded  damages of  approximately  $18.8 million.
SPS  appealed the judgment  and, in January  1997,  that Court found in favor of
Thunder  Basin and upheld the  judgment.  In February  1997,  SPS  recorded  the
liability  for the judgment  including  interest and court costs.  The amount of
approximately $22.3 million was paid in April 1997.

      During  1996 and  1997,  SPS  obtained  conditional  approval  to  collect
portions of the Thunder Basin  judgment from  wholesale  customers from the FERC
and the  NMPRC  issued  an order  granting  recovery  of the New  Mexico  retail
jurisdictional  portion of the judgment.  In May 1997,  SPS filed a request with
the PUCT to surcharge  undercollected  fuel and purchased power expenses,  which
included $9.1 million of the Thunder Basin judgment.  The PUCT issued a decision
which denied  recovery of the  judgment  through a surcharge on the grounds that
the costs were not classified as fuel costs. In 1997, SPS expensed approximately
$12.1  million of the Texas retail  jurisdictional  portion of the Thunder

                                       44
Basin  judgment  and   recognized  an  equal  amount  as  deferred   revenue  in
anticipation  of  future  recovery  through  the  pending  fuel   reconciliation
proceeding.

      SPS believes that recovery of the Thunder Basin costs for the Texas retail
jurisdiction  will be approved in the pending  fuel  reconciliation  proceeding.
Under the PUCT  regulations,  a utility may recover  eligible  fuel  expenses or
fuel-related  expenses,  which result in benefits to  customers  that exceed the
costs that  customers  would  otherwise  have to pay.  The  Thunder  Basin costs
resulted in total net savings to customers of approximately  $8.5 million,  with
approximately   $4.6   million  net  savings   attributable   to  Texas   retail
jurisdictional customers.

New Mexico

      In October  1997,  the NMPRC  approved  a fixed fuel  factor for SPS's New
Mexico retail  jurisdiction,  effective January 1998. This employs an over/under
fuel collection calculation made on a monthly basis. SPS is required to petition
for a change in the fixed fuel factor if the over/under recovery balance reaches
$5 million. In addition, on an annual basis SPS files with the NMPRC a report of
SPS's fuel and purchase  power  costs,  which  includes  the current  over/under
recovery  balance and proposed  rate changes to refund or surcharge the balance.
The methodology of the over/under calculation,  plus interest, is similar to the
Texas  fixed  fuel  factor   calculation.   Previously,   New  Mexico's   retail
jurisdictional  electric  rates applied a monthly fuel factor.  In January 1999,
SPS  implemented  new annual fixed fuel cost  recovery  factors to reflect lower
fuel costs primarily as a result of the aforementioned  coal transportation cost
settlement between SPS's coal supplier and the railroad company.

SPS Rate Cases

New Mexico

      In November 1997, the NMPRC issued an order  investigating SPS's rates. In
the order, the NMPRC  determined that because of the rapid changes  occurring in
the  electric  industry  the NMPRC would  require rate case filings by the major
electricity  suppliers who have not adopted a plan to provide retail open access
and customer  choice of  suppliers.  SPS made a  compliance  filing in May 1998,
which proposed a $1.7 million annual rate reduction for certain retail customers
in New  Mexico and  incorporated  the $1.2  million  guaranteed  minimum  annual
credits,  discussed  above.  In October  1998,  SPS entered into an  uncontested
stipulation  agreement  settling the rate  investigation  case.  As part of this
settlement,  SPS  instituted  a  $6  million  annual  reduction  in  base  rates
(discontinuing  the $1.2  million in  guaranteed  minimum  annual  credits)  for
certain retail customers.  Additionally,  SPS implemented full  normalization in
its accounting  for income taxes with recovery of the New Mexico  jurisdictional
portion of the tax regulatory  asset over 16.8 years.  On November 30, 1998, the
NMPRC approved the stipulation and the rate reduction became effective  December
30, 1998.

Wholesale - FERC

      In 1989,  the FERC issued its final order  regarding a 1985 wholesale rate
case. SPS appealed certain portions of that order that related to recognition of
rates of the  reduction  of the  federal  income tax rates from 46% to 34%.  The
United  States  Court  of  Appeals  remanded  the  case,  directing  the FERC to
reconsider  SPS's claim.  Negotiated  settlements  with certain  customers  were
reached,  and  approved  by the  FERC,  in 1993 and  1995,  with  SPS  receiving
approximately  $10  million,  including  interest.  Settlement  agreements  were
reached with the two remaining  customers  during 1998 and approved by the FERC.
In connection with these  settlements,  SPS recorded $16.9 million of additional
revenues and $7.6 million of additional depreciation expense.

Cheyenne Electric Cost Adjustment Mechanism

      Cheyenne  filed  for an  increase  in its ECA  rates of  approximately  $3
million and new rates became effective January 1, 1999. This increase,  however,
is being contested and hearings are scheduled for March 1999.

                                       45
Gas Utility Matters

PSCo Rate Cases

      On June 5, 1996, PSCo filed a retail rate case with the CPUC requesting an
annual increase in its jurisdictional  gas department  revenues of approximately
$34  million.   In  early  1997,  the  CPUC  approved  an  overall  increase  of
approximately $18 million with an 11.25% return on equity, effective February 1,
1997 and as  modified  on May 15,  1997.  The CPUC  disallowed  the  recovery of
certain  postemployment  benefit  costs under SFAS 112 and  imputed  anticipated
merger  related  savings net of costs  related to the gas business  (see Note 1.
Summary of  Significant  Accounting  Policies).  PSCo filed a petition  with the
Denver  District Court appealing the CPUC's  decision.  The District Court judge
requested oral arguments in the proceeding.  The Company  anticipates a decision
during 1999.

      In  November  1998,  PSCo  filed a  retail  gas  rate  case  with the CPUC
requesting  an annual  increase in rates of  approximately  $23.4  million.  The
request for a rate increase reflects revenues for additional plant investment, a
12.0% return on equity and the recovery of incremental year 2000 costs (see Note
5.  Commitments  and   Contingencies  -  Year  2000  Costs).   The  recovery  of
postemployment benefit costs was not included in this request pending a decision
from the Denver District Court, as discussed  above.  Hearings are set for April
1999. The new rates, if approved, would become effective July 1, 1999.

Cheyenne Rate Case

      In May 1997,  Cheyenne filed an  application  with the WPSC for an overall
annual increase in retail gas revenues of approximately $1.25 million.  The WPSC
approved an increase in retail gas revenues of approximately $1.19 million, with
an 11.71% return on equity, effective October 1, 1997.

10. Commitments and Contingencies (NCE, PSCo and SPS)

Environmental Issues

      The Company  and its  subsidiaries  are  subject to various  environmental
laws, including  regulations governing air and water quality and the storage and
disposal of hazardous or toxic wastes. The Company and its subsidiaries  assess,
on an ongoing basis,  measures to ensure  compliance  with laws and  regulations
related  to air and water  quality,  hazardous  materials  and  hazardous  waste
compliance and remediation activities.

Environmental Site Cleanup

      As  described  below,  PSCo has  been or is  currently  involved  with the
cleanup of contamination from certain hazardous substances.  In many situations,
PSCo is  pursuing  or intends to pursue  insurance  claims and  believes it will
recover some portion of these costs  through  such claims.  Additionally,  where
applicable, PSCo is pursuing, or intends to pursue, recovery from other PRPs and
through the rate regulatory  process.  To the extent any costs are not recovered
through the options listed above, PSCo would be required to recognize an expense
for such unrecoverable amounts.

      Under the CERCLA,  the U.S. EPA identified,  and a Phase II  environmental
assessment  revealed,  low  level,   widespread   contamination  from  hazardous
substances at the Barter Metals Company ("Barter") properties located in central
Denver.  For an  estimated  30 years,  PSCo  sold  scrap  metal  and  electrical
equipment to Barter for  reprocessing.  PSCo has  completed  the cleanup of this
site at a cost of approximately  $9 million and has received  responses from the
Colorado Department of Public Health and Environment  ("CDPHE")  indicating that
no further action is required related to these  properties.  On January 3, 1996,
in a lawsuit by PSCo against its insurance providers,  the Denver District Court
entered  final  judgment  in favor of PSCo in the  amount  of $5.6  million  for
certain  cleanup  costs at Barter.  Several  appeals and cross appeals have been
filed  by one of the  insurance  providers  and  PSCo in the  Colorado  Court of
Appeals.  The insurance  provider has posted  supersedeas bonds in the amount of
$9.7 million ($7.7 million  attributable  to the Barter  judgment).  On July 10,
1997,  the Colorado  Court of Appeals  overturned  the  previously  awarded $7.7
million judgment on the basis that the jury had not been properly  instructed by
the Judge regarding a narrow issue associated with certain policies. Previously,
PSCo had received  certain  insurance  settlement  proceeds from other insurance

                                       46
providers for Barter and other  contaminated  sites and a portion of those funds
remains  to be  allocated  to this site by the trial  court.  Both  sides of the
litigation  filed  petitions for certiorari to the Colorado  Supreme Court which
granted a hearing on several  issues,  although the matter is still pending.  In
addition,  in August  1996,  PSCo  filed a  lawsuit  against  four PRPs  seeking
recovery of certain Barter related costs.  Settlement has been achieved with two
smaller PRPs. On December 16, 1997,  the U. S.  District  Court awarded  summary
judgment in favor of the remaining PRPs, on the basis that PSCo failed to follow
CERCLA guidelines in the cleanup. On January 15, 1998, PSCo appealed the summary
judgment to the U.S. Court of Appeals,  which is still  pending.  In March 1998,
PSCo sold the  remaining  Barter  properties,  and the total  proceeds were $1.1
million.

      PCB presence was identified in the basement of an historic office building
located in downtown Denver.  The Company was negotiating the future cleanup with
the current  owners;  however,  in October 1993, the owners filed a civil action
against  PSCo in the Denver  District  Court.  The action  alleged that PSCo was
responsible  for the PCB  releases and  additionally  claimed  other  damages in
unspecified  amounts.  In August  1994,  the  Denver  District  Court  entered a
judgment  approving a $5.3  million  offer of  settlement  between  PSCo and the
building owners  resolving all claims.  In December 1995, PSCo filed  complaints
against all applicable  insurance carriers in the Denver District Court. In June
1997,  the Court  ruled in favor of the  carriers  on summary  judgment  motions
addressing late notice and other issues. In August 1997, PSCo filed an appeal of
the decision with the Colorado  Court of Appeals,  which is still  pending.  One
carrier was  excluded  from the summary  judgment;  subsequently,  that  carrier
received  approval to be dismissed on the same basis as the other  carriers.  In
March 1998,  PSCo reached a settlement  with another carrier who was not part of
the Denver District Court action.  In December 1998, the CPUC approved  recovery
of the electric  jurisdictional  net costs totaling  approximately  $3.1 million
through PSCo's electric department  earnings test over a five-year  amortization
period.

      In addition to these sites, PSCo has identified  several other sites where
clean up of hazardous substances may be required.  While potential liability and
settlement costs are still under  investigation  and negotiation,  PSCo believes
that the resolution of these matters will not have a material  adverse effect on
PSCo's financial position, results of operations or cash flows. PSCo will pursue
the  recovery  of all  significant  costs  incurred  for such  projects  through
insurance claims and/or the rate regulatory process.

Other Environmental Matters

      Under the Clean Air Act  Amendments of 1990  ("CAAA"),  coal-fueled  power
plants are required to reduce SO2 and NOx emissions to specified  levels through
a phased  approach.  PSCo and SPS's  facilities  must  comply  with the Phase II
requirements,  which  will be  effective  in the  year  2000.  Currently,  these
regulations  permit  compliance  with SO2  emission  limitations  by  using  SO2
allowances  allocated  to  plants  by the EPA,  using  allowances  generated  by
reducing  emissions at existing  plants and by using  allowances  purchased from
other  companies.  The Company  expects to meet the Phase II emission  standards
placed on SO2 through the  combination of: a) the use of low sulfur coal, b) the
operation of air quality control equipment on certain generation facilities, and
c) allowances issued by the EPA and purchased from other companies. In addition,
PSCo will be required to modify  certain  boilers by the year 2000 to reduce the
NOx emissions in order to comply with Phase II requirements. The estimated Phase
II costs for these future plant  modifications  to meet NOx  requirements  total
approximately  $2.5  million  and  pertain to PSCo's  Cherokee  Unit 1 and 2 and
Arapahoe Unit 3.

      PSCo has announced its  intention to spend  approximately  $211 million on
its Denver and Boulder  Metro area  coal-fueled  power plants to further  reduce
such emissions below the required  regulatory  levels  discussed above, but will
only do so if the following  three  conditions are met: 1) the Colorado  General
Assembly  and the  CPUC  approve  recovery  of  these  costs,  2)  PSCo  obtains
flexibility  in  operating  the  plants,  and 3) PSCo is  assured  the  emission
reduction  plan is  sufficient to meet future state  requirements  for 15 years.
Legislation  was passed and signed  into law during the second  quarter of 1998.
During the third  quarter of 1998,  PSCo and the CDPHE  entered into a voluntary
emissions  reduction  agreement  under the  legislation.  In November  1998, the
Company filed for recovery of these costs with the CPUC. The voluntary emissions
reduction  agreement will be effective only if the CPUC approves a cost recovery
mechanism acceptable to PSCo.

                                       47
Hayden Steam Electric Generating Station

      In May 1996,  PSCo and the other joint owners of Hayden Station reached an
agreement  resolving  violations  alleged in complaints  filed by a conservation
organization,  the  CDPHE and the EPA  against  the  joint  owners.  PSCo is the
operator  and owns an average  undivided  interest of  approximately  53% of the
station's two generating  units. In connection  with the  settlement,  the joint
owners of the Hayden station were required to install emission control equipment
of approximately $130 million (PSCo's portion is approximately $70 million). The
settlement  included  stipulated future penalties for failure to comply with the
terms  of the  agreement,  including  specific  provisions  related  to  meeting
construction  deadlines  associated with the installation of additional emission
control  equipment  and  complying  with  particulate,  SO2  and  NOx  emissions
limitations.  In  August  1996,  the U.S.  District  Court for the  District  of
Colorado  entered the  settlement  agreement,  which  effectively  resolved this
litigation. Installation of this emission control equipment is in process and on
schedule in accordance with the settlement  agreement.  The initial installation
of some equipment at Unit 1 was completed in late 1998.

Craig Steam Electric Generating Station

      In October 1996, a conservation organization filed a complaint in the U.S.
District  Court  pursuant to provisions of the Federal Clean Air Act (the "Act")
against the joint owners of the Craig Steam Electric  Generating Station located
in western Colorado. Tri-State Generation and Transmission Association,  Inc. is
the operator of the Craig station and PSCo owns an undivided  interest (acquired
in April 1992) in each of two units at the station totaling  approximately 9.7%.
The plaintiff alleged that: 1) the station exceeded the 20% opacity  limitations
in excess of 14,000 six minute  intervals  during the period  extending from the
first  quarter of 1991  through  the second  quarter of 1996,  and 2) the owners
failed to operate the  station in a manner  consistent  with good air  pollution
control  practices.  The complaint  seeks,  among other things,  civil  monetary
penalties and injunctive relief. The Act provides for penalties of up to $25,000
per day per  violation,  but the level of  penalties  imposed in any  particular
instance is discretionary. Settlement discussions were held in 1998, although no
settlement  was  achieved.  There have been no further  settlement  discussions.
Resolution of this matter may require the  installation  of additional  emission
control  equipment.  Management does not believe that this potential  liability,
the future impact of this  litigation on plant  operations,  or any related cost
will have a material  adverse impact on PSCo's  financial  position,  results of
operations or cash flows.

Fort St. Vrain Defueling and Decommissioning

      In 1989, PSCo announced its decision to end nuclear operations at Fort St.
Vrain.   Defueling  of  the  reactor  to  the  Independent  Spent  Fuel  Storage
Installation  ("ISFSI") was completed in June 1992. In March 1996,  PSCo and the
decommissioning   contractors   announced  that  the  physical   decommissioning
activities  at the  facility  had been  completed.  The final  site  survey  was
completed  in late October  1996.  On August 5, 1997,  the NRC  approved  PSCo's
request to terminate the Part 50 license.  This  concluded  the  decommissioning
activities as the  facilities  and the site was released for  unrestricted  use.
PSCo is currently operating a gas-fired combined cycle steam generation plant at
this facility.

      On February 9, 1996, PSCo and the DOE entered into an agreement  resolving
all the  defueling  issues.  As part of this  agreement,  PSCo has agreed to the
following:  1) the DOE assumed title to the fuel currently  stored in the ISFSI,
2) the DOE will assume title to the ISFSI and will be responsible for the future
defueling and decommissioning of the facility, 3) the DOE agreed to pay PSCo $16
million  for the  settlement  of  claims  associated  with the  ISFSI,  4) ISFSI
operating and maintenance costs,  including  licensing fees and other regulatory
costs, will be the  responsibility of the DOE, and 5) PSCo provided to the DOE a
full and complete  release of claims  against the DOE resolving all  contractual
disputes  related to  storage/disposal  of Fort St. Vrain spent nuclear fuel. On
December 17, 1996,  the DOE submitted a request to the NRC to transfer the title
of the ISFSI. The NRC is reviewing this request and PSCo anticipates approval in
early 1999.

      As a result  of the DOE  settlement,  coupled  with a  complete  review of
expected  remaining  decommissioning  costs and establishment of the anticipated
refund to customers, pre-tax earnings were positively impacted for 1997 and 1996
by  approximately $5 million and $16 million,  respectively.  In accordance with
the 1991 CPUC approval to recover certain decommissioning costs, 50% of any cash
amounts received from the DOE as part of a settlement,  net of 

                                       48
costs incurred by PSCo,  including  legal fees, is to be refunded or credited to
customers.  At December 31, 1998,  a $4.7 million  refund to customers  has been
recorded on the consolidated balance sheet.

      Under  the   Price-Anderson   Act,  PSCo  remains   subject  to  potential
assessments  levied in response to any  nuclear  incidents  prior to early 1994.
PSCo continues to maintain primary  commercial  nuclear  liability  insurance of
$100  million for the Fort St.  Vrain site and the  adjoining  ISFSI.  PSCo also
maintains   coverage   of  $20.4   million  to  provide   property   damage  and
decontamination protection in the event of an accident involving the ISFSI.

Leyden Gas Storage Facility

      During August 1998, a Jefferson County, Colorado District Court jury found
PSCo liable for  approximately  $1.8 million for the reduction in land value and
related  damages  resulting from the  allegations  that natural gas had migrated
from the Leyden Gas Storage facility.  PSCo appealed the judgment.  The affected
land is located north of, but not immediately adjacent to, the storage facility.

Fuel Purchase Requirements

Coal Purchases and Transportation

      PSCo and SPS have in place  various  long-term  contracts for the purchase
and  transportation of coal (and with respect to SPS, the processing of coal for
deliveries  to its bunkers)  which are used in the  generation  of  electricity.
These  contracts  expire on various dates through 2017 and at December 31, 1998,
the  total  estimated   obligations,   based  on  1998  prices,  for  PSCo  were
approximately $729.2 million, and for SPS were approximately $1.2 billion.

Gas Purchases and Transportation

      PSCo  and  Cheyenne  have  long-term  contracts  for  the  purchase,  firm
transportation  and  storage of natural  gas.  These  contracts,  excluding  the
thirty-year  contract  with  Young  Storage  which has been  accounted  for as a
capital lease, are primarily used to support distribution of natural gas and the
majority of these  contracts  expire on various  dates through 2002. At December
31,  1998,  PSCo  has  minimum  annual   obligations  under  such  contracts  of
approximately  $167 million in 1999 declining  thereafter for a total  estimated
commitment of approximately $245 million. The combined PSCo and Cheyenne minimum
annual  obligation at December 31, 1998,  under such contracts is  approximately
$169 million in 1999 declining  thereafter for a total  estimated  commitment of
approximately  $248  million.  SPS does not have any  long-term  contracts  with
minimum obligations.

Purchased Power

      PSCo, SPS and Cheyenne have entered into agreements with utilities and QFs
for  purchased  power to meet  system  load  and  energy  requirements,  replace
generation from  company-owned  units under maintenance and during outages,  and
meet operating reserve obligations.

      PSCo and SPS have various  pay-for-performance  contracts  with QFs having
expiration dates through the year 2022. In general,  these contracts provide for
capacity payments, subject to the QFs meeting certain contract obligations,  and
energy  payments based on actual power taken under the  contracts.  The capacity
and energy  costs are  recovered  through  base  rates and other  cost  recovery
mechanisms.  Additionally,  the Company's  regulated  utilities  have  long-term
purchased power contracts with various regional utilities expiring through 2018.
Total capacity and energy  payments  associated with such contracts for NCE were
$490 million,  $477 million,  and $473 million; for PSCo such payments were $439
million,  $452 million and $453  million;  and, for SPS such  payments  were $23
million, $15 million and $20 million in 1998, 1997 and 1996, respectively.

                                       49
At December 31, 1998, the estimated future payments for capacity that NCE,
PSCo and SPS are obligated to purchase, subject to availability,  are as follows
(in thousands):
                                                           Regional
                                                 QFs     Utilities       Total
                                                 ---     ---------       -----
NCE
  1999..............................          $ 156,489     $182,969    $339,458
  2000..............................            153,808      163,990     317,798
  2001..............................            151,903      142,301     294,204
  2002..............................            139,656      130,534     270,190
  2003..............................            128,171      119,397     247,568
  2004 and thereafter...............          1,053,855    1,018,503   2,072,359
                                              ---------    ---------   ---------
   Total............................         $1,783,882   $1,757,694  $3,541,576
                                             ==========   ==========  ==========

PSCo
  1999..............................          $ 140,445     $166,620    $307,065
  2000..............................            137,497      155,227     292,724
  2001..............................            135,323      142,301     277,624
  2002..............................            122,802      130,534     253,336
  2003..............................            111,035      119,397     230,432
  2004 and thereafter...............            758,917    1,018,504   1,777,421
                                               --------    ---------   ---------
   Total............................         $1,406,019   $1,732,583  $3,138,602
                                             ==========   ==========  ==========

SPS
  1999..............................          $  16,044     $ 7,923     $ 23,967
  2000..............................             16,311           -       16,311
  2001..............................             16,580           -       16,580
  2002..............................             16,854           -       16,854
  2003..............................             17,136           -       17,136
  2004 and thereafter...............            294,938           -      294,938
                                              ---------     -------     --------
   Total............................          $ 377,863     $ 7,923     $385,786
                                              =========     =======     ========

      Historically,  all  minimum  coal,  coal  transportation,  natural gas and
purchased power requirements have been met.

System Purchase Option

      SPS 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 SPS 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 SPS 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. SPS has
the right to terminate the agreement if, in SPS'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 SPS's termination of the
agreement, SPS 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. It is anticipated that the City will file
a in suit in State  District  Court in 1999  seeking  to  condemn  the  electric
distribution facilities of EPE. In conjunction with the agreement, the NMPRC 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. SPS 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  was
conducted in Case 2651 in July 1997.  On November 24, 1998,  the NMPRC issued an
order dismissing the investigation.

                                       50
Other
      In  connection  with an  agreement  for the sale of  electric  power,  SPS
guaranteed  certain  obligations of a customer  totaling $48 million at December
31, 1997.  These  obligations are related to the construction of certain utility
property  that,  in the event of default by the  customer,  would revert to SPS.
Additionally,  the Company and its subsidiaries have commitments  related to the
purchase of materials, plant and equipment additions, DSM expenditures and other
various items resulting from the normal course of business.

Tax Matters

      PSRI, a subsidiary  of PSCo,  owns and manages  permanent  life  insurance
policies  on certain  past and present  employees.  These  corporate  owned life
insurance  ("COLI")  policies  were entered into prior to July 1, 1986. In 1996,
Congress  passed  legislation  to phase out the tax  benefits  with certain COLI
policies,   however,  the  Company's  policies  were  grandfathered  under  this
legislation.  In August  1998,  the IRS issued a Notice of  Proposed  Adjustment
proposing to disallow the 1993 and 1994  deductions of interest  expense related
to policy loans on the COLI policies  totaling  approximately  $54.6 million.  A
Request for Technical  Advice was filed with the IRS National  Office on January
15, 1999, with respect to the proposed adjustment.

      Management plans to vigorously  contest this issue.  PSCo has not recorded
any  provision  for  income tax or  interest  expense  related  to this  matter.
Management believes that the Company's tax deduction of interest expense on life
insurance  policy loans was in full compliance with IRS regulations and believes
that the  resolution of this matter will not have a material  adverse  impact on
PSCo's financial position, results of operations or cash flows.

Year 2000 Issue

      The  Year  2000  ("Y2K")  issue  is a result  of a  universal  programming
standard that records dates as six digits, e.g.,  mm/dd/yy,  using only the last
two digits for the year.  Any  automated  system  software or firmware that uses
two-digit fields could understand the year 2000 as the year 1900 if the issue is
not corrected.  This situation is not limited to computers; it has the potential
to affect many systems,  components  and devices,  which have embedded  computer
chips,  which may be,  date  sensitive.  The Y2K issue  could  result in a major
system failure or  miscalculations  and does impact many NCE systems  considered
critical or important to the Company's business  operations.  Systems posing the
greatest business risks to the Company include power generation and distribution
systems, telecommunications systems, energy trading systems and billing systems.
The Company is addressing  all potential  Y2K failure  points  identified in its
critical  automated systems to maintain service to its customers and to mitigate
legal and financial risks.

      In 1997,  the Company  established  the Y2K Program  Office to oversee all
corporate-wide  Y2K  initiatives.   These  initiatives  encompass  all  computer
software,  embedded systems, as well as contingency planning.  Teams of internal
and external  specialists  were  established  to  inventory  and assess and test
critical  computer programs and automated  operational  systems and modify those
that may not be Y2K  compliant.  The inventory  phase and  assessment  phase for
information  technology  ("IT")  systems were  completed in 1998.  Additionally,
approximately  77% of the  remediation  and  testing  phase for all  critical IT
systems was completed in 1998 with the remaining remediation and testing planned
to be completed by June 30, 1999. For non-IT  systems,  which exist primarily in
the  generation,  transmission  and  distribution  areas  of the  business,  the
inventory and assessment phases are complete. Remediation and testing for non-IT
systems were  approximately  46% complete at December 31, 1998; the remainder is
expected  to be  completed  by  September  30,  1999.  Systems  critical  to the
generation and delivery of energy are expected to be completed by June 30, 1999.

      The Company  has  identified  third  parties,  with which it has  material
business relationships including  interconnected  utilities,  telecommunications
service  providers,  fuel  and  water  suppliers,  equipment  suppliers,  leased
facilities  and  financial  institutions.  Subject  matter  experts,  along with
functional managers,  continue to evaluate the current list of third parties and
have ongoing discussions with these and other critical suppliers about their Y2K
readiness and contingency planning efforts.

                                       51
The Company  currently expects to incur costs of approximately $25 million
to modify its computer  software,  hardware and other automated  systems used in
operations enabling proper data processing relating to the year 2000 and beyond.
This includes approximately $19 million for inventory,  assessment,  remediation
and testing and approximately $6 million for the replacement of automated system
components.  Furthermore, the Company expects to spend approximately $15 million
in capital expenditures for the accelerated replacement of certain non-compliant
IT systems,  which are expected to be  implemented  by September  30, 1999.  The
majority  of all Y2K  costs  will be  incurred  by PSCo and SPS.  A  significant
portion of the costs incurred to address the Company's Y2K issues will represent
the redeployment of existing information  technology resources.  The table below
details the actual costs incurred  through  December 31, 1998, and the estimated
costs to be incurred during 1999 (in millions).

                                               Actual Costs  Estimated Estimated
                                               1998 and Prior  1999      Total
                                               --------------  ----      -----

      Operating expenses.......................     $  8.2   $ 11.1  $ 19.3
      Capital expenditures ....................        7.1     13.4    20.5

      Yorkshire Power has also undertaken  activities to address Y2K issues. The
estimated  proportionate share of Yorkshire Power's incremental Y2K costs (costs
which would not have been required in the normal  course of business)  that will
flow through to the  Company's  earnings as a result of such  activities  is not
expected  to have a material  impact on the  financial  condition  or results of
operations of the Company.

      The most  reasonably  likely  worst  case  scenario  resulting  during Y2K
critical  dates is a loss of  production  capacity from certain of the Company's
generating units, along with loss of a portion of the communication  system that
is critical to generation and distribution  control.  If this were to occur, the
Company's  operating  utilities  may be  required  to  "island"  (separate  from
neighboring  interconnected utilities) their generation and distribution systems
in their service  territories.  As part of this  scenario,  difficulty  could be
encountered with the restart of generating  units. The overall blackout recovery
plan for NCE is designed so that this most reasonably likely worst case scenario
would be addressed and electricity  restored.  Critical  components of this plan
have been and continue to be tested to provide  assurance  that the Company will
be prepared for risks which could result from the Y2K millennium change.

      If correction or replacement of non-compliant systems are not completed on
a timely basis,  the Y2K issues may have a material  impact on the operations of
the Company and its subsidiaries. Management, however, does not anticipate these
activities  will  have a  material  adverse  impact on the  financial  position,
results of operations or cash flows of the Company or its subsidiaries.

Leasing Program

      The Company's  subsidiaries lease various equipment and facilities used in
the  normal  course of  business,  some of which are  accounted  for as  capital
leases.  Expiration of the capital  leases range from 1999 to 2025. The net book
value of property  under capital  leases was $39.8 million and $39.6 million for
NCE and PSCo,  respectively  at December  31,  1998 and $44.7  million and $44.4
million for NCE and PSCo,  respectively,  at December 31, 1997.  Assets acquired
under capital leases are recorded as property at the lower of fair-market  value
or the present  value of future  lease  payments  and are  amortized  over their
actual  contract term in accordance  with practices  allowed by regulators.  The
related obligation is classified as long-term debt. Executory costs are excluded
from the minimum lease payments.

      The majority of the operating  leases are under a leasing program that has
initial  noncancellable  terms of one year,  while  the  remaining  leases  have
various terms. These leases may be renewed or replaced. No material restrictions
exist in these leasing  agreements  concerning  dividends,  additional  debt, or
further leasing. Rental expense for 1998, 1997 and 1996 was $15.5 million, $36.2
million and $26.9 million,  respectively,  for NCE; $12.2 million, $31.1 million
and $25.0 million,  respectively,  for PSCo; and $2.4 million,  $4.3 million and
$3.7 million,  respectively,  for SPS.  SPS's rental  expense for the Transition
Period was $1.2 million.

                                       52
Estimated  future  minimum  lease  payments at December 31,  1998,  are as
follows (in thousands):

Capital Leases
                                                          NCE        PSCo 
                                                          ---        ---- 
1999 ..............................................    $ 8,020     $ 7,890
2000...............................................      5,158       5,092
2001...............................................      5,035       5,035
2002...............................................      4,820       4,820
2003...............................................      4,646       4,646
All years thereafter...............................     71,711      71,711
                                                       -------     -------
    Total future minimum lease payments                 99,390      99,194
    Less amounts representing interest.............     59,639      59,639
                                                       -------     -------
    Present value of net minimum lease payments....    $39,751     $39,555
                                                       =======     =======

Operating Leases
                                              NCE        PSCo         SPS 
                                              ---        ----         --- 
1999..................................     $13,512     $10,451     $ 2,292
2000..................................      10,647       8,012       2,195
2001..................................       5,450       3,297       1,860
2002..................................         499         347          31
2003..................................         379         245          26
All years thereafter.................        7,752       7,313          52
                                           -------     -------     -------
    Total future minimum lease payments    $38,239     $29,665     $ 6,456
                                           =======     =======     =======

Employee Matters

      The Company and its subsidiaries are engaged in certain employment related
litigation and intend to contest, or are actively  contesting,  all such claims,
and believe that the ultimate outcome will not have a material adverse impact on
the  financial  position,  results of operations or cash flows of the Company or
its subsidiaries.

Union Contracts

PSCo

      The current  Collective  Bargaining  Agreement is a  three-year  agreement
extending  from June 1, 1997 through May 31, 2000 with wage  increases of 3%, 3%
and  3.25%  beginning  in each  year  of the  agreement  1997,  1998  and  1999,
respectively. Approximately 1,946 employees, or 62% of PSCo's total workforce at
December  31,  1998,  are  represented  by  the  International   Brotherhood  of
Electrical Workers, ("IBEW"), Local 111.

SPS

      The current  Collective  Bargaining  Agreement is a  three-year  agreement
extending from November 1, 1996 through  November 1, 1999 with wage increases of
3% in each year of the agreement.  Approximately 805 employees,  or 60% of SPS's
total workforce at December 31, 1998, are represented by the IBEW, Local 602.

                                       53
11.  Jointly-Owned Electric Utility Plants (NCE and PSCo)

      The Company's investments in jointly-owned plants (PSCo participation) and
its ownership percentages as of December 31, 1998, are (in thousands):
                                   Plant                 Construction
                                    in      Accumulated     Work in
                                  Service  Depreciation    Progress  Ownership %
                                  -------  ------------    --------  -----------

   Hayden Unit 1................   $70,191     $31,785      $  2,841      75.50
   Hayden Unit 2................    58,257      35,518        11,191      37.40
   Hayden Common Facilities.....    23,411         720         1,350      53.10
   Craig Units 1 & 2............    57,660      25,985            50       9.72
   Craig Common Facilities 
     Units 1 & 2 ...............    10,990       3,388            30       9.72
   Craig Common Facilities
     Units 1,2 & 3 .............     8,773       3,698             1       6.47
   Transmission Facilities, 
     Including Substations .....    79,722       24,703           92   42.0-73.0
                                   -------     --------       ------

                                   $309,004    $125,797     $ 15,555
                                   ========    ========     ========

      These assets include  approximately  320 Mw of net  dependable  generating
capacity.  PSCo is responsible for its proportionate share of operating expenses
(reflected  in PSCo's and the Company's  consolidated  statements of income) and
construction  expenditures.  The  increase  in plant in  service in 1998 and the
construction  work in  progress  amounts  for Hayden  Unit 1,  Hayden Unit 2 and
Hayden  Common  Facilities  include  construction  expenditures  for  installing
emission control equipment for these facilities as discussed in Note 10.

12. Employee Benefits (NCE, PSCo and SPS)

      The FASB issued SFAS  No.132,  "Employers'  Disclosures  about  Pensions &
Other  Postretirement  Benefits",  effective  for 1998.  This  standard does not
change  the   measurement   or   recognition  of  costs  for  pension  or  other
postretirement plans but rather standardizes disclosures.

Pensions

      The Company and its  subsidiaries  maintain tax qualified  noncontributory
defined  benefit  pension  plans which cover  substantially  all  employees.  At
December  31,  1998,  there  were  5,839,  3,118,  and 1,276  NCE,  PSCo and SPS
employees, respectively, participating in these plans. NCE, as the plan sponsor,
has overall responsibility for directly allocating such costs of each individual
plan to each of the participating  employers.  This allocation was determined by
the plans' actuary based on benefit obligations for active participants.

      Plan  assets are held in a master  trust.  Plan  assets are stated at fair
value and are comprised  primarily of corporate  debt and equity  securities,  a
real estate fund and government securities held either directly or in commingled
funds. The Company's funding policy is to contribute annually, at a minimum, the
amount necessary to satisfy the IRS funding standards.

      A comparison  of the  actuarially  computed  benefit  obligation  and plan
assets at December 31, 1998 and 1997,  is presented in the  following  table (in
thousands).

Change in Benefit Obligation            1998        1997 
                                       ------      ------

Obligation at January 1............    $ 991,973   $919,452
Service cost.......................       23,902     18,418
Interest cost......................       66,735     68,327
Plan amendments *..................      (60,014)        -
Actuarial loss.....................       52,416     42,460
Benefit payments...................      (61,221)   (54,412)
Curtailment........................            -     (2,272)
                                         -------     ------
Obligation at December 31..........   $1,013,791   $991,973
                                      ==========   ========

                                       54
Change in Fair Value of Plan Assets          1998          1997 
                                            ------         -----
Fair value of plan assets at 
  January 1 .......................     $1,131,270    $  996,085
Actual return on plan assets.......        168,872       189,597
Benefit payments...................        (61,221)      (54,412)
                                           -------       -------
Fair value of plan assets at 
  December 31 .....................     $1,238,921    $1,131,270
                                        ==========    ==========
Funded Status
Funded status at December 31.......       $255,130      $139,297
Unrecognized transition asset......        (30,871)      (38,109)
Unrecognized prior-service cost (credit)   (33,073)       26,477
Unrecognized gain..................       (120,838)     (111,190)
                                          --------      --------
NCE prepaid pension asset..........        $40,348       $16,475
                                           =======       =======
PSCo  prepaid pension asset........        $15,089        $9,925
                                           =======        ======
SPS  prepaid pension asset.........        $24,611        $7,243
                                           =======        ======

* Effective  July 1, 1998, a new cash balance plan was  established  by NCE. The
NCE board of directors approved amendments to the existing pension plans and the
plan  assets  and  obligation  for  all   non-bargaining   unit  employees  were
transferred into this plan.

                                        1998        1997 
                                        ----        ---- 
Significant assumptions:
  Discount rate                         6.75%        7.0%
  Expected long-term increase
   in compensation level                4.0%         4.0%

      Cumulative  variances  between actual experience and assumptions for costs
and returns on assets,  outside of a 10%  corridor of the greater of plan assets
and  obligations,  are  amortized  over the average  remaining  service lives of
employees in the plans.

      The  components  of net periodic  pension cost (credit) are as follows (in
thousands):

NCE                                           1998        1997     1996 
---                                          -----       ------   -----

Service cost...............................  $ 23,902   $18,418  $21,226
Interest cost..............................    66,735    68,327   66,503
Expected return on plan assets.............  (103,928)  (89,567) (75,723)
Curtailment................................         -       126        -
Amortization of transition asset...........    (7,238)   (7,238)  (7,238)
Amortization of prior-service cost (credit)      (464)    2,431    2,440
Amortization of net gain...................    (2,880)   (2,395)    (801)
                                             -------     ------   ------
NCE net periodic pension cost (credit).....  $(23,873)  $(9,898) $ 6,407
                                             ========   =======  =======
PSCo net periodic pension cost (credit)....  $ (5,093)  $ 2,318  $ 6,856
                                             ========   =======  =======
SPS net periodic pension cost (credit).....  $(15,175) $(10,968) $   855
                                             ========  ========  =======

                                                                  SPS
                                                               Transition
1996                                          PSCo       SPS     Period  
----                                         ------    ------   --------

Service cost...............................  $14,317   $ 6,846  $ 2,390
Interest cost..............................   46,497    20,266    7,066
Expected return on plan  assets............  (53,739)  (20,984)  (8,263)
Amortization of transition asset...........   (3,674)   (3,564)  (1,188)
Amortization of prior-service cost.........    2,304       136       45
Amortization of net loss (gain)............    1,151    (1,845)     (59)
                                             -------    ------   ------
Net periodic pension cost..................  $ 6,856   $   855   $   (9)
                                             =======   =======   ======

                                               1998     1997           1996    
                                             -------   ------      -----------
                                                                   PSCo    SPS
Significant assumptions:
  Discount rate............................     7.0%   7.5-8.0%   7.25%    8.0%
  Expected long-term increase in 
     compensation level ...................     4.0%  4.25-6.0%    4.0%    6.0%
  Expected weighted average long-term rate
     of return on assets ..................     9.5%   9.75%      9.75%    8.0%

                                       55
Additionally,   the  Company  maintains  noncontributory  defined  benefit
supplemental   retirement  income  plans   ("Supplemental   Plan")  for  certain
qualifying  executive  personnel.  The  Supplemental  Plan benefits are paid out
of/or funded through the Company's general fund.

Defined Contribution Plans

      The Company and its subsidiaries maintain defined contribution plans which
cover  substantially  all employees.  Total  contributions to these plans by the
Company and its subsidiaries  were  approximately $12 million in 1998, 1997, and
1996.

Postretirement Benefits Other Than Pensions

      The Company and its  subsidiaries  provide certain  postretirement  health
care and life  insurance  benefits for  substantially  all  employees  who reach
retirement  age while  working for the  Company.  PSCo,  SPS,  NCS and other NCE
affiliates  participate in these plans. NCE, as the plan sponsor,  will continue
to reflect the costs of these  plans in  accordance  with SFAS 106 and  directly
allocate such costs to each of the participating  employers.  Historically,  the
Company  recorded the cost of these benefits for these plans on a  pay-as-you-go
basis.  The  Company's  subsidiaries  have adopted  SFAS 106 which  requires the
accrual,  during the years that an employee  renders service to the Company,  of
the expected cost of providing  these  benefits to the employee.  The Company is
amortizing the transition obligations for these plans over a period of 20 years.

      Plan  assets  are  stated at fair  value and are  comprised  primarily  of
corporate debt and equity securities,  a real estate fund, government securities
and other short-term investments held either directly or in commingled funds.

      PSCo adopted SFAS 106 based on a level of expense determined in accordance
with the CPUC.  PSCo  transitioned  to full  accrual  accounting  for OPEB costs
between  January 1, 1993 and December 31, 1997,  consistent  with the accounting
requirements for rate regulated enterprises.  All OPEB costs deferred during the
transition period will be amortized on a straight line basis over the subsequent
15 years.

      Additionally, certain state agencies, which regulate the Company's utility
subsidiaries,  have issued guidelines related to the recovery or funding of OPEB
costs.  SPS is  required  to fund  SFAS  106  costs  for  Texas  and New  Mexico
jurisdictional  amounts collected in rates and PSCo and Cheyenne are required to
fund SFAS 106 costs in  irrevocable  external  trusts which are dedicated to the
payment of these postretirement benefits.

      A comparison  of the  actuarially  computed  benefit  obligation  and plan
assets at December 31, 1998 and 1997,  is presented in the  following  table (in
thousands):

Change in Benefit Obligation            1998        1997 
                                       ------      ------

Obligation at January 1............    $376,685    $350,354
Service cost.......................       4,917       6,120
Interest cost......................      26,503      26,537
Plan amendments....................     (14,346)          -
Actuarial loss.....................      20,310      16,627
Benefit payments...................     (16,874)    (21,253)
Curtailment........................           -      (1,700)
                                         ------      ------
Obligation at December 31..........    $397,195    $376,685
                                       ========    ========

                                       56
Change in Fair Value of Plan Assets     1998        1997 
                                       ------      ------

Fair value of plan assets at 
  January 1 .......................  $112,324     $88,673
Actuarial return on plan assets....    14,158       1,423
Employer contributions.............    26,928      28,908
Employee contributions.............       535       1,886
Benefit payments...................    (7,717)     (8,566)
                                       ------      ------
Fair value of plan assets at 
  December 31 .....................  $146,228    $112,324
                                     ========    ========

Funded Status
Funded status at December 31.......  $250,967    $264,361
Unrecognized transition obligation.  (212,648)   (227,724)
Unrecognized prior-service credit..    13,588           -
Unrecognized gain..................     9,825      26,079
                                       ------      ------
NCE accrued benefit cost...........   $61,732     $62,716
                                      =======     =======
PSCo accrued benefit cost..........   $55,537     $58,695
                                      =======     =======
SPS accrued benefit cost...........    $5,941      $3,800
                                       ======      ======

                                        1998        1997 
                                        ----        ---- 
Significant assumptions:
  Discount rate                         6.75%        7.0%
  Expected long-term increase in
    compensation level                   4.0%        4.0%

      The components of net periodic  postretirement benefit cost are as follows
(in thousands):

NCE                                           1998        1997     1996 
---                                          -----        ----     -----

Service cost.............................   $ 4,917   $ 6,121   $ 8,191
Interest cost............................    26,503    26,537    27,998
Expected return on plan assets...........   (10,767)   (8,078)   (6,233)
Curtailment..............................         -     3,323         -
Amortization of transition obligation....    15,076    14,992    15,388
Amortization of prior-service cost (credit)    (757)        -         -
Amortization of net gain.................      (786)   (1,162)      (90)
                                            ------     ------   ------
Net periodic postretirement benefit costs   34,186     41,733    45,254
OPEB expense recognized in accordance with 
  current regulations ...................  (39,859)   (36,351)  (37,981)    
                                            ------     ------   ------- 
  
Increase (decrease) in regulatory asset
 (Note 1) ...............................   (5,673)     5,382     7,273
Regulatory asset at beginning of year....   63,023     57,641    50,368
                                           -------     ------    ------
Regulatory asset at end of period........  $57,350    $63,023   $57,641
                                           =======    =======   =======

                                                   1998             1997      
                                             ----------------   --------------
                                              PSCo        SPS      PSCo    SPS
                                              ----        ---      ----    ---

Net periodic postretirement benefit
  costs.. .............................      $26,044   $3,295   $29,025  $8,199
OPEB expense recognized in accordance
  with current regulations ............      (31,578)  (3,434)  (23,479) (8,363)
                                              ------   ------    ------  ------
Increase (decrease) in regulatory asset
  (Note 1) ............................       (5,534)    (139)    5,546    (164)
Regulatory asset at beginning of year..       59,995    3,028    54,449   3,192
                                             -------   ------   -------  ------
Regulatory asset at end of period......      $54,461   $2,889   $59,995  $3,028
                                             =======   ======   =======  ======

                                                                  SPS
                                                                Transition
1996                                          PSCo       SPS     Period  
----                                         ------    ------   --------

Service cost...........................      $ 6,928   $ 1,266   $  419
Interest cost..........................       22,982     5,109    1,608
Expected return on plan assets.........       (4,500)   (1,589)    (674)
Amortization of transition obligation..       12,710     2,674      892
Amortization of net gain...............            -         -      (87)
                                             -------   -------   ------
Net periodic postretirement benefit costs..   38,120     7,460    2,158
OPEB expense recognized in accordance
 with current regulations .............      (31,271)   (6,715)  (2,230)    
                                             -------    ------   ------
Increase in regulatory asset (Note 1)..        6,849       745      (72)
Regulatory asset at beginning of year..       47,600     2,519    3,264
                                             -------   -------   ------
Regulatory asset at end of period..........  $54,449   $ 3,264   $3,192
                                             =======   =======   ======

                                       57
1998     1997         1996    
                                             -------   ------    -----------
                                                                  PSCo    SPS   
Significant assumptions:
  Discount rate............................     7.0%   7.5-8.0%  7.25%    8.0%
  Expected long-term increase in 
   compensation level .....................     4.0%   4.0-6.0%   4.0%    6.0%
  Expected weighted average long-term rate
   of return on assets ....................     9.5%    9.75%    9.75%    8.0%

      The assumed  health care cost trend rate for 1998 is 8.5%,  decreasing  to
4.5% in 2007 in 0.5% annual increments. A 1% increase in the assumed health care
cost trend rate would have the following effects (in thousands):
NCE                     PSCo                    SPS       
                              ----------------       ----------------         ---------------
                         1% Increase  1% Decrease 1% Increase 1% Decrease 1% Increase  1% Decrease
                         -----------  ----------- ----------- ----------- -----------  -----------
Effect on total 
  of service and interest
  cost components of net
  periodic postretirement
  benefit cost.........    $ 3,300      $ (2,600)    $ 2,364     $(1,911)    $   787     $  (634)

Effect on the accumulated
  postretirement
  benefit obligation...    $38,200      $(31,300)    $27,290     $(22,509)   $ 9,414     $(7,681)
Postemployment Benefits

      The Company and its  subsidiaries  provide  certain  benefits to former or
inactive  employees  after  employment  but  before  retirement  (postemployment
benefits).  At December  31,  1998,  the Company  has  recorded a $31.3  million
liability on the consolidated  balance sheet,  using an assumed discount rate of
6.75%.  The costs of the benefit were  historically  recorded on a pay-as-you-go
basis  prior  to the  adoption  of SFAS  112 in  1994,  which  required  accrual
accounting.  PSCo and Cheyenne  recorded  regulatory assets upon the adoption of
SFAS 112 in anticipation  of obtaining  future rate recovery of these costs (see
Note 1.  Summary of  Significant  Accounting  Policies -  Regulatory  Assets and
Liabilities).  PSCo  received  FERC  approval  in 1997 to recover  the  electric
wholesale  jurisdictional  portion of its regulatory asset and Cheyenne received
WPSC  approval  in 1997 to  recover  its gas  jurisdictional  portion.  The CPUC
allowed  recovery  of  postemployment  benefit  costs  on an  accrual  basis  in
connection with PSCo's 1996 gas rate case, but denied PSCo's request to amortize
its approximately  $8.9 million regulatory asset (gas  jurisdictional)  portion.
PSCo has  appealed to the Denver  District  Court the  decision  related to this
issue.  A  final  determination  on  the  recovery  of  PSCo's  retail  electric
jurisdictional  portion  has not been made.  Management  believes it is probable
that the Company will receive the required regulatory approvals to recover these
costs in the future.

Incentive Compensation

      The  Company  and  its  subsidiaries  have  Incentive  Compensation  Plans
("Incentive Plans"), which provide for annual and long-term incentive awards for
key  employees.  Approximately  5  million  shares  of  common  stock  have been
authorized  for these  Incentive  Plans for the  issuance of  restricted  shares
and/or stock options,  with certain  vesting and/or exercise  requirements.  The
Company recognizes compensation expense for restricted stock awards based on the
fair value of the Company's  common stock on the date of grant,  consistent with
Statement of Financial Accounting Standards ("SFAS 123"). Cash, restricted stock
and stock option awards were made under these plans during 1998, 1997 and 1996.

      The Company  applies APB Opinion No. 25 in accounting for its  stock-based
compensation  and,  accordingly,  no  compensation  cost is  recognized  for the
issuance  of stock  options  as the  exercise  price of the  options  equals the
fair-market  value of the Company's common stock at the date of grant.  Assuming
compensation cost for the Company,  PSCo and SPS had been determined  consistent
with SFAS 123 using the fair-value based method,  the Company's net income would
have been  reduced by  approximately  $1.1  million and $2.8 million in 1998 and
1997, respectively, which would have reduced earnings per share by approximately
$0.01 and  $0.03,  respectively.  The net income  would have been  reduced by an
insignificant amount with no impact on earnings per share for 1996.

                                       58
SFAS 123's method of accounting for stock-based  compensation plans has not been
applied to  options  granted  prior to January 1, 1995,  and as a result the pro
forma  compensation  cost may not be  representative  of that to be  expected in
future  years.  A summary of the  Company's  stock options at December 31, 1998,
1997 and 1996 and changes  during the years then ended is presented in the table
below:
NCE*                     PSCo                           SPS     
                         ---------------           ---------------              ---------------
                                 Weighted-                  Weighted-                    Weighted-
                                 Average                    Average                      Average
                        Shares   Exercise Price    Shares   Exercise Price      Shares   Exercise Price
                        ------   --------------    ------   --------------      ------   --------------
1998
Outstanding at
 beginning of year    2,085,632   $   41.10
Granted                 570,200       47.55
Exercised               187,198       34.61
Forfeited                38,607       45.10
                         ------
Outstanding at end
 of year              2,430,027       43.07
                      =========
Exercisable at end
 of year              1,650,088       40.99
                      =========
Weighted-average
 fair value
 of options granted                $   4.40

1997
Outstanding at
 beginning of year      477,783    $  31.46         441,227       $31.38         38,480      $  30.80
Granted               1,690,147       43.32          62,100        39.00          2,147         37.24
Exercised                78,647       30.34          40,404        29.57          3,666         30.81
Forfeited                 3,651       33.41           3,651        33.41              -             -
Converted to NCE
 options at
Merger date                   -           -         459,272        32.56         36,961         32.70
                         ------                     -------                      ------
Outstanding at end
 of year              2,085,632       41.10               -            -              -             -
                      =========                     =======                       =====
Exercisable at end
 of year                431,071       32.66               -            -              -             -
                        =======                     =======                       =====

Weighted-average
 fair value
 of options granted                 $  5.45                      $  4.23                       $ 3.70

1996
Outstanding at 
 beginning of year      407,117      $29.78         347,931       $29.33         62,301        $30.78
Granted                 158,270       35.13         158,270        35.13              -             -
Exercised                74,303       30.87          51,673        30.21         21,647         30.76
Forfeited                13,301       32.48          13,301        32.84              -             -
                         ------                      ------                       -----
Outstanding at year
 of year                477,783       31.46         441,227        31.38         40,654         30.79
                        =======                     =======                      ======
Exercisable at end
 of year                158,970       29.05         158,970        29.05              -             -
                        =======                     =======                       =====

Weighted-average
 fair value
 of options granted                 $  4.31                      $  4.31                       $    -

SPS Transition Period
Outstanding at beginning of year                                                 40,654        $30.79
Granted                                                                               -             -
Exercised                                                                         2,174         30.69
Forfeited                                                                             -             -
                                                                                  -----
Outstanding at year of year                                                      38,480         30.80
                                                                                 ======
Exercisable at end of year                                                            -
                                                                                  =====
* For 1997 and 1996 the  amounts  reflect the  conversion  of SPS and PSCo stock
options to NCE stock options.

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   Option-Pricing   Model  with  the   following   weighted-average
assumptions:
                                                  1998        1997      1996    
                                                 ------       ----      ----

Expected  option life.....................       10 years   10 years  10 years
Stock volatility..........................          13.8%      13.3%    11.95%
Risk-free interest rate...................          5.08%      6.15%     6.21%
Dividend yield............................           5.4%       5.4%      5.8%

                                       59
Additionally,  NCE, PSCo and SPS have other plans,  which provide for cash
awards to all employees  based on the  achievement of corporate  goals, of which
certain  goals were met in each of the last three years.  The  expenses  accrued
under the  incentive  programs for the years 1998,  1997 and 1996 are as follows
(in millions):

                                               1998      1997     1996 
                                               ----      ----     ----

NCE........................................  $   11.3  $   4.2  $  10.9
PSCo.......................................       3.4      2.7      7.8
SPS........................................       1.9      1.1      3.1

     In accordance  with the terms of the  Company's  Incentive  Plans,  certain
unexercisable  stock options,  restricted stock awards and dividend  equivalents
became  exercisable  or  vested on the  effective  date of the  Merger.  The NCE
Omnibus Incentive Plan, which was adopted in 1997,  contains a change in control
provision  under which all  stock-based  awards,  such as options and restricted
shares, will vest 100% and all cash-based awards will be paid out immediately in
cash as if the performance  objectives have been achieved  through the effective
date of the change in control.

13.  Income Taxes (NCE, PSCo and SPS)

      The  provisions  for  income  taxes for NCE and PSCo for the  years  ended
December 31, 1998,  1997 and 1996,  and for SPS for the years ended December 31,
1998,  1997 and August 31, 1996 and for the four months ended  December 31, 1996
consist of the following (in thousands):

            1998                                NCE          PSCo        SPS
                                                ---          ----        ---
Current income taxes:
   Federal..........................         $126,122     $91,122     $71,954
   State............................            8,448       8,176       2,592
                                             --------     -------     -------
Total current income taxes..........          134,570      99,298      74,546
                                             --------     -------     -------
Deferred income taxes:
   Federal..........................            5,433       6,014      (8,266)
   State............................              815       1,078        (334)
                                             --------     -------     -------
   Total deferred income taxes......            6,248       7,092      (8,600)
                                             --------     -------     -------

Investment tax credits - net........           (5,222)     (4,896)       (250)
                                             --------     -------     -------

Total provision for income taxes....         $135,596     $101,494    $65,696
                                             ========     ========    =======

            1997                                NCE          PSCo        SPS
                                                ---          ----        ---
Current income taxes:
   Federal..........................         $ 82,337     $55,041     $43,401
   State............................            4,872       3,601       2,057
                                             --------     -------     -------
Total current income taxes..........           87,209      58,642      45,458
                                             --------     -------     -------
Deferred income taxes:
   Federal..........................           45,537      31,548       3,045
   State............................            6,674       5,842         542
                                             --------     -------     -------
   Total deferred income taxes......           52,211      37,390       3,587
                                             --------     -------     -------

Investment tax credits - net........           (5,501)     (5,219)       (250)
                                             --------     -------     -------

Total provision for income taxes....         $133,919     $90,813     $48,795
                                             ========     =======     =======

                                       60
1996                               NCE          PSCo        SPS
                                               ---          ----        ---
Current income taxes:
   Federal..........................         $ 79,365     $41,737     $46,435
   State............................            2,832         951       2,689
                                             --------     -------     -------
     Total current income taxes.....           82,197      42,688      49,124
                                             --------     -------     -------
Deferred income taxes:
   Federal..........................           70,964      53,612      15,776
   State............................            7,998       7,287         647
                                             --------     -------     -------
   Total deferred income taxes......           78,962      60,899      16,423
                                             --------     -------     -------

Investment tax credits - net........           (7,506)     (7,256)       (250)
                                             --------     -------     -------

Total provision for income taxes....         $153,653     $96,331     $65,297
                                             ========     =======     =======

                                          Four Months Ending December 31,
            SPS - Transition Period         1996            1995   
                                          --------        -------
                                                        (unaudited)
Current income taxes:
   Federal..........................      $  5,991        $14,799
   State............................           190            998
                                          --------        -------
     Total current income taxes.....         6,181         15,797
                                          --------        -------
Deferred income taxes:
   Federal..........................         4,697          3,117
   State............................           192            132
                                          --------        -------
   Total deferred income taxes......         4,889          3,249
                                          --------        -------

Investment tax credits - net........           (83)           (83)
                                          --------        -------

Total provision for income taxes....      $ 10,987        $18,963
                                          ========        =======

      A reconciliation  of the statutory U.S. income tax rates and the effective
tax rates follows (in thousands):

            1998
NCE             PSCo             SPS     
                                           ---             ----             ---
Tax computed at U.S. statutory
  rate on pre-tax accounting
  income... ....................    $169,010  35.0%  $105,559  35.0%  $63,239   35.0%
Increase (decrease) in tax from:
  Allowance for funds used
   during construction.........       (6,072) (1.3)    (4,315) (1.4)   (1,730)  (1.0)
  Amortization of investment
    tax credits ...............       (5,221) (1.1)    (4,896) (1.6)     (250)  (0.1)
  State income taxes, net of
   Federal income tax  benefit         6,010   1.2      6,015   2.0     1,468    0.8
  Cash surrender value of life
   insurance policies..........      (14,553) (3.0)   (14,478) (4.8)      (76)     -
  Amortization of prior
   flow-through amounts .......       10,509   2.2     10,446   3.5         -      -
  Merger related costs -
    non-deductible ............        1,482   0.3          -     -        562    0.3
  Foreign tax credit...........      (15,457) (3.2)    (1,363) (0.5)         -      -
  International treaty tax relief    (12,806) (2.7)    (1,129) (0.4)         -      -
  Other-net....................        2,694   0.7      5,655   1.9      2,483    1.4
                                       -----  -----    ------   ---      -----   ----
   Total income taxes..........     $135,596  28.1%  $101,494  33.7%   $65,696  36.4%         
                                    ========  =====  ========  =====   =======  =====
61
1997
NCE           PSCo              SPS     
                                        ---           ----              ---
Tax computed at U.S. statutory
  rate on pre-tax accounting
  income........................    $142,506  35.0%  $103,199  35.0%   $43,529  35.0%
Increase (decrease) in tax from:
  Allowance for funds used
   during construction.........       (2,220) (0.6)    (2,222) (0.8)        (2)    -
Amortization
  of investment tax credits.....      (5,501) (1.4)    (5,219) (1.8)      (250) (0.2)
  State income taxes, net of
   Federal income tax  benefit         6,617   1.6      5,250   1.8      1,689   1.4
  Cash surrender value of life
   insurance policies..........     (12,952)  (3.2)   (12,876) (4.4)       (76) (0.1)
  Amortization of prior
   flow-through amounts .......      10,509    2.6     10,483   3.6          -     -
  Merger related costs -
   non-deductible .............       8,274    2.0      4,921   1.7      3,352   2.7
  Foreign tax credit...........      (7,043)  (1.7)    (7,043) (2.4)         -     -
  International treaty tax relief    (6,309)  (1.4)    (6,309) (2.1)         -     -
  Other-net....................          38    0.0        629    .2        553   0.4
                                      -----   -----    ------  ----     ------  ----
   Total income taxes..........    $133,919   32.9%   $90,813  30.8%   $48,795  39.2%          
                                   ========   =====   =======  =====   =======  =====

            1996
                                        NCE           PSCo              SPS     
                                        ---           ----              ---     
Tax computed at U.S. statutory
  rate on pre-tax accounting
  income... ..................     $153,287   35.0%  $100,337  35.0%   $59,874  35.0%
Increase (decrease) in tax from:
  Allowance for funds used
   during construction........      (1,685)   (0.3)    (1,438) (0.5)      (248) (0.1)
  Amortization of investment 
   tax credits ...............      (7,506)   (1.7)    (7,256) (2.5)      (250) (0.1)
  State income taxes, net of
   Federal income tax benefit        6,579     1.5      5,356   1.9      1,748   0.9
  Cash surrender value of life
   insurance policies..........    (11,265)   (2.6)   (11,265) (3.9)       (76)    -
  Amortization of prior
   flow-through amounts .......     10,509     2.4     10,509   3.6          -     -
  Merger related costs -
    non-deductible ............      4,258     1.0      2,574   0.9      2,006   1.2
  Other-net....................       (524)   (0.2)    (2,486) (0.9)     2,243   1.3      
                                     -----   -----     ------  ----      -----  ----
   Total income taxes..........   $153,653    35.1%   $96,331  33.6%   $65,297  38.2%          
                                  ========    =====   =======  =====   =======  =====
SPS Transition Period      Four Months Ending December 31,
                                           1996             1995     
                                          -----             -----
                                                         (unaudited)
Tax computed at U.S. statutory
 rate on pre-tax accounting
 income... ....................        $10,544  35.0%  $17,468   35.0%
Increase (decrease) in tax from:
  Allowance for funds used
   during construction.........           (144) (0.5)     (180)  (0.4)
  Amortization of investment tax
   credits ....................            (83) (0.3)      (83)  (0.2)
  State income taxes, net of 
   Federal income tax benefit..            123   0.4       649    1.3
  Merger related costs - 
   non-deductible .............            488   1.6       620    1.2
  Other-net....................             59   0.3       489    1.1
                                         -----   ---       ---    ---
   Total income taxes..........        $10,987  36.5%  $18,963   38.0%
                                       =======  =====  =======   =====

      The Company and its regulated  subsidiaries have historically provided for
deferred income taxes to the extent allowed by their regulatory agencies whereby
deferred taxes were not provided on all differences  between financial statement
and taxable income (the flow-through method). At December 31, 1998, PSCo and SPS
are fully normalized for FERC jurisdictional  purposes. For state jurisdictional
purposes, PSCo is fully normalized in Colorado and Wyoming, respectfully and SPS
is fully normalized in Texas,  Oklahoma,  and New Mexico (see Note 9. Regulatory
Matters -SPS Electric Cost adjustment  Mechanisms).  SPS is fully  normalized to
the extent allowed by its regulators in Kansas,  with flow-through  treatment of
certain temporary differences. To give effect to temporary differences for which
deferred taxes were not previously  required to be provided,  a regulatory asset
was recognized.  The regulatory asset represents temporary differences primarily
associated with prior flow-through amounts and the equity component of allowance
for funds used during  construction,  net of  temporary  differences  related to
unamortized  investment tax credits and excess  deferred  income taxes that have
resulted  from  historical  reductions  in tax  rates  (see Note 1.  Summary  of
Significant Accounting Policies).

                                       62
The tax effects of significant temporary differences representing deferred
tax  liabilities  and assets as of December 31, 1998 and 1997 are as follows (in
thousands):

            1998                                NCE         PSCo          SPS
                                                ---         ----          ---
Deferred income tax liabilities:
  Accelerated depreciation and
    amortization ...................       $  762,538    $ 471,776    $ 280,949
  Plant basis differences (prior
    flow-through) ..................          150,210       98,208       52,383
  Allowance for equity funds used
    during construction ............           74,903       45,137       29,664
  Pensions..........................           29,915       35,053       (6,648)
  Other.............................          114,456       64,045       36,169
                                             --------      -------     --------
   Total............................        1,132,022      714,219      392,517
Deferred income tax assets:
  Investment tax credits............           61,912       58,315        2,925
  Contributions in aid of construction         87,685       84,720        2,172
  Other.............................           33,147       24,461       12,878
                                             --------      -------     --------
   Total............................          182,744      167,496       17,975
                                             --------      -------     --------
Net deferred income tax liability...         $949,278     $546,723     $374,542
                                             ========     ========     ========

            1997                                NCE          PSCo        SPS
                                                ---          ----        ---
Deferred income tax liabilities:
  Accelerated depreciation and
    amortization ..................        $  724,879     $432,453     $278,566
  Plant basis differences (prior
    flow-through) .................           173,523      118,332       54,384
  Allowance for equity funds used
    during construction ...........            77,925       46,715       31,103
  Pensions..........................           31,832       33,105       (1,693)
  Other.............................          116,912       75,143       39,424
                                             --------      -------     --------
   Total............................         1,125,071     705,748      401,784
Deferred income tax assets:
  Investment tax credits............           65,111       61,333        3,065
  Contributions in aid of construction         72,424       69,560        2,172
  Other.............................           37,804       20,737       13,360
                                             --------      -------     --------
   Total............................          175,339      151,630       18,597
                                             --------      -------     --------
Net deferred income tax liability...         $949,732     $554,118     $383,187
                                             ========     ========     ========

      As of  December  31,  1998,  the  consolidated  group  does  not  have any
cumulative  Federal  or state  tax  credits  which  have not  been  realized.  A
valuation  allowance  has not been  recorded  as the  Company  expects  that all
deferred  income  tax assets  will be  realized  in the  future.  The  Company's
management  intends to  reinvest  indefinitely,  its  earnings  from the foreign
operations of Yorkshire  Power.  According,  deferred income taxes have not been
provided on any cumulative amount of unremitted earnings.

Note 14.  Business Segment Information (NCE, PSCo and SPS)

NCE:
      NCE has three  reportable  segments:  electric  utility,  gas  utility and
international. The electric utility segment consists primarily of the activities
of the three  regulated  operating  companies that provide  wholesale and retail
electric service in the states of Colorado,  Texas, New Mexico,  Wyoming, Kansas
and Oklahoma.  The gas utility segment  consists  primarily of the activities of
three regulated operating companies providing retail gas service in the state of
Colorado and Wyoming.  The international  segment consists of equity investments
in foreign  operations held by NCI since 1997.  Revenues from operating segments
below the quantitative thresholds are included in the all other category.  Those
primarily  segments include a company  involved in  non-regulated  power and gas
marketing activities throughout the United States; a company that invests in and
develops  cogeneration and energy related projects; a company that is engaged in
engineering, design construction management and other miscellaneous services and
a  company  engaged  in  energy   consulting,   energy  efficiency   management,
conservation programs and mass market services.

      The accounting policies of the segments are the same as those described in
Note 1. Summary of Significant Accounting Policies. NCE evaluates performance by
each legal entity based on profit or loss  generated from the product or service
provided. NCE segment information is as follows (in thousands):

                                       63
Electric     Gas                      All
1998                  Utility    Utility   International   Other        Total 
----                  -------    -------   -------------   -----        ----- 
Revenues:
 External customers. $2,626,644  $653,438    $      -    $330,823    $3,610,905
 Intersegment.......        316     5,281           -      75,209        80,806
Electric margin.....  1,339,201         -           -       1,087     1,340,288
Gas margin..........          -   265,971           -      12,722       278,693
Equity in earnings of
  nonconsolidated 
  subsidiaries .....          -         -      38,127      (2,026)       36,101
Interest charges and
 preferred dividend
 requirements           153,462    28,589         745      15,530       198,326
Income taxes........    164,189    14,273     (15,817)    (12,075)      150,570
Depreciation &
 amortization ......    216,288    43,889         121       8,445       268,743
Segment profit (loss)   278,726    29,859      51,978       9,396       369,959
Segment assets......  4,777,189   973,263     333,069     482,560     6,566,081
Construction 
 expenditures ......    412,005    99,038           -      97,929       608,972

                      Electric     Gas                      All
1997                  Utility    Utility   International   Other        Total 
----                  -------    -------   -------------   -----        ----- 
Revenues:
 External customers. $2,450,498  $640,248    $      -    $251,779    $3,342,525
 Intersegment.......        293     3,825           -      25,819        29,937
Electric margin.....  1,269,080         -           -         987     1,270,067
Gas margin..........          -   268,423           -       4,882       273,305
Equity in earnings of
  nonconsolidated
  subsidiaries .....          -         -      35,499      (1,333)       34,166
Interest charges and
 preferred dividend
 requirements ......    151,718    27,376         186      14,168       193,448
Income taxes........    146,621    18,555      (1,186)    (26,875)      137,115
Depreciation & 
 amortization ......    193,877    39,833          89       9,279       243,078
Segment profit (loss)   215,712    27,034      35,946       1,746       280,438
Segment assets......  4,770,091 1,060,633     290,845      90,401     6,211,970
Construction
 expenditures ......    365,219   105,894           -       4,384       475,497

                      Electric     Gas                      All
1996                  Utility    Utility   International   Other        Total 
----                  -------    -------   -------------   -----        ----- 
Revenues:
 External customers. $2,408,733  $571,329    $      -    $116,972    $3,097,034
 Intersegment.......        733         -           -       7,008         7,741
Electric margin.....  1,270,520         -           -         157     1,270,677
Gas margin..........          -   239,521           -       7,813       247,334
Equity in earnings of
  nonconsolidated
  subsidiaries .....          -         -           -         389           389
Interest charges and
 preferred dividend
 requirements ......    141,380    23,665           -      14,759       179,804
Income taxes........    163,657    12,913           -     (22,917)      153,653
Depreciation &
 amortization ......    182,667    34,166           -       8,032       224,865
Segment profit (loss)   239,442    17,356           -      13,862       270,660
Segment assets......  4,529,294   933,666           -     135,362     5,598,322
Construction 
 expenditures ......    357,201    96,842           -         925       454,968

Reconciliations:                            1998        1997        1996  
                                            ----        ----        ----
Revenues
     Total revenues for reportable
      segments ....................     $3,280,398  $3,090,746  $2,980,062
     Intersegment revenue..........         80,806      29,937       7,741
     Other revenues................        330,507     251,779     116,972
     Elimination of intersegment
      revenues ....................        (80,806)    (29,937)     (7,741)
                                          --------     -------    --------
        Total consolidated revenues     $3,610,905  $3,342,525  $3,097,034
                                        ==========  ==========  ==========

                                       64
1998        1997        1996  
                                          --------    --------    --------
Profit or Loss
     Total profit for reportable 
       segments ...................       $360,563    $278,692   $ 256,798
     Other profit (loss)...........          9,396       1,743      13,862
     Other unallocated amounts.....        (28,002)    (18,954)      3,643
     Elimination of intercompany profit          -           6      (1,962)
                                             -----       -----   ---------
        Income before extraordinary item  $341,957    $261,487   $ 272,341
                                          ========    ========   =========

Assets
     Total assets for reportable
       segments ...................     $6,083,521  $6,121,049  $5,462,960
     Other assets..................        482,559      90,401     135,362
     Unallocated assets............      1,105,884   1,109,696   1,019,120
                                         ---------   ---------   ---------
        Total consolidated assets..     $7,671,964  $7,321,146  $6,617,442
                                        ==========  ==========  ==========

                                           Segment  Consolidated
1998                                       Totals     Adjustments   Totals 
----                                      --------    ----------- ---------
Other Significant Items
     Interest charges & preferred
      dividends ...................       $198,326    $  6,473    $204,799
     Income taxes..................        150,570     (14,974)    135,596
     Depreciation and amortization.        268,743           -     268,743
     Equity in earnings of
       unconsolidated subsidiaries.         36,101           -      36,101
     Construction expenditures.....        608,972           -     608,972

1997
Other Significant Items
     Interest charges & preferred 
       dividends ..................       $193,448    $ 13,182    $206,630
     Income taxes..................        137,115      (3,196)    133,919
     Depreciation and amortization.        243,078           -     243,078
     Equity in earnings of
       unconsolidated subsidiaries.         34,166           -      34,166
     Construction expenditures.....        475,497           -     475,497

1996
Other Significant Items
     Interest charges & preferred
       dividends ..................       $179,804    $ (4,708)   $175,096
     Income taxes..................        153,653           -     153,653
     Depreciation and amortization.        224,865           -     224,865
     Equity in earnings of
       unconsolidated subsidiaries.            389           -         389
     Construction expenditures.....        454,968           -     454,968

PSCo:
      PSCo has three reportable  segments:  electric utility,  gas utility,  and
international.  During 1998, the electric utility segment consists  primarily of
the activities of PSCo's regulated  operations that provide wholesale and retail
electric service in the state of Colorado. For the years ended December 31, 1997
and 1996,  this segment also  included  Cheyenne's  regulated  operations in the
state of Wyoming. During 1998, the gas utility segment consists primarily of the
activities of PSCo's  regulated gas operations in Colorado.  For the years ended
December  31, 1997 and 1996,  this segment also  included  Cheyenne's  regulated
operations in the state of Wyoming and WGI's regulated  operations in the states
of Colorado and Wyoming. Revenues from operating segments below the quantitative
thresholds  are included in the all other  category.  Those  segments  primarily
include a real estate company which owns certain real estate  interests of PSCo,
a company which owns and manages  permanent life  insurance  policies on certain
past and present employees and a finance company that finances certain of PSCo's
current assets.

      The accounting policies of the segments are the same as those described in
Note 1. Summary of Significant  Accounting Policies.  PSCo evaluates performance
by each  legal  entity  based on profit or loss  generated  from the  product or
service provided. PSCo segment information is as follows (in thousands):

                                       65
Electric     Gas                      All
1998                  Utility    Utility   International   Other        Total 
----                  -------    -------   -------------   -----        ----- 
Revenues from
 external customers. $1,635,573  $640,064    $      -    $  8,449    $2,284,086
Electric margin.....    833,752         -           -           -       833,752
Gas margin..........          -   259,509           -           -       259,509
Equity in earnings of
  Yorkshire Power...          -         -       3,446           -         3,446
Interest charges and
 preferred dividend
 requirements ......     93,579    27,745         192      14,291       135,807
Income taxes........     97,924    13,997         427     (10,854)      101,494
Depreciation &
 amortization ......    135,876    43,036          40       1,961       180,913
Segment profit......    166,066    29,207       2,799      15,015       213,087
Segment assets......  2,981,154   944,456           -     433,417     4,359,027
Construction 
 expenditures ......    313,825    95,692           -      95,211       504,728

                      Electric     Gas                      All
1997                  Utility    Utility   International   Other        Total 
----                  -------    -------   -------------   -----        ----- 
Revenues from
 external customers. $1,485,196  $733,091    $      -    $ 11,356    $2,229,643
Electric margin.....    792,588         -           -           -       792,588
Gas margin..........          -   265,346           -           -       265,346
Equity in earnings of
  Yorkshire Power...          -         -      34,926           -        34,926
Interest charges and
 preferred dividend
 requirements ......     92,684    26,980         186      13,885       133,735
Income taxes........     92,930    18,496      (1,186)    (19,427)       90,813
Depreciation &
 amortization ......    125,418    38,983          89       3,961       168,451
Segment profit......    137,899    25,813      35,946      14,091       213,749
Segment assets......  2,955,537 1,027,060     290,845      55,212     4,328,654
Construction 
 expenditures ......    246,015   103,957           -       2,301       352,273

                      Electric     Gas                      All
1996                  Utility    Utility   International   Other        Total 
----                  -------    -------   -------------   -----        ----- 
Revenues from
 external customers. $1,488,990  $640,497    $      -    $  7,951    $2,137,438
Electric margin.....    803,120         -           -           -       803,120
Gas margin..........          -   239,521           -       7,813       247,334
Interest charges and
 preferred dividend
 requirements ......     87,001    23,665           -      14,115       124,781
Income taxes........    106,615    12,913           -     (23,197)       96,331
Depreciation &
 amortization ......    116,802    34,166           -       3,663       154,631
Segment profit......    151,139    17,356           -      11,900       180,395
Segment assets......  2,840,481   930,474           -      71,109     3,842,064
Construction
 expenditures ......    223,395    96,842           -         925       321,162

Reconciliations:                            1998        1997        1996  
                                          --------    --------    --------
Revenues
     Total revenues for reportable
      segments ...................        $2,275,637  $2,218,287  $2,129,487
     Other revenues................            8,449      11,356       7,951
                                            --------    --------    --------
        Total consolidated revenues       $2,284,086  $2,229,643  $2,137,438
                                          ==========  ==========  ==========

Profit or Loss
     Total profit or loss for reportable
      segments ....................         $198,072    $199,658    $179,679
     Other profit or loss..........           15,015      14,091      11,926
     Other unallocated amounts.....          (18,316)    (21,458)    (13,107)
     Elimination of intersegment profit            -          (1)          -
                                               -----      ------      ------
        Income before extraordinary item    $194,771    $192,290    $178,498
                                            ========    ========    ========

                                       66
1998        1997        1996  
                                          --------    --------    --------
Assets
     Total assets for reportable
      segments ....................      $3,925,610   $4,273,442  $3,770,955
     Other assets..................         433,417       55,212      71,109
     Other unallocated amounts.....         818,609      666,079     730,584
                                           --------     --------    --------
        Consolidated total.........      $5,177,636   $4,994,733  $4,572,648
                                         ==========   ==========  ==========

                                          Segment   Consolidated
1998                                       Totals     Adjustments   Totals 
----                                      --------    ----------- ---------
Other Significant Items
     Interest charges & preferred
      dividends ...................       $135,807    $  7,839    $143,646
     Income taxes..................        101,494           -     101,494
     Depreciation and amortization.        180,913           -     180,913
     Equity in earnings of Yorkshire
      Power .......................          3,446           -       3,446
     Construction expenditures.....        504,727           -     504,727

1997
Other Significant Items
     Interest charges & preferred
      dividends ...................       $133,735    $ 14,219    $147,954
     Income taxes..................         90,813           -      90,813
     Depreciation and amortization.        168,451           -     168,451
     Equity in earnings of Yorkshire
      Power .......................         34,926           -      34,926
     Construction expenditures.....        352,273           -     352,273

1996
Other Significant Items
     Interest charges & preferred
      dividends ...................       $124,781    $ (3,213)   $121,568
     Income taxes..................         96,331           -      96,331
     Depreciation and amortization.        154,631           -     154,631
     Construction expenditures.....        321,162           -     321,162

SPS:
     SPS operates in the regulated electric utility industry providing wholesale
and  retail  electric  service in the states of Texas,  New  Mexico,  Kansas and
Oklahoma.  Revenues from external  customers  for this  reportable  segment were
$951.2 million,  $979.3  million,  $931.8  million,  $306.3 million,  and $278.5
million for the fiscal years ended  December 31, 1998,  1997 and August 31, 1996
and for the four months ended December 1996 and 1995,  respectively.  During the
fiscal  years ended  December 31, 1997 and August 31,  1996,  operating  results
included the  activities of Quixx and UE,  subsidiaries  that were  subsequently
transferred to NC Enterprises  in connection  with the Merger.  Neither of these
two segments has ever met any of the  quantitative  thresholds  for  determining
reportable segments.

15.  Transactions with Affiliates (PSCo and SPS)

      PSCo and SPS receive various administrative, management, environmental and
other  support  services  from NCS,  which began  operations  on May 1, 1997 and
construction services from UE. In addition, PSCo and SPS pay interest expense on
any short-term  borrowings from NCE.  Dividends on common stock declared by PSCo
and SPS are paid to NCE.

      PSCo sells firm and interruptible  transportation  services to e prime for
gas delivered into the Denver/Pueblo operating area. PSCo also receives interest
income from NC  Enterprises  on the note  receivable  related to the sale of NCI
effective  March 31, 1998 (see Note 2.  "Investment in Yorkshire  Power and U.K.
Windfall  Tax").  SPS receives  interest  income from NC Enterprises on the note
receivable  related to the sale of Quixx and UE as part of the Merger. The table
below  contains  the  various  significant  affiliate   transactions  among  the
companies and related parties for the years ended December 31, 1998 and 1997 (in
thousands).

                                       67
PSCo                      SPS        
                                 -------------------     --------------------
                                  1998        1997        1998        1997   
                                 -------     -------     -------     --------

Gas revenues.................    $ 5,281    $  3,825    $     -      $      -
Operating expenses...........    197,862     108,096     63,108        36,317
Interest income..............     14,188           -      8,630         3,618
Interest expenses............      1,714         156      1,390           747
Dividends paid to NCE........    188,845      76,093     75,157        45,092
Construction services........     68,744      16,934      6,465         3,832

There were no significant related party transactions for the year ended December
31, 1996.

16. Quarterly Financial Data (Unaudited) (NCE, PSCo and SPS)

      The  following  summarized  quarterly  information  for  1998  and 1997 is
unaudited,  but includes all adjustments  (consisting  only of normal  recurring
accruals) which the Company  considers  necessary for a fair presentation of the
results  for  the  periods.  Information  for any one  quarterly  period  is not
necessarily  indicative of the results which may be expected for a  twelve-month
period due to seasonal and other factors (in thousands, except per share data).

NCE                                        Three Months ended        
                                      --------------------------------
                1998               March 31   June 30  September 30  December 31
              -------              --------   -------  ------------  -----------

Operating revenues.............    $939,504   $859,621    $915,898    $895,882
Operating income ..............     181,837    146,666     164,173     157,825
Net income ....................      86,149     56,593      90,772     108,443
Earnings per share of common 
 stock outstanding:
  Basic........................       $0.78      $0.50       $0.82       $0.96
  Diluted......................       $0.78      $0.50       $0.82       $0.95

                1997 
Operating revenues.............     $890,011  $776,742    $793,472    $882,300
Operating income ..............      176,000   130,336     153,168     169,721
Net income (loss)..............       78,156    34,045     (47,225)     85,946
Basic and diluted earnings per
 share of common stock
 outstanding:
  Income before extraordinary
   item.... ...................        $0.75    $0.33       $ 0.61      $0.81
  Extraordinary item  (1) .....            -        -        (1.06)         -
  Net income (loss)............        $0.75    $0.33       $(0.45)     $0.81

PSCo                                                 Three Months ended        
                                             ----------------------------------
                1998               March 31   June 30  September 30  December 31
              -------              --------   -------  ------------  -----------

Operating revenues..............    $644,642  $504,598    $541,601    $593,245
Operating income ...............      99,846    63,266      76,834      92,072
Net income......................      68,897    30,908      44,015      56,283

                1997 
Operating revenues..............    $668,717  $533,520    $466,582    $560,824
Operating income ...............      95,981    73,271      70,372      97,729
Net income......................      62,881    30,607     (73,085)(1)  73,074

SPS                                           Three Months ended        
                                             ----------------------------------
                1998               March 31   June 30  September 30  December 31
              -------              --------   -------  ------------  -----------

Operating revenues..............   $199,732  $264,006     $284,648     $202,801
Operating income ...............     31,339    49,319       49,458       35,563
Net income......................     18,139    36,917       36,929       23,002
                1997 

Operating revenues..............   $221,295  $243,221     $284,156     $230,611
Operating income ...............     34,457    41,744       50,976       32,104
Net income......................     18,218     6,380(2)    31,111       19,866

(1) Includes the extraordinary U.K. windfall tax recognized in the third quarter
     1997.
(2) Includes the write-off of Quixx's & UE's investment in the Carolina Energy
     Project.

                                       68
DEFINITIONS

The  abbreviations  or acronyms  used in the  financial  statements  are defined
below:

Abbreviation or Acronym                                              Term
-----------------------                                              ----
AEP............................................American Electric Power Company
AFDC..............................Allowance for Funds Used During Construction
Arapahoe............................Arapahoe Steam Electric Generating Station
CERCLA ...Comprehensive Environmental Response, Compensation and Liability Act
Cherokee........................... Cherokee Steam Electric Generating Station
Cheyenne ...............................Cheyenne Light, Fuel and Power Company
Company or NCE........................New Century Energies, Inc., a registrant
CPUC .....................Public Utilities Commission of the State of Colorado
Craig..................................Craig Steam Electric Generating Station
Denver District Court..District Court in and for the City and County of Denver
DOE..................................................U.S. Department of Energy
DSM.....................................................Demand Side Management
DSMCA...................................Demand Side Management Cost Adjustment
Dth..................................................................Dekatherm
e prime.........................................e prime, inc. and subsidiaries
ECA.....................................................Energy Cost Adjustment
EPA.......................................U.S. Environmental Protection Agency
FASB......................................Financial Accounting Standards Board
FERC......................................Federal Energy Regulatory Commission
Fort St. Vrain..................... Fort St. Vrain Electric Generating Station,
                                         formerly a nuclear generating station
Fuelco .......Fuel Resources Development Co., a dissolved Colorado corporation
GCA .......................................................Gas Cost Adjustment
Hayden ...............................Hayden Steam Electric Generating Station
ICA..................................................Incentive Cost Adjustment
IRS...................................................Internal Revenue Service
Kwh..............................................................kilowatt-hour
Merger...................... the business combination between the PSCo and SPS
Mw....................................................................Megawatt
NMPRC........................New Mexico Public Regulation Commission formerly,
                                      the New Mexico Public Utility Commission
Natural Fuels .......................................Natural Fuels Corporation
NC Enterprises............................................NC Enterprises, Inc.
NCI............................................New Century International, Inc.
NCS.................................................New Century Services, Inc.
New Century Cadence..................................New Century Cadence, Inc.
NOx.............................................................Nitrogen Oxide
OCC .......................................Colorado Office of Consumer Counsel
OPEB ...................................Other Postretirement Employee Benefits
PCB...................................................Polychlorinated biphenyl
Pawnee ...............................Pawnee Steam Electric Generating Station
Pawnee 2...........Pawnee Steam Electric Generating Station, Unit 2 (proposed)
Planergy..............................................The Planergy Group, Inc.
PRPs ..........................................Potentially Responsible Parties
PSCCC...........................................PS Colorado Credit Corporation
PSCo..........................Public Service Company of Colorado, a registrant
PSRI ....................................................PSR Investments, Inc.
PUHCA ..............................Public Utility Holding Company Act of 1935
PUCT........................................Public Utility Commission of Texas
QF.........................................................Qualifying Facility

                                       69
Abbreviation or Acronym                                              Term
-----------------------                                              ----
QSP....................................................Quality of Service Plan
Quixx.......................................Quixx Corporation and subsidiaries
SFAS...............................Statement of Financial Accounting Standards
SFAS 106................Statement of Financial Accounting Standards No. 106 -
       "Employers' Accounting for Postretirement Benefits Other Than Pensions"
SFAS 112................Statement of Financial Accounting Standards No. 112 -
                           "Employers' Accounting for Postemployment Benefits"
SFAS 123................Statement of Financial Accounting Standards No. 123 -
                                     "Accounting for Stock-Based Compensation"
SO2.............................................................Sulfur Dioxide
SPS..........................Southwestern Public Service Company, a registrant
TNP.............................................Texas-New Mexico Power Company
TOG.......................................................Texas-Ohio Gas, Inc.
TOP..................................................Texas-Ohio Pipeline, Inc.
Transition Period..........................Four month period September 1, 1996
                                                     through December 31, 1996
UE............................Utility Engineering Corporation and subsidiaries
U.K. ...........................................................United Kingdom
WGI ..................................................WestGas InterState, Inc.
WPSC......................................Public Service Commission of Wyoming
Young Storage..................................Young Gas Storage Company, Ltd.
YGSC.................................................Young Gas Storage Company
Yorkshire Electricity..........................Yorkshire Electricity Group plc
Yorkshire Power.....................................Yorkshire Power Group Ltd.

                                       70
EXHIBIT B

                         CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

      As independent public accountants,  we hereby consent to the incorporation
by reference of our report included in this Current Report on Form 8-K, into New
Century Energies, Inc.'s previously filed Registration Statement (Form S-8, File
No.  333-28639)  pertaining to the Omnibus Incentive Plan; New Century Energies,
Inc.'s Registration  Statement (Form S-3, File No. 333-28637)  pertaining to the
Dividend  Reinvestment  and Cash  Payment  Plan;  New Century  Energies,  Inc.'s
Registration  Statement (Form S-3, File Nos. 333-40361 and 333-6407)  pertaining
to the  registration  of NCE  Common  Stock  and New  Century  Energies,  Inc.'s
Registration  Statement  (Form S-8,  File No.  333-58117)  pertaining to the NCE
Employee Investment Plan and NCE Employees' Savings and Stock Ownership Plan and
to all references to our firm included in this Current Report on Form 8-K.

      As independent public accountants,  we hereby consent to the incorporation
by reference of our report  included in this  Current  Report on Form 8-K,  into
Public Service Company of Colorado's  previously  filed  Registration  Statement
(Form S-3, File No. 33-62233) pertaining to the Automatic Dividend  Reinvestment
and  Common  Stock   Purchase  Plan;   Public  Service   Company  of  Colorado's
Registration  Statement (Form S-3, File No.  33-37431) as amended on December 4,
1990,  pertaining  to the  shelf  registration  of  Public  Service  Company  of
Colorado's   First  Mortgage   Bonds;   Public  Service  Company  of  Colorado's
Registration  Statement (Form S-8, File No. 33-55432)  pertaining to the Omnibus
Incentive  Plan;  Public Service  Company of Colorado's  Registration  Statement
(Form S-3, File No.  33-51167)  pertaining to the shelf  registration  of Public
Service Company of Colorado's  First  Collateral  Trust Bonds and Public Service
Company of  Colorado's  Registration  Statement  (Form S-3,  File No.  33-54877)
pertaining to the shelf  registration  of Public  Service  Company of Colorado's
First  Collateral  Trust  Bonds  and  Cumulative  Preferred  Stock  and  to  all
references to our firm included in this Current Report on Form 8-K.

      As independent public accountants,  we hereby consent to the incorporation
by reference of our report  included in this  Current  Report on Form 8-K,  into
Southwestern  Public Service Company's  previously filed Registration  Statement
(Form  S-3,  File No.  333-05199)  pertaining  to  Southwestern  Public  Service
Company's  Preferred  Stock and Debt  Securities;  Southwestern  Public  Service
Company's  Registration  Statement (Form S-8, File No.  33-27452)  pertaining to
Southwestern Public Service Company's 1989 Stock Incentive Plan and Southwestern
Public Service  Company's  Registration  Statement (Form S-8, File No. 33-57869)
pertaining to Southwestern Public Service Company's Employee Investment Plan and
Non-Qualified Salary Deferral Plan and to all references to our firm included in
this Current Report on Form 8-K.

                                                         ARTHUR ANDERSEN LLP

Denver, Colorado
February 23, 1999
EXHIBIT C
                         CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

We consent to the  incorporation  by reference  in  Registration  Statement  No.
333-05199 on Form S-3 and  Registration  Statements No. 33-27452 and 33-57869 on
Form S-8 of Southwestern Public Service Company and Registration  Statements No.
333-28637 and 333-40361 on Form S-3 and Registration  Statement No. 333-28639 on
Form S-8 of New Century  Energies,  Inc. of our report  dated  February 28, 1997
(June 19, 1997,  as to the Carolina  Energy  Limited  Partnership  in Note 3) on
Southwestern  Public Service  Company,  appearing in this Current Report on Form
8-K of New Century Energies,  Inc. and Southwestern Public Service Company dated
February 23, 1999.

                                                DELOITTE & TOUCHE  LLP
Dallas, Texas
February 23, 1999
EXHIBIT D

       -------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                            -------------------------

                                    FORM T-1

                            STATEMENT OF ELIGIBILITY
                    UNDER THE TRUST INDENTURE ACT OF 1939 OF
                   A CORPORATION DESIGNATED TO ACT AS TRUSTEE
                   -------------------------------------------
               CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
                A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________
                    ----------------------------------------

                            THE CHASE MANHATTAN BANK
               (Exact name of trustee as specified in its charter)

New York                                                     13-4994650
(State of incorporation                                (I.R.S. employer
if not a national bank)                             identification No.)

270 Park Avenue
New York, New York                                                10017
(Address of principal executive offices)                     (Zip Code)

                               William H. McDavid
                                 General Counsel
                                 270 Park Avenue
                            New York, New York 10017
                               Tel: (212) 270-2611
            (Name, address and telephone number of agent for service)
                  --------------------------------------------
                       Southwestern Public Service Company
               (Exact name of obligor as specified in its charter)

New Mexico                                                    75-057540
(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)

                            Unsecured Debt Securities
                       (Title of the indenture securities)
GENERAL

Item 1. General Information.

       Furnish the following information as to the trustee:

       (a)Name and address of each  examining  or  supervising  authority  to
          which it is subject.

          New York State Banking Department, State House, Albany,New York 12110.

          Board of Governors of the Federal Reserve System, Washington, 
           D.C., 20551

          Federal Reserve Bank of New York, District No. 2, 33 Liberty Street,
           New York, N.Y.

          Federal Deposit Insurance Corporation, Washington, D.C., 20429.

      (b) Whether it is authorized to exercise corporate trust powers.

         Yes.

Item 2.  Affiliations with the Obligor.

      If  the  obligor  is an  affiliate  of the  trustee,  describe  each  such
affiliation.

      None.

                                      - 2 -
Item 16.    List of Exhibits

        List  below  all  exhibits   filed  as  a  part  of  this  Statement  of
Eligibility.

        1. A copy  of the  Articles  of  Association  of the  Trustee  as now in
effect, including the Organization Certificate and the Certificates of Amendment
dated February 17, 1969, August 31, 1977, December 31, 1980,  September 9, 1982,
February 28, 1985, December 2, 1991 and July 10, 1996 (see Exhibit 1 to Form T-1
filed  in  connection  with  Registration  Statement  No.  333-06249,  which  is
incorporated by reference).

        2. A copy of the  Certificate  of  Authority  of the Trustee to Commence
Business  (see  Exhibit  2 to Form T-1  filed in  connection  with  Registration
Statement No. 33-50010, which is incorporated by reference. On July 14, 1996, in
connection  with the  merger  of  Chemical  Bank and The  Chase  Manhattan  Bank
(National  Association),  Chemical Bank, the surviving corporation,  was renamed
The Chase Manhattan Bank).

        3.  None,   authorization  to  exercise  corporate  trust  powers  being
contained in the documents identified above as Exhibits 1 and 2.

        4. A copy of the existing  By-Laws of the Trustee (see Exhibit 4 to Form
T-1 filed in connection  with  Registration  Statement No.  333-06249,  which is
incorporated by reference).

        5. Not applicable.

        6. The consent of the Trustee required by Section 321(b) of the Act (see
Exhibit  6 to Form T-1  filed in  connection  with  Registration  Statement  No.
33-50010,  which is incorporated  by reference.  On July 14, 1996, in connection
with  the  merger  of  Chemical  Bank and The  Chase  Manhattan  Bank  (National
Association),  Chemical Bank, the surviving  corporation,  was renamed The Chase
Manhattan Bank).

        7. A copy of the latest  report of condition  of the Trustee,  published
pursuant to law or the requirements of its supervising or examining authority.

        8. Not applicable.

        9. Not applicable.

                                    SIGNATURE

      Pursuant  to the  requirements  of the  Trust  Indenture  Act of 1939  the
Trustee,  The Chase Manhattan  Bank, a corporation  organized and existing under
the laws of the State of New York, has duly caused this statement of eligibility
to be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of New York and State of New York, on the 22nd day of February, 1999.

                            THE CHASE MANHATTAN BANK

                                      By _/s/_W.B. Dodge_______________
                                         /s/   W.B. Dodge
                                               Vice President

                                      - 3 -
Exhibit 7 to Form T-1

                                Bank Call Notice

                             RESERVE DISTRICT NO. 2
                       CONSOLIDATED REPORT OF CONDITION OF

                            The Chase Manhattan Bank
                  of 270 Park Avenue, New York, New York 10017
                     and Foreign and Domestic Subsidiaries,
                     a member of the Federal Reserve System,

                 at the close of business September 30, 1998, in
         accordance with a call made by the Federal Reserve Bank of this
         District pursuant to the provisions of the Federal Reserve Act.

                                                                 Dollar Amounts
               ASSETS                                             in  Millions

Cash and balances due from depository institutions:
   Noninterest-bearing balances and
   currency and coin.....................................          $  11,951
   Interest-bearing balances.............................              4,551
Securities:..............................................
Held to maturity securities..............................              1,740
Available for sale
 securities..............................................             48,537
Federal funds sold and securities purchased under
   agreements to resell..................................             29,730
Loans and lease financing receivables:
   Loans and leases, net of unearned income    $127,379
   Less: Allowance for loan and lease losses      2,719
   Less: Allocated transfer risk reserve .....        0
                                               --------
   Loans and leases, net of unearned income,
   allowance, and reserve................................           124,660
Trading Assets
 .........................................................            51,549
Premises and fixed assets (including capitalized
 leases).................................................             3,009
Other real estate owned..................................               272
Investments in unconsolidated subsidiaries and
   associated companies..................................               300
Customers' liability to this bank on acceptances
   outstanding...........................................             1,329
Intangible assets........................................             1,429
Other assets.............................................            13,563
                                                                     ------ 
TOTAL ASSETS.............................................          $292,620
                                                                   ========

                                      - 4 -
LIABILITIES

Deposits
   In domestic offices....................................         $ 98,760
   Noninterest-bearing...................... $39,071
   Interest-bearing.........................  59,689
                                              ------
   In foreign offices, Edge and Agreement,
    subsidiaries and IBF's.................................           75,403
   Noninterest-bearing ....................................        $   3,877
   Interest-bearing........................................           71,526

Federal funds purchased and securities sold under agree-
 ments to repurchase.......................................           34,471
Demand notes issued to the U.S. Treasury...................            1,000
Trading liabilities........................................           41,589

Other borrowed money (includes mortgage indebtedness
   and obligations under capitalized leases):
   With a remaining maturity of one year or less ..........            3,781
   With a remaining maturity of more than one year.
        through three years................................              213
       With a remaining maturity of more than three years..              104
Bank's liability on acceptances executed and outstanding               1,329
Subordinated notes and debentures..........................            5,408
Other liabilities..........................................           12,041

TOTAL LIABILITIES..........................................          274,099
                                                                     -------
                                 EQUITY CAPITAL

Perpetual preferred stock and related surplus                              0
Common stock...............................................            1,211
Surplus  (exclude all surplus related to preferred stock)..           10,441
Undivided profits and capital reserves.....................            6,287
Net unrealized holding gains (losses)
 on available-for-sale securities..........................              566
Cumulative foreign currency translation adjustments........               16

TOTAL EQUITY CAPITAL.......................................           18,521
                                                                      ------
TOTAL LIABILITIES AND EQUITY CAPITAL.......................         $292,620
                                                                    ========

I, Joseph L. Sclafani,  E.V.P. & Controller of the  above-named  bank, do hereby
declare that this Report of Condition has been prepared in conformance  with the
instructions issued by the appropriate Federal regulatory  authority and is true
to the best of my knowledge and belief.

                               JOSEPH L. SCLAFANI

We, the  undersigned  directors,  attest to the  correctness  of this  Report of
Condition  and declare  that it has been  examined by us, and to the best of our
knowledge  and belief has been  prepared in  conformance  with the  instructions
issued by the appropriate Federal regulatory authority and is true and correct.

                        WALTER V. SHIPLEY       )
                        THOMAS G. LABRECQUE     )DIRECTORS
                        WILLIAM B. HARRISON, JR.)
                                       -5-
EXHIBIT E

                     LeBoeuf, Lamb, Greene & MacRae, L.L.P.
                              125 West 55th Street
                            New York, N.Y. 10019-5389

                                                             February 23, 1999

Southwestern Public Service Company
P.O. Box 1261
Amarillo, TX 79170

Dear Sirs:

      In connection  with the  Registration  Statement  No.333-05199 on Form S-3
relating  to  the  registration  of  Debt  Securities  and  Preferred  Stock  of
Southwestern  Public Service Company,  we hereby consent to any reference to our
firm in such Registration Statement and any amendments or prospectus supplements
thereto under the caption "Legal Opinions".

                                Very truly yours,

         LEBOEUF, LAMB, GREENE & MACRAE, L.L.P.