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

                                  FORM 10-K

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

           For the Fiscal Year Ended December 31, 1997

                      OR

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

           For the transition period from _____________   to   ____________

            Exact name of registrant as specified in its charter, State or
            other jurisdiction of incorporation or organization, Address of
            principal executive offices and Registrant's Telephone Number,
Commission  including area code                                  IRS Employer
File Number                                                   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

                             ____________________

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


<PAGE>

Securities registered pursuant to Section 12(b) of the Act:

                                                           Name of Each Exchange
Registrant                 Title of Each Class               on Which Registered
----------                 -------------------               -------------------
New Century Energies, Inc. Common Stock, $1 par value
                              per share                           New York

Public Service Company
  of Colorado              Cumulative Preferred Stock,
                              par value $100 per share
                            4 1/4% Series                          American
                            7.15% Series                          New York
 
                           Cumulative Preferred Stock ($25),
                              par value per share
                            8.40% Series                          New York

Southwestern Public
  Service Company           7.85% Trust Preferred Securities,
                              Series A                            New York

Securities registered pursuant to Section 12(g) of the Act:

Registrant                 Title of Class
----------                 --------------

Public Service Company
 of Colorado               Cumulative Preferred Stock par value
                              $100 per share
                           4.20% series
                           4 1/2% series
                           4.64% series
                           4.90% series
                           4.90% 2nd series
                           7.50% series
                           8.40% series

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

      Indicate by check mark if disclosure of  delinquent  filers  pursuant to
Item  405  of  Regulation  S-K  is  not  contained  herein,  and  will  not be
contained,  to the best of  registrants'  knowledge,  in  definitive  proxy or
information  statements  incorporated  by  reference  in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]

      As of February 19,  1998,  110,997,546  shares of New Century  Energies,
Inc.  Common  Stock  were  outstanding.  The  aggregate  market  value  of New
Century  Energies,  Inc.  Common  Stock,  $1.00 par value  (the only  class of
voting stock),  held by non-affiliates  was  $5,050,388,343  based on the last
sale  price of such  stock on the New York  Stock  Exchange  on  February  19,
1998.  New Century  Energies,  Inc. is the sole holder of the Common  Stock of
PSCo and SPS.

                     DOCUMENTS INCORPORATED BY REFERENCE
      Portions  of the Proxy  Statement  of New Century  Energies,  Inc. to be
filed in connection  with its Annual Meeting of  Shareholders,  to be held May
12, 1998, are incorporated by reference into Part III hereof.



<PAGE>


                              TABLE OF CONTENTS

                                                                          Page
Definitions                                                            Number

Part I
      Item 1. Business..............................................    1
      Item 2. Properties............................................    23
      Item 3. Legal Proceedings.....................................    27
      Item 4. Submission of Matters to a Vote of Securities Holders.    27
Part II
      Item 5. Market for Registrant's Common Equity and Related
                Stockholder Matters ................................    27
      Item 6. Selected Financial Data...............................    29
      Item 7. Management's Discussion and Analysis of Financial
                Condition and Results of Operations.................    31
      Item 7A Quantitative and Qualitative Disclosures About Market
                Risk ...............................................    NA
      Item 8. Financial Statements and Supplementary Data...........    39
      Item 9. Changes in and Disagreements with Accountants on 
                Accounting and Financial Disclosure.................   120
Part III
      Item 10.Directors and Executive Officers of the Registrants...   120
      Item 11.Executive Compensation ...............................   124
      Item 12.Security Ownership of Certain Beneficial Owners
                and Management .....................................   130
      Item 13.Certain Relationships and Related Transactions .......   132
Part IV
      Item 14.Exhibits, Financial Statement Schedules and Reports
                on Form 8-K ........................................   132
Experts       ......................................................   133
Consents of Independent Public Accountants..........................   134
Signatures    ......................................................   136
Exhibit Index ......................................................   143

This  combined Form 10-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.

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

                         FORWARD LOOKING INFORMATION

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

                                       i
<PAGE>

                                 DEFINITIONS

The abbreviations or acronyms used in the text and notes 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
BLM .................................................Bureau of Land Management
Cameo .................................Cameo Steam Electric Generating Station
CCT3 ................................................Clean Coal Technology III
CERCLA ...Comprehensive Environmental Response, Compensation and Liability Act
Cherokee........................... Cherokee Steam Electric Generating Station
Cheyenne ...............................Cheyenne Light, Fuel and Power Company
CIG ...........................................Colorado Interstate Gas Company
Colorado Supreme Court..................Supreme Court of the State of Colorado
Comanche ...........................Comanche Steam Electric Generating Station
Company or NCE........................New Century Energies, Inc., a registrant
CPCN...........................Certificate of Public Convenience and Necessity
CPUC .....................Public Utilities Commission of the State of Colorado
Craig..................................Craig Steam Electric Generating Station
CWIP.............................................Construction Work in Progress
CWQCD..................................Colorado Water Quality Control Division
Cyprus/Amax...........................................Cyprus/Amax Coal Company
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
EIS.............................................Environmental Impact Statement
EPA.......................................U.S. Environmental Protection Agency
EPAct.......................................National Energy Policy Act of 1992
EWG.................................................Exempt Wholesale Generator
FASB......................................Financial Accounting Standards Board
FERC......................................Federal Energy Regulatory Commission
FERC Order 636.................................FERC Order Nos. 636-A and 636-B
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
IBM .......................................................IBM Global Services
ICA..................................................Incentive Cost Adjustment
IPPF ....................................Independent Power Production Facility
IRP ..................................................Integrated Resource Plan
IRS...................................................Internal Revenue Service
ISFSI..............................Independent Spent Fuel Storage Installation
KN Energy......................................................KN Energy, Inc.
Kwh..............................................................kilowatt-hour
Merger...................... the business combination between the PSCo and SPS
Merger Agreement.............Agreement and Plan of Reorganization by and among
                                                 PSCo, SPS and NCE, as amended

                                       ii
<PAGE>

Mw....................................................................Megawatt
NMPUC.....................................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.
NOPR.............................................Notice of Proposed Rulemaking
NOx.............................................................Nitrogen Oxide
NRC .............................................Nuclear Regulatory Commission
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)
Pool ........................................................Inland Power Pool
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
QFCCA...........................Qualifying Facilities Capacity Cost Adjustment
QSP....................................................Quality of Service Plan
Quixx.......................................Quixx Corporation and subsidiaries
SEC.........................................Securities and Exchange Commission
SFAS...............................Statement of Financial Accounting Standards
SFAS 71...................Statement of Financial Accounting Standards No. 71 -
                   "Accounting for the Effects of Certain Types of Regulation"
SFAS 106................Statement of Financial Accounting Standards No. 106 -
       "Employers' Accounting for Postretirement Benefits Other Than Pensions"
SFAS 109................Statement of Financial Accounting Standards No. 109 -
                                                 "Accounting for Income Taxes"
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
SPP.......................................................Southwest Power Pool
SPS..........................Southwestern Public Service Company, a registrant
TNP.............................................Texas-New Mexico Power Company
TOG.......................................................Texas-Ohio Gas, Inc.
TOP..................................................Texas-Ohio Pipeline, Inc.
Transition PeriodFour month period September 1, 1996 through December 31, 1996
Tri-State..............Tri-State Generation and Transmission Association, Inc.
TUCO................................................................TUCO, Inc.
UE............................Utility Engineering Corporation and subsidiaries
U.K. ...........................................................United Kingdom
Valmont .............................Valmont Steam Electric Generating Station
WGI ..................................................WestGas InterState, Inc.
WPSC......................................Public Service Commission of Wyoming
WSCC......................................Western Systems Coordinating Council
WSPP................................................Western Systems Power Pool

                                      iii
<PAGE>

Young Storage..................................Young Gas Storage Company, Ltd.
YGSC.................................................Young Gas Storage Company
Yorkshire Electricity..........................Yorkshire Electricity Group plc
Yorkshire Power.....................................Yorkshire Power Group Ltd.
Zuni ...................................Zuni Steam Electric Generating Station


                                       iv
<PAGE>


                                    PART I

Item l.  Business

The Company

      NCE,  incorporated  under  the laws of  Delaware  in  1995,  is a public
utility  holding company  registered  under PUHCA. On August 1, 1997, PSCo and
SPS  combined  to  form  NCE,   with  PSCo  and  SPS   becoming   wholly-owned
subsidiaries  of NCE.  The common  shareholders  of PSCo and SPS  received one
and 0.95 of one share, respectively,  of NCE common stock, par value $1.00 per
share,  and became  common  shareholders  of NCE. The Merger was accounted for
as a  pooling-of-interests,  and the  Consolidated  Financial  Statements  and
statistical  data in this  Form  10-K  are  presented  as if the  Merger  were
consummated as of the beginning of the earliest period presented.

      The  Company  has no  significant  assets  other  than the  stock of its
subsidiaries.   The  revenues  of  NCE  and  its   subsidiaries   are  derived
substantially from the generation,  purchase,  transmission,  distribution and
sale of electricity and from the purchase,  transmission,  distribution,  sale
and   transportation   of  natural   gas.  The  utility   subsidiaries   serve
approximately  1.6 million electric  customers and  approximately  1.0 million
gas  customers in their  service  territories  which  include  portions of the
states of Colorado, Texas, New Mexico, Wyoming, Kansas and Oklahoma.

      The  Company  owns  all the  outstanding  common  stock  of  PSCo,  SPS,
Cheyenne,  WGI, NCS, and NC  Enterprises.  PSCo owns certain  subsidiaries  as
described below. NC Enterprises,  an intermediate  holding  company,  owns the
following  subsidiaries:   Quixx,  e  prime,  UE,  Natural  Fuels  Corporation
(83.63% ownership) and NC Cadence.  Refer to the non-utility section below for
further discussion regarding the Company's non-utility operations.

      On April 22,  1997,  SPS  changed  its fiscal  year from a  twelve-month
period ending August 31 to a twelve-month  period ending December 31. The 1995
financial and  statistical  data  presented in Item 1.  Business  combines the
historical  financial  and  statistical  data of  PSCo as of and for the  year
ended December 31, 1995 with the historical  financial and statistical data of
SPS as of and for the year  ended  August  31,  1995 (See Note 1.  Summary  of
Significant   Accounting   Policies  in  Item  8.  Financial   Statements  And
Supplementary Data).

      Information  regarding  industry  segments  is set  forth  in  Note  14.
Segments of Business in Item 8. Financial Statements And Supplementary Data.

Utility Operations

      PSCo was incorporated  through merger of predecessors  under the laws of
the  State  of  Colorado  in  1924.  PSCo  is  an  operating  utility  engaged
principally in the generation, purchase,  transmission,  distribution and sale
of  electricity  and in the  purchase,  transmission,  distribution,  sale and
transportation   of  natural  gas.  PSCo  serves   approximately  1.2  million
electric  customers and  approximately  1.0 million gas customers in the state
of  Colorado.  PSCo  owns the  following  direct  subsidiaries:  1480  Welton,
Inc., a real estate company which owns certain real estate  interests of PSCo;
PSRI which owns and manages permanent life insurance  policies on certain past
and present  employees,  the benefits from which are to provide future funding
for  general  corporate  purposes;  PSCCC,  a finance  company  that  finances
certain of PSCo's  current  assets;  Green and Clear Lakes  Company which owns
water  rights  and  storage  facilities  for water  used at PSCo's  Georgetown
Hydroelectric  station;  and Fuelco, a dissolved Colorado  corporation,  which
was primarily  involved in the  exploration  and production of oil and natural
gas.  On July 1, 1996,  Fuelco  sold its  remaining  properties,  the San Juan
Basin Coal Bed Methane properties,  at approximately book value and, effective
October  31,  1996,  Fuelco  was  dissolved.  PSCo  also  holds a  controlling
interest in several other  relatively  small ditch and water  companies  whose
capital requirements are not significant.

                                       1

<PAGE>

      PSCo  also  owns all of the  outstanding  common  stock of NCI.  NCI was
formed  to hold  PSCo's  50%  interest  in  Yorkshire  Electricity  which  was
purchased in April 1997 by Yorkshire  Power (a joint venture  between PSCo and
AEP)  through  Yorkshire   Holdings  plc.  For  a  more  detailed   discussion
regarding  the  acquisition  of  Yorkshire  Electricity,   refer  to  "Foreign
Investments"  below and Note 2. Acquisition of Yorkshire  Electricity and U.K.
Windfall Tax in Item 8. Financial Statements And Supplementary Data.
 
      SPS was  incorporated  in  1921  under  the  laws  of the  State  of New
Mexico.  SPS is an operating  utility  engaged  primarily  in the  generation,
transmission,  distribution and sale of electricity.  SPS serves approximately
380,000  electric  customers  in portions of the states of Texas,  New Mexico,
Oklahoma and Kansas.

      Cheyenne  was  incorporated  in 1900  under  the  laws of the  State  of
Wyoming.   Cheyenne  is  an  operating   utility   engaged  in  the  purchase,
distribution  and  sale of  electricity  and  natural  gas  primarily  serving
customers  in  Cheyenne,   Wyoming.   Cheyenne  serves   approximately  35,000
electric customers and 28,000 gas customers in the state of Wyoming.

      WGI was  incorporated  in 1990 under the laws of the State of  Colorado.
WGI is a natural  gas  transmission  company  engaged in  transporting  gas to
Cheyenne,  Wyoming  via a thirteen  mile  connecting  pipeline  between  Chalk
Bluffs, Colorado and Cheyenne, Wyoming.

Electric Utility Operations

      The  Company's  utility   subsidiaries  propose  to  use  the  following
resources to meet their net dependable  system capacity  requirements:  1) the
Company's electric  generating  stations (see Electric  Generation Property in
Item 2.  Properties);  2)  purchases  from  other  utilities  and from QFs and
IPPFs; 3) renewables and demand-side  management options and 4) new generation
alternatives, including the phased repowering of Fort St. Vrain.

Peak Load

      During 1998, net firm system peak demand and the net  dependable  system
capacity for the Company's  electric  utility  subsidiaries is projected to be
as follows:
                                             1998 Projected
                      1998 Projected       Net Dependable System     Reserve
Operating company   Net Firm System Peak         Capacity*            Margin
-----------------   --------------------         ---------            ------

      PSCo                4,401 Mw                4,960 Mw             13%
      SPS                 4,058 Mw                4,595 Mw             13%
      Cheyenne             132 Mw                  149 Mw              **
--------------
      *  Net dependable system capacity is the maximum net capacity  available
         from both owned  generating  units and purchased  power  contracts to
         meet the net firm system peak demand.
      ** Reserve margin for Cheyenne is held by PacifiCorp.

      The net firm  system  peak  demand for each of the last three  years was
as follows:

                                          Net Firm System Peak Demand (Mw)
                                      1995          1996           1997
                                      ----          ----           ----

      PSCo*......................   4,248          4,397          4,487
      SPS........................   3,952          3,694          3,715
      Cheyenne **................       -              -            132
--------------

      *  Excludes  station  housepower,  nonfirm  electric  furnace  load  and
         controlled  interruptible  loads (of which  approximately 148 Mw, 122
         Mw  and  116  Mw  in  the  years  1995-1997,  respectively,  was  not
         interrupted at the  time of the system peak).
      ** Prior to the Merger,  Cheyenne was a subsidiary  of PSCo;  therefore,
         Cheyenne's  coincidental  peak demand is  included  with PSCo in 1995
         and 1996.

                                       2

<PAGE>

      The net  firm  system  peak  demand  for PSCo  for the  years  1995-1997
occurred  in the  summer.  The net firm  system  peak  demand for 1997,  which
occurred  on July 23,  1997,  was 4,487 Mw. At that time,  the net  dependable
system  capacity  totaled 5,001 Mw (generating  capacity of 3,319 Mw, together
with firm  purchases  of 1,682  Mw),  which  represented  a reserve  margin of
approximately 12%).

      The net firm  system  peak demand for SPS for the years 1995 - 1997 also
occurred  in the  summer.  The net firm  system  peak  demand for 1997,  which
occurred  on July 28,  1997,  was 3,715 Mw. At that time,  the net  dependable
system capacity  totaled  approximately  4,443 Mw (including firm  purchases),
which represented a reserve margin of approximately 20%.

Purchased Power

      The   Company's   electric   utility   subsidiaries   have   contractual
arrangements  with  regional  utilities as well as QFs and an IPPF in order to
meet the energy  needs of their  customers.  Capacity,  typically  measured in
Kilowatts  or  Megawatts,  is the  measure  of the rate at which a  particular
generating  source  produces  electricity.   Energy,   typically  measured  in
Kilowatt-hours  or  Megawatt-hours,  is a measure of the amount of electricity
produced from a particular  generating source over a period of time.  Purchase
power  contracts  typically  provide  for a  charge  for the  capacity  from a
particular  generating  source,  together  with a  charge  for the  associated
energy actually purchased from such generating source.

                                       3
<PAGE>

      The Company's  electric  utility  subsidiaries  have contracted with the
following  sources for the firm purchase of capacity and energy at the time of
the  anticipated   summer  1998  net  firm  system  peak  demand  through  the
expiration of the contracts:

                                                    Mw Contracted
                                                  For at the Time
                                                 of the Anticipated
                                Generating      Summer 1998 Net Firm Contract
Company                           Source         System Peak Demand  Expiration
-------                           ------         ------------------  ----------

PSCo Contracts:

Basin Electric Power Coopera-  Laramie River Station
tive, Agreements 1 and 2(a)(b) Units 2 and 3             175           2016


PacifiCorp (c)                 PacifiCorp Resource Pool  176           2011

Platte River Power
Authority (a) (f)              Craig Units 1 and 2;      142           2004
                               Rawhide Unit 1

Tri-State                                                525            (f)
Agreements 1, 2, 3 and 4 (a)(e)Laramie River Station
                               Units 2 and 3;
                               Craig Units 1, 2 and 3

Agreement 5 (a) (e)            Laramie River Station
                               Units 2 and 3;
                               Craig Units 1, 2 and 3;
                               Nucla Units 1, 2, 3 and 4

Various Owners (a)             QFs & IPPF                623       Various dates
                                                         ---

    Subtotal - PSCo                                    1,641

SPS Contract:

Borger Energy Associates (g)   QF                        192           2023
 
Cheyenne Contract:

PacifiCorp (d)                 PacifiCorp System         149           2000
                                                         ---   

                                                       1,982
                                                       =====
____________

(a)   These  contracts  are  contingent  upon the  availability  of the  units
   listed  as  the  generating  source.  These  contracts  are  take  and  pay
   contracts.  Based upon the terms of these  agreements,  if the  capacity is
   available  from these  units,  then PSCo is  obligated  to pay for capacity
   whether  or not  it  takes  any  energy.  However,  PSCo  has  historically
   satisfied the minimum energy requirements  associated with these agreements
   and anticipates  doing so in the future.  Additionally,  if these units are
   unavailable,  the supplying  company has no obligation to furnish  capacity
   or energy and the capacity charge to PSCo is reduced accordingly.

(b)   PSCo  has  entered  into  two  agreements   with  Basin  Electric  Power
   Cooperative.  The first  agreement is for 100 Mw of capacity  through March
   31,  2016.  The second  agreement  is for 75 Mw of summer  season  capacity
   through  March 31, 2016 and 25 Mw of winter season  capacity  through March
   31, 2010.

(c)   The  current  agreement  with  PacifiCorp   expires  October  31,  2022.
   However,  the  agreement  provides  PSCo the  opportunity  to  exercise  an
   irrevocable  option to  terminate  the  agreement  on  December  31,  2011,
   provided PSCo gives notice to PacifiCorp no later than March 1, 2002.

                                       4

<PAGE>

(d)   This  contract,  which expires in 2000,  calls for PacifiCorp to sell to
   Cheyenne the total  electric  capacity and energy  requirements  associated
   with the operation of Cheyenne's service area.

(e)   PSCo has entered into five agreements  with  Tri-State.  Agreements 1, 2
   and 5 are  contracts  for 100 Mw each of capacity and expire in 2001,  2017
   and  2011,  respectively.  Agreement  3 is a  contract  for 25 Mw of summer
   season  capacity and 75 Mw of winter  season  capacity and expires in 2016.
   Agreement 4 expires in 2018 and the related  capacity is for the  following
   amounts:  1998  through  2000 - 200  Mw and  2001  through  2018 - 250  Mw;
   however,  either  party may elect to reduce the  Agreement 4 capacity by up
   to 50 Mw each year,  except for 2001,  effective  in the year 1999.  If the
   full 50 Mw  reduction  is taken each year,  the  capacity  associated  with
   Agreement 4 from 1999 on would be as follows:  1999 - 150 Mw, 2000  through
   2001 - 100 Mw,  2002 - 50 Mw  with  no  commitments  thereafter.  PSCo  has
   notified  Tri-State  of its intent to reduce the capacity  associated  with
   Agreement 4 to 150 Mw for 1999.


(f)   The amount of capacity to be made  available  for each summer and winter
   season is agreed upon prior to such season to the extent that Platte  River
   Power Authority has excess capacity for such season.


(g)   SPS entered into an agreement with Borger Energy  Associates in May 1997
   for the purchase of capacity and energy.  Power  deliveries are expected to
   begin on or before  September 15, 1998.  Power purchases from Borger Energy
   Associates  will be up to 192 MW of capacity for the 1998 summer season and
   230 MW beginning  October 1, 1998 through the remaining  contract term. SPS
   has an option to extend  the term of the  agreement  for an  additional  10
   years.

      See Note 10.  Commitments and  Contingencies - Purchase  Requirements in
Item  8.  Financial   Statements  And   Supplementary   Data  for  information
regarding the  Company's  financial  commitments  under these  contracts.  See
Interconnections  in Item 2.  Properties  for a  discussion  of the  Company's
interconnections with these sources.

      Based on present estimates,  PSCo will purchase approximately 32% of the
total  electric  system  energy  input for  1998.  In  addition,  based on the
capacity  associated  with  the  purchase  power  contracts  described  above,
approximately  33% of  the  total  net  dependable  system  capacity  for  the
estimated  summer  1998 net firm  system peak demand for PSCo will be provided
by purchased power.

      All of the QF capacity purchased by PSCo,  including  approximately 4 Mw
of  additional  capacity  scheduled  to come on line in the  future,  is being
purchased  under  contracts  entered  into  prior  to  January  1,  1988.  The
purchases  of  additional  QF and  IPPF  capacity  are  currently  based  on a
competitive  bidding  process.  In 1997,  approximately  14% of PSCo's  summer
net firm system peak demand was provided by QFs.

      In  addition  to  long-term  and QF and IPPF  purchases,  PSCo also made
short-term and non-firm  purchases  throughout the year to replace  generation
from PSCo-owned  units which were unavailable due to maintenance and unplanned
outages,  to provide PSCo's  reserve  obligation to the Pool, to obtain energy
at a lower cost than that which could be produced by other  resource  options,
including  PSCo-owned  generation  and/or long-term  purchase power contracts,
and  for  various  other  operating  requirements.   Short-term  and  non-firm
purchases  accounted for  approximately 3% of PSCo's total energy  requirement
in 1997.

      Based on current projections,  PSCo expects that purchased capacity will
continue to meet a  significant  portion of system  requirements  at least for
the remainder of the 1990s.  Such  purchases  neither  require PSCo to make an
investment  nor  afford  PSCo  an  opportunity  to  earn  a  return.   Further
discussion  related to recovery of  purchased  capacity  costs can be found in
"Regulations  and Rates - Cost  Recovery  Mechanisms."  SPS arranged  seasonal
short-term   purchases  for  the  summer  of  1997  and  may  make  additional
short-term purchases for the 1998 summer season.

      PSCo is a member of the Pool which is composed of members  each of which
owns and/or operates  electric  generation and/or  transmission  systems which
are  interconnected to one or more other member systems.  The objective of the
Pool  is  to  provide   capacity  which  is  categorized  as:  1)  immediately
accessible;  2) accessible within ten minutes; and 3) accessible within twelve
hours,  as required.  As a result of membership  in the Pool,  PSCo can supply
and  protect  its  electric  system  with  less  aggregate  operating  reserve
capacity than otherwise  would be necessary;  emergency  conditions can be met
with less  likelihood of  curtailment or impairment of electric

                                       5

<PAGE>

service; and generation and transmission  facilities and interconnections can be
used more  efficiently  and  economically.  PSCo is in discussion  with regional
utilities to create a new reserve sharing  arrangement that better meets the new
FERC and WSCC requirements.  This new sharing arrangement,  when finalized, will
replace the current Pool arrangement.

      Refer  to  Item  2.  Properties-Electric  Transmission  Property  for  a
discussion of SPS's activities with the SPP and the WSPP.

Construction Program

      At December 31, 1997, the Company's  subsidiaries  estimated the cost of
their total  construction  program,  including AFDC, to be approximately  $530
million in 1998,  approximately  $541 million in 1999, and approximately  $450
million  in  2000  (see  Item  7.  Management's  Discussion  And  Analysis  Of
Financial Condition And Results Of Operations).

Electric Fuel Supply

      The following  tables present the delivered cost per million Btu of each
category of fuel  consumed by the system for  electric  generation  during the
years  indicated,  the  percentage of total fuel  requirements  represented by
each  category of fuel and the weighted  average cost of all fuels during such
years:

      PSCo generating plants:                             Weighted
                                                           Average
                                Coal*          Gas       All Fuels**
                            Cost $   %     Cost $   %     Cost $
                            ----------------------------------------

       1997...............    0.99  98       3.03   2       1.03

       1996...............    1.03  98       2.42   2       1.05

       1995...............    0.99  99       1.52   1       1.00

      *  The average cost per ton of coal,  including freight,  for years 1995
         through   1997  shown   above  was   $19.06,   $20.17   and   $18.96,
         respectively.
      ** Insignificant purchases of oil are included.

      SPS generating plants:                              Weighted
                                                           Average
                                Coal           Gas       All Fuels**
                            Cost $   %     Cost $   %     Cost $
                            ----------------------------------------

       1997...............    1.84  69       2.55  31       2.06

       1996...............    1.93  69       2.38  31       2.06

       1995...............    1.81  64       1.63  36       1.75

      *  The  average  cost  per ton of  coal,  including  freight  and  other
         components,  for years  1995  through  1997 shown  above was  $31.37,
         $33.26 and $31.97, respectively.
      ** Insignificant purchases of oil, steam and hot nitrogen are included.

Coal

      PSCo's  primary  fuel for its  steam  electric  generating  stations  is
low-sulfur  western coal.  PSCo's coal  requirements  are purchased  primarily
under eight  long-term  contracts  with  suppliers  operating  in Colorado

                                       6

<PAGE>

and Wyoming. The largest contract tonnage is supplied by Cyprus/Amax Coal, which
operates  the Belle Ayr and Eagle  Butte  Mines near  Gillette,  Wyoming and the
Foidel Creek mine in northwestern Colorado.

      Long-term  contracts  presently in existence  provide for  approximately
88% of 1998  coal  requirements  and  more  than  80% of  future  annual  coal
requirements  through  2000.  Any  shortfall  for  1998  will be  provided  by
purchases  on the spot  market.  During  the year  ended  December  31,  1997,
PSCo's coal  requirements  for existing  plants were  approximately  9,451,759
tons,  a  substantial  portion of which was  supplied  pursuant  to  long-term
supply  contracts.   Coal  supply   inventories  at  December  31,  1997  were
approximately 40 days usage,  based on the average burn rate for all of PSCo's
coal-fired plants.

      The following  table  provides a summary of the basic supply  provisions
of PSCo's existing long-term  contracts,  which provide for a minimum delivery
of  approximately 78 million tons of low-sulfur coal over their remaining life
(see Note 10.  Commitments and  Contingencies - Purchase  Requirements in Item
8. Financial Statements And Supplementary Data ).

                                          1998             1998       Contract
                                         Minimum          Maximum      maximum
                                        delivery         delivery      sulfur
Coal Supplier and Delivery Year          in tons          in tons      content
-------------------------------          -------          -------      -------

Cyprus/Amax (1).....................   3,960,000          (2) (3)       0.50%

Colowyo Coal Company................      88,571 (4)       88,571       0.70%

Twentymile Coal Company (10)........   1,170,000        1,430,000       0.55

Mountain Coal Company...............     600,000 (5)      800,000       0.67%

Powderhorn Coal Company.............     150,000          350,000       0.69%

Seneca Coals, Ltd (6) ..............     439,800              (7)       1.00%

Trapper Mining, Inc.................     179,427 (8)      179,427         (9)

Kennecott Energy Company (10).......     450,000          500,000        0.55

(1)   The  contract  term is  completed  upon  delivery  of a  fixed  quantity
      regardless of the year in which  delivery is completed.  From January 1,
      1976 through  December 31, 1997,  approximately  57.6% of the obligation
      has been delivered.
(2)   Coal requirements of Comanche and Pawnee.
(3)   Coal  requirements  of Pawnee and Pawnee 2 upon  completion  of Pawnee 2
      through 2013.
(4)   The contract minimum quantity varies by year during the agreement.
(5)   The contract  term is completed  upon delivery of a fixed  quantity.  As
      of December 31, 1997,  approximately  62.7% of the  obligation  has been
      delivered.
(6)   The contract term is completed  upon total  delivery of a fixed quantity
      to Hayden  from and after  January 1, 1983.  As of  December  31,  1997,
      approximately  71.1% of the obligation has been  delivered.  Delivery is
      expected to be completed in the year 2004.
(7)   Coal requirements of Hayden.
(8)   The contract minimum quantity varies by year during the agreement.
(9)   Not specified in the contract.
(10)  The contract  maximum sulfur content as presented in the table is stated
      in pounds of sulfur per million Btu.

      Each coal contract  contains  adjustment  clauses which permit  periodic
price  increases or  decreases.  Powder  River Basin coal  supplies for PSCo's
Arapahoe,  Pawnee and Comanche  stations  are  transported  by the  Burlington
Northern  Sante Fe Railway  Company under two contracts  which have  remaining
terms of one year for  Arapahoe  and three  years  for  Pawnee  and  Comanche.
Colorado  origin coal  supplies for PSCo's  Cherokee and 

                                       7

<PAGE>

Valmont stations are anticipated to be transported by the Union Pacific Railroad
Company to Cherokee and by a joint haul of the Union  Pacific  Railroad  Company
and Burlington  Northern Sante Fe Railway Company to Valmont under two contracts
with remaining terms of five and two years, respectively.

      SPS  purchases  all of its coal  requirements  for  Harrington  and Tolk
Stations from TUCO, in the form of crushed,  ready-to-burn  coal  delivered by
coal-handling  facilities owned by Wheelabrator Coal Services Co. to the SPS's
boiler  bunkers  located  within  SPS's  coal-fueled   stations  where  it  is
processed  for burning.  The contract for the  Harrington  station  expires in
2016  and the  contract  for the Tolk  station  expires  in 2017.  The coal is
transported  for TUCO by rail,  primarily  from mines  located in Wyoming,  to
TUCO's  stockpiles  which  are  adjacent  to  SPS's  coal-burning   generation
stations.  At December 31, 1997,  TUCO's coal  inventories  at the  Harrington
and  Tolk  sites  were  approximately  41 days  usage.  TUCO  has  executed  a
long-term  coal supply  agreement with  Kennecott  Energy  Company  affiliated
companies to supply approximately 55% of Harrington's  projected  requirements
through 2001 from  Cordero,  Caballo Rojo and  Antelope  mines  located in the
Powder River Basin.  In addition,  TUCO has contracted for  approximately  33%
of  Harrington's  1998  projected  requirements  with  Kennecott's  affiliate,
Colowyo Coal Company,  from its Colowyo mine located in western Colorado.  The
Colowyo  agreement  provides for delivery to Harrington  station via the Union
Pacific  Railroad.  TUCO has long term  contracts with ARCO for supply of coal
in  sufficient  quantities  to meet  all of  SPS's  needs  for  Tolk  Station.
Specific  coal  reserves  in the  Powder  River  Basin in  Wyoming  have  been
dedicated  by ARCO to meet the  contract  quantities.  The Powder  River Basin
coal  supplies for both  stations are  currently  transported  for TUCO by the
Burlington  Northern  Sante Fe Railway  Company  to  Harrington  Station  near
Amarillo,  Texas and to Tolk  Station  near  Muleshoe,  Texas.  Transportation
charges for these  Powder River Basin coal  supplies  make up more than 50% of
the total cost of the coal delivered to the boiler.

      See Note 10.  Commitments and  Contingencies - Purchase  Requirements in
Item  8.  Financial   Statements  And   Supplementary   Data  for  information
regarding  financial  commitments under the coal supply contracts,  as well as
the coal transportation contracts.

Natural Gas and Fuel Oil

      PSCo uses both firm and  interruptible  natural  gas and  standby oil in
combustion  turbines  and certain  boilers.  Natural gas  supplies  for PSCo's
power plants are procured  under short- and  intermediate-term  contracts on a
competitive  basis to provide an adequate  supply of fuel. SPS has a number of
contracts  of  short  and  intermediate   terms  with  natural  gas  suppliers
operating  in gas fields  with long life  expectancies  in or near its service
area.  SPS also utilizes  firm and  interruptible  transportation  to minimize
fuel costs  during  volatile  market  conditions  and provide  reliability  of
supply.  To increase  competition  for natural gas supply,  SPS attained three
new  interconnections  between interstate and intrastate pipelines and various
power  plant  supply  headers  during  1997.  SPS  maintains   sufficient  gas
supplies under short and  intermediate  term contracts to meet all power plant
requirements;  however,  due to flexible contract terms,  approximately 40% of
SPS's gas requirements were purchased under spot agreements.

Natural Gas Utility Operations

      During the period 1993-1997,  PSCo and Cheyenne have experienced  growth
in the number of  residential  and commercial  customers  ranging from 2.7% to
3.2% annually.  Since 1993,  residential  and commercial gas volumes sold have
averaged  132.9  million  dekatherms   ("MMDth")   annually.   The  growth  of
residential  and  commercial  sales has  steadily  improved  due  primarily to
stronger  economic  conditions  in Colorado  and  Wyoming.  PSCo and  Cheyenne
offer  transportation  services  to  their  large  commercial  and  industrial
customers,  allowing  these  customers  to purchase  gas  directly  from their
suppliers.  The  per-unit  fee  charged  for  transportation  services,  while
significantly  less than the  per-unit  fee  charged  for the sale of gas to a
similar  customer,  provides an operating margin  approximately  equivalent to
the margin earned on gas sold.  Therefore,  increases in such  activities will
not have as great an impact on gas revenues as increases  in  deliveries  from
the sale of gas, but will have a positive impact on operating  margin.  During
1997,  transportation services generated revenues of $32.7 million compared to
$28.5 million in 1996 and $23.8 million in 1995.

                                       8

<PAGE>

Natural Gas Supply and Storage

      PSCo and Cheyenne have attempted to maintain low cost,  reliable natural
gas supplies by  optimizing a balance of long- and  short-term  gas  purchase,
firm  transportation  and  gas  storage  contracts.   During  1997,  PSCo  and
Cheyenne purchased 151.0 MMDth from approximately 72 suppliers,  including the
following  major  suppliers:  CIG (32.0 MMDth);  Western Gas  Resources  (14.0
MMDth);  Amoco  Energy  Trading Co.  (11.6  MMDth);  Barrett  Resources  (11.4
MMDth);  and Duke  Energy  Trading  &  Marketing  (6.1  MMDth).  In 1997,  the
average  delivered  cost per one  thousand  dekatherms  ("MDth")  for PSCo and
Cheyenne  was $2.92  compared  to $2.58 per MDth in 1996 and $2.22 per MDth in
1995 (see Item 7. Management's  Discussion And Analysis Of Financial Condition
And Results Of  Operations).  Purchased gas costs are recovered from customers
through  the  GCA  (see  Note 9.  Regulatory  Matters  in  Item  8.  Financial
Statements And Supplementary Data).

      PSCo and Cheyenne have completed  substantially all of their obligations
related to gas supply  transportation  and storage  contracts  which  resulted
from  FERC  Order  636.  During  1996,  PSCo  and  Cheyenne  entered  into new
contracts  with  CIG and  others  for  firm  transportation  and  gas  storage
services  with terms of 5-10  years.  Adequate  supplies  of  natural  gas are
currently  available for delivery within the Rocky Mountain  region.  PSCo and
Cheyenne  continually  evaluate the natural gas markets and procure  supplies,
as needed, to meet current and anticipated customer demand.

Regulation and Rates

Regulation

General

      The NCE  system  is  subject  to the  jurisdiction  of the SEC under the
PUHCA.  The PUHCA  generally  limits the  operations  of a registered  holding
company to a single  integrated  public utility  system,  plus such additional
businesses  as are  functionally  related to such system.  PUHCA rules require
that  transactions  between  associated  companies  in  a  registered  holding
company system be performed at cost, with limited exceptions.

PSCo

      PSCo is  subject  to the  jurisdiction  of the CPUC with  respect to its
facilities,  rates,  accounts,  services and issuance of securities.  The CPUC
consists of three full-time  members appointed by the Governor and approved by
the Colorado Senate.  Only two members may be from the same political party.

      PSCo is subject to the  jurisdiction  of the DOE  through  the FERC with
respect to its wholesale  electric  operations  and  accounting  practices and
policies.  PSCo is also subject to the  jurisdiction  of the NRC in connection
with its  ownership,  decommissioning  and defueling of Fort St. Vrain,  which
has been repowered as a gas fired combined cycle steam plant.

      PSCo holds a FERC certificate  which allows it to transport  natural gas
in interstate  commerce pursuant to the provisions of the Natural Gas Act, the
Natural Gas Policy Act of 1978 and FERC Order Nos.  436 and 500  without  PSCo
becoming subject to full FERC jurisdiction.

SPS

      The PUCT has  jurisdiction  over SPS's Texas  operations  as an electric
utility,  and original and  appellate  jurisdiction  over its retail rates and
services.  The Texas municipalities  exercise original jurisdiction over rates
within their  respective  city  limits.  The NMPUC,  the Oklahoma  Corporation
Commission  and the  Kansas  Corporation  Commission  have  jurisdiction  with
respect to retail  rates and  services in their  respective  states.  The FERC
has jurisdiction over SPS's rates for sales of electricity for resale.

                                       9

<PAGE>

Other

      Cheyenne  is subject to the  jurisdiction  of the WPSC.  WGI and TOP are
subject  to  FERC  jurisdiction.  WGI  and TOP  each  hold a FERC  certificate
which allows them to transport natural gas in interstate  commerce pursuant to
the  provisions  of the  Natural  Gas Act. e prime and TOG have  authorization
from FERC to act as power marketers.

Cost Recovery Mechanisms
 
PSCo

      At December 31, 1997, PSCo has four adjustment  clauses:  the ICA (which
replaced the ECA in 1996),  GCA,  DSMCA and QFCCA.  These  adjustment  clauses
allow  certain  costs  to be  passed  through  to  retail  customers.  PSCo is
required  to file  applications  with  the  CPUC for  approval  of  adjustment
mechanisms in advance of the proposed  effective date. The  applications  must
be acted upon before becoming effective.

      The CPUC  decision on the Merger  modified and replaced the ECA with the
ICA. The ICA,  which became  effective  October 1, 1996,  allows for a 50%/50%
sharing  of  certain  fuel and  energy  cost  increases  and  decreases  among
customers and shareholders.  PSCo,  through its GCA, is allowed to recover the
difference  between its actual costs of purchased  gas and the amount of these
costs  recovered  under its base  rates.  The GCA rate is revised  annually on
October 1 and  otherwise as needed,  to coincide with changes in purchased gas
costs.  Purchased  gas costs and  revenues  received to recover such gas costs
are  compared on a monthly  basis and  differences,  including  interest,  are
deferred.  The QFCCA was  implemented  on December  1, 1993.  Under the QFCCA,
all purchased capacity costs from new QF projects,  not otherwise reflected in
base electric rates, are recoverable.

      PSCo, in a collaborative process with public interest groups,  consumers
and industry,  has developed  DSM programs  (programs  designed to reduce peak
electricity  demand,  shift on-peak  demand to off-peak  hours and provide for
more  efficient  operation  of  the  electric  generation  system),  including
incentive  and cost  recovery  mechanisms.  The CPUC  approved the programs in
1993  along  with a  schedule  to be  implemented  over a  three-year  period.
Effective  July 1, 1993,  PSCo  implemented a DSMCA clause which permits it to
recover  deferred  DSM costs  over seven  years  while  non-labor  incremental
expenses,  carrying  costs  associated  with  deferred  DSM costs and  certain
incentives  associated  with the approved  DSM  programs  are  recovered on an
annual basis.

      The CPUC  subsequently  opened a separate  docket to investigate  issues
involving alternative annual revenue  reconciliation  mechanisms and incentive
mechanisms  related to PSCo's DSM programs.  The  investigation  was completed
in 1995 and a final  order  was  issued.  The  major  provisions  of the final
order,  effective December 27, 1995,  included:  1) not to proceed with any of
the proposed  mechanisms;  2) to reduce the recovery  period for certain costs
of PSCo's DSM programs  from seven to five years for  expenditures  made on or
after  January 1, 1995;  3) not to establish DSM targets for 1997 and 1998; 4)
not to adopt a penalty for failure to achieve DSM  targets;  and 5) to approve
PSCo's  proposal to forego incentive payments for DSM programs.

      Under  a  separate  CPUC  order  issued  in  December  1992,   PSCo  has
implemented a Low-Income Energy Assistance  Program.  The costs of this energy
conservation  and   weatherization   program  for  low-income   customers  are
recoverable through the DSMCA.

SPS

      Fuel and purchased  power costs are recoverable in Texas through a fixed
fuel factor which is part of SPS's  rates.  If it appears that the factor will
materially  over-recover  or  under-recover  these  costs,  the  factor may be
revised  upon  application  by SPS or action by the  PUCT.  The rule  requires
refunding and surcharging  under/over-recovery amounts including interest when
they exceed 4% of the  utility's  annual fuel and  purchased  power costs,  as
allowed by the PUCT,  if this  condition  is expected to  continue.  Under the
PUCT's  regulations,  SPS is required to file an  application  for the PUCT to
retrospectively  review at least  every three  years the  operations  of SPS's
electricity  generation  and  fuel  management  activities.  SPS  will  file a
reconciliation in 1998


                                       10
<PAGE>

for the generation and fuel management  activities of approximately $690 million
for the three year period ended December 31, 1997.

      On October 24,  1997,  the NMPUC  approved a fixed fuel factor for SPS's
New Mexico retail  jurisdiction,  effective  January 1998. This will employ an
over/under  fuel  collection  calculation  made on a monthly  basis.  SPS will
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 will file
the  utility's  electric  generation  and  fuel  management  activities.   The
methodology of the over/under  calculation,  plus interest,  is similar to the
Texas fixed fuel factor calculation discussed above.

      In all other  jurisdictions,  SPS currently  recovers  substantially all
increases and refunds  substantially all decreases in fuel and purchased power
costs pursuant to monthly adjustment and clauses.

Cheyenne

      Purchased  power and gas costs are  recoverable in Wyoming.  Cheyenne is
required  to file  applications  with  the  WPSC for  approval  of  adjustment
mechanisms in advance of the proposed effective date.

      See Note 9.  Regulatory  Matters  in Item 8.  Financial  Statements  And
Supplementary Data  for additional discussion.

Environmental Matters

      Certain of the Company's subsidiary  facilities are regulated by federal
and state  environmental  agencies.  These agencies have jurisdiction over air
emissions,  water quality,  wastewater discharges,  solid wastes and hazardous
substances.   Various  Company  activities  require  registrations,   permits,
licenses,  inspections  and  approvals  from these  agencies.  The Company has
received all  necessary  authorizations  for the  construction  and  continued
operation of its generation,  transmission and distribution  systems.  Company
facilities  have been designed and  constructed to operate in compliance  with
the  environmental  standards.  During  1997,  the EPA issued new  regulations
regarding  particulate  emissions.  The Company is  currently  evaluating  the
impact of these new regulations on its operations.

      The Company's  utility  subsidiaries  have applied for an early election
of annual NOx  emission  limits for eleven  units  including  six PSCo  units:
Cherokee  Units 3 and 4, Valmont  Unit 5, Pawnee Unit 1, and Comanche  Units 1
and 2 and  five  SPS  units:  Harrington  Station  Units  1, 2 and 3 and  Tolk
Station  Units 1 and 2. In 1997,  the  Company met early  emission  limits for
these eleven units.  Early election limit is applicable until the year 2008.

      The  Company  and  its  subsidiaries   continue  to  strive  to  achieve
compliance  with all  environmental  regulations  currently  applicable to its
operations.  However,  it is not possible at this time to determine when or to
what extent  additional  facilities  or  modifications  of existing or planned
facilities  will  be  required  as  a  result  of  changes  to   environmental
regulations,  interpretations  or  enforcement  policies or,  generally,  what
effect  future laws or  regulations  may have upon the  Company's  operations.
See Note 10.  Commitments and Contingencies - Environmental  Issues in Item 8.
Financial  Statements And  Supplementary  Data for additional  discussion.  At
December  31,  1997,  the  estimated  1998,  1999  and 2000  expenditures  for
environmental  air and water emission  control  facilities were $57.9 million,
$24.3  million  and $14.7  million,  respectively  (see  Item 7.  Management's
Discussion and analysis of Financial Condition and Results of Operations).


                                       11
<PAGE>

Competition

Industry Outlook

      Unprecedented  change is  continuing  to occur in the  electric  utility
industry   nationwide,   furthering   the   development   of   a   competitive
environment.  In general,  the economics of the electric  generation  business
have  fundamentally  changed with open  transmission  access and the increased
availability of electric supply  alternatives.  Such  alternatives will likely
serve to lower customer  prices,  particularly in areas where only higher cost
energy is currently  provided.  Customer demands for lower prices and supplier
choices,  the availability of alternative supplies (IPPFs, QFs, EWGs and power
marketers),  and open access to the utility transmission grid have resulted in
a commodity  market for bulk electric  supply.  The EPAct  directly  addressed
this issue by giving the FERC the  authority  to require  utilities to provide
non-discriminatory  open  access  to the  transmission  grid for  purposes  of
providing  wholesale  customers  with  direct  access.  In  response  to  such
authority,   in  early  1996,  the  FERC  issued  new  rules  on  open  access
transmission  services.  A number  of  states  have  recently  adopted  or are
pursuing   plans  for   competition   in  the   electric   utility   industry.
Legislative  and regulatory  initiatives  are likely to result in even greater
competition at both the wholesale and retail level in the future.

      The presence of competition  and the  associated  pressure on prices may
ultimately  lead to the  unbundling  of products and services  similar to what
has  evolved in the natural gas  industry.  Today's  market view of the future
envisions an unbundled  electric utility industry  consisting of at least four
major business segments: energy supply, transmission,  distribution and energy
services.

PUHCA

      The SEC has also  responded  to  increasing  competition  in the utility
industry and changes in state and federal  utility  regulation.  In June 1995,
the  SEC  issued   its  report   which   focused  on  both   legislative   and
administrative  options  for the  reform of  public  utility  holding  company
regulation.   The  report   presented  three  possible   recommendations   for
legislative   reform   of  PUHCA:   1)   conditional   repeal  of  PUHCA,   2)
unconditional  repeal of PUHCA,  and 3) PUHCA remains  unmodified,  but grants
the SEC broader  exemptive  authority  under PUHCA.  Any changes in regulation
will be determined by Congress.  In early 1997,  legislation was introduced in
Congress  that would  have  repealed  PUHCA and  transferred  certain  federal
authority  to the FERC as  recommended  in the SEC  report as part of  broader
legislation  regarding changes in the electric  industry.  This legislation is
likely to be debated on the Senate floor in April 1998.  This  legislation was
not passed;  however, the Company expects that a number of bills regarding the
restructuring  of the electric utility industry will continue to be considered
in the current Congress.
 
Retail Electric Business

      Today, the retail electric  business faces  increasing  competition from
industrial  and large  commercial  customers  who have the  ability  to own or
operate  facilities to generate  their own electric  energy  requirements.  In
addition,  customers  may have  the  option  of  substituting  fuels,  such as
natural  gas for  heating,  cooling  and  manufacturing  purposes  rather than
electric energy,  or the option of relocating their facilities to a lower cost
environment.  While  each of the  Company's  utility  subsidiaries  face these
challenges,  these  subsidiaries  believe  their  rates are  competitive  with
currently  available  alternatives.  The Company's  utility  subsidiaries  are
taking actions to lower  operating  costs and are working with their customers
to analyze the feasibility of various options,  including  energy  efficiency,
load  management and  cogeneration  in order to better  position the Company's
utility subsidiaries to more effectively operate in a competitive environment.

State Regulatory and Legislative Environments - Electric Business

      Below is a discussion  on the  regulatory  and  legislative  initiatives
currently  being  addressed  in each  of the  Company's  retail  jurisdictions
related to the electric business.

                                       13

<PAGE>

      Colorado - Colorado law permits the CPUC to authorize  rates  negotiated
with individual  electric and gas customers who have threatened to discontinue
using  the   services   of  PSCo,   so  long  as  the  CPUC  finds  that  such
authorization:  1) in the case of electric  rates,  will not adversely  affect
PSCo's  remaining  customers and 2) in the case of gas rates,  will not affect
PSCo's remaining customers as adversely as would the alternative.  In response
to the  increasingly  competitive  operating  environment  for utilities,  the
regulatory  climate  is also  changing.  In 1996,  the CPUC  opened an inquiry
docket related to electric  utility  restructuring.  PSCo submitted a response
to a CPUC  sponsored  restructuring  questionnaire  which was  followed by the
CPUC  issuing  a  report  on  a  comprehensive  survey  on  electric  industry
restructuring.  The  CPUC is  currently  working  with  the  Colorado  General
Assembly in its  investigation and  implementation of public policy.  The CPUC
has no electric restructuring authority without legislative mandate.

      During  December 1997,  PSCo submitted a draft bill relating to electric
utility  industry  restructuring  and customer  choice.  The principles of the
proposed bill include:  all customers  must have the  opportunity  to benefit;
the reliability of electric  service must be maintained;  all energy suppliers
must be  subject  to the same  laws and  regulations;  the  price of  electric
energy and electric  generation  capacity must be determined  solely by market
forces;   generation,   transmission  and  distribution  may  be  functionally
separated and the transmission and distribution  functions will remain subject
to  regulation;  and  each  electric  utility  must  have  a  good  reasonable
opportunity to recover its stranded  costs.  PSCo will continue to participate
in regulatory  proceedings  which could change or impact  current  regulation.
PSCo believes it will continue to be subject to Colorado rate  regulation that
will allow for the recovery of all of its deferred  costs (see Note 1. Summary
of  Significant   Accounting  Policies  -  Business,   Utility  Operation  and
Regulation - Regulatory Assets and Liabilities and Note 9. Regulatory  Matters
in Item 8. Financial Statements And Supplementary Data).

      Texas - Texas  legislation  enacted in 1995 recognizes the movement to a
more  competitive  market-place by requiring the PUCT to issue new regulations
relating to, among other things,  allowance of less than fully costed rates in
wholesale  and retail  markets;  recognition  of and  essentially  waiving all
Texas utility  regulation of EWGs and power marketers;  and  implementation of
transmission   access   comparable   to  the  owning   utility's  use  of  its
transmission system for non-FERC regulated utilities.

      In the 1997 session,  Texas introduced legislative proposals relating to
retail wheeling;  however,  the Texas  legislature  adjourned without adopting
any  legislation  on this issue.  There will be no general  session in 1998 in
Texas. A Senate Interim  Committee on Electric Utility  Restructuring  began a
series of  statewide  hearings in late 1997.  The  hearings  will  continue in
1998 in  order  to  solicit  public  input on a  series  of  statewide  issues
relating to retail  competition  in Texas.  This  information  will be used by
the Committee to make  recommendations  on  restructuring  legislation for the
1999 session.  SPS believes it will continue to be subject to rate  regulation
that  will  allow  for  recovery  of all of its  deferred  costs  (see Note 1.
Summary of Significant Accounting Policies - Business,  Utility Operations and
Regulation - Regulatory Assets and Liabilities and Note 9. Regulatory  Matters
in Item 8. Financial Statements And Supplementary Data).

      New Mexico - In 1997 the NMPUC  approved  Case 2718,  "Texas-New  Mexico
Power  Company's  TNP's  Community  Choice  Plan."  The plan calls for all TNP
customers to be able to choose their energy supplier by April 1, 2003.

      The New Mexico  legislature  rejected all retail  wheeling  proposals in
1997.  Following  the  1997  session,  the  NMPUC  initiated  Case  2681,  the
"Investigation  of  Electric  Utility  Restructuring",   which  called  for  a
"collaborative   process"   that   involved   utilities,    consumer   groups,
environmental   groups,   and  other   interested   stakeholders.   The  NMPUC
encouraged  the  parties to attempt to reach a  consensus  on a retail  choice
plan for New Mexico,  but the effort was  unsuccessful.  On January 28,  1998,
the NMPUC  issued its final  report in case 2681.  The NMPUC  found that it is
in the public  interest for the State of New Mexico to advance  changes in the
structure  and  regulation  of the  electric  industry,  and  recommends  that
restructuring   proposals   should   continue   to  be   brought   before  the
legislature.  The New Mexico legislature has a 30 day budget session in 1998.

      Wyoming - In January  1998,  the Joint  Minerals,  Business and Economic
Development   Interim  Committee  voted  against  moving  forward  with  draft
legislation  entitled the "Wyoming Electric  Restructuring

                                       13

<PAGE>

Act." The 9-5 vote  inhibits  the  progress  of the draft  during the brief 1998
legislative  session  of 20  days,  unless  further  acted  upon  by  individual
legislators. The draft was a collaborative effort which included the Legislative
Subcommittee  on  Electric  Industry  Re-regulation,  the  WPSC,  utilities  and
consumer interest groups. The 1998 legislative session began in February.

      A joint committee of the Wyoming  legislature began a series of hearings
on  restructuring  in June of 1997. On September  15, 1997, a report  entitled
the "Study of the Potential Economic Impacts of Electric  Restructuring on the
State of Wyoming," which was prepared for the WPSC by an external  consultant,
was made public.  The report analyzed four different  restructuring  scenarios
and  concluded  overall that  restructuring  would have only a small impact on
rates.

      Kansas -- In December 1997, the Task Force On Retail Wheeling  presented
its final  report to the 1998  Kansas  Legislature.  The report  culminated  a
study that was  authorized by House Bill 2600 which was signed by the Governor
on April  26,  1996.  Additionally,  this  legislation  imposed  a  three-year
freeze on  retail  electric  wheeling.  The task  force,  which  consisted  of
lawmakers  and utility  industry  representatives,  studied  numerous  issues,
including the actions of the FERC;  the  obligation  of electric  utilities to
serve   customers;   the  recovery  of  stranded  costs;   the  unbundling  of
generation,  transmission,  and  distribution  services.  The report concluded
with draft legislation  entitled the "Electric Utility  Restructuring  Act." A
90-day  legislative  work session,  which began January 12, 1998, will also be
looking at three other comprehensive  electric restructuring bills, along with
two other related measures, which were held over from the 1997 session.

      Oklahoma  - The  Electric  Restructuring  Act of 1997 was  signed by the
Governor of Oklahoma on April 25, 1997. This  legislation  directs a series of
studies  which will  define  the  orderly  transition  to  consumer  choice of
electric  energy  supplier  by July 1, 2002.  The  studies  include:  Taxation
Issues,  Independent  System Operator  ("ISO"),  Technical  Issues,  Financial
Issues,  and Consumer Issues.  The Joint Electric Utility Force, a legislative
entity,  is in  place to  oversee  the  actions  of the  Oklahoma  Corporation
Commission,  which is the state's regulatory agency. The Oklahoma  Corporation
Commission  has  been  granted  the  authority  to  work  alongside   electric
utilities  and  other  industry  interests  and  consumer  groups  in order to
examine  several key concerns.  Unbundling of Rates and Services;  Ceiling for
Rates;  Stranded Cost Recovery;  Reliability and Safety;  Transition Costs are
included in the focus.  Results and  recommendations  derived from the studies
will direct any further  legislative action that may be necessary in order for
the Electric Restructuring Act of 1997 to be fully implemented.  The ISO study
report was  presented  on January 27, 1998.  It is expected  that the Taxation
Issues study,  which began in April 1997, and the Technical  Issues study will
conclude by December 31, 1998.

Wholesale Electric

      The wholesale  electric  business  faces  increasing  competition in the
supply of bulk  power due to  provisions  of the EPAct and  Federal  and state
initiatives  with  respect to  providing  open access to utility  transmission
systems.  Under the FERC rules  issued in early 1996,  utilities  are required
to provide wholesale  open-access  transmission  services consistent with what
is provided for in their own operations.  The Company's  utility  subsidiaries
are  operating  with the tariffs  approved by the FERC under these  rules.  To
date,  these  provisions  have  not had a  material  impact  on the  Company's
utility  subsidiaries   operations.   For  1997,  the  Company's  consolidated
wholesale  revenues totaled  approximately 15% of total electric  revenues.  A
substantial  portion of these revenues related to firm sales contracts,  which
are expected to continue at current levels for a minimum of 10 years.

Natural Gas

      Changes in  regulatory  policies  and market  forces have begun to shift
the industry  from  traditional  cost-based  regulation  involving  gas sales,
transportation,  storage and other related  services on a bundled basis toward
market-based  sales on an unbundled  basis. In 1993, the FERC  accelerated the
process  of  unbundling  the  commodity  supply  component  from the  physical
delivery  component  of natural gas retail  sales  service.  In recent  years,
numerous state  initiatives  have been  developed to continue this  unbundling
process down to the residential and small  commercial  customers.  The goal of
unbundling is to offer  customers  choice of gas suppliers.  In 1996,

                                       14

<PAGE>

the CPUC  opened an  investigatory  docket  concerning  the issue of  unbundling
natural gas  services.  At this time, no formal action is expected from the CPUC
mandating the  unbundling of gas  utilities.  PSCo expects that a gas unbundling
bill will be proposed in the Colorado Legislature in 1998 providing the CPUC the
authority  to allow for full  unbundling  at the  retail  level.  PSCo  plans to
participate  fully in any such  legislative  efforts and in any other regulatory
proceedings which could change or impact current regulation.

      The  natural  gas  delivery  or  transportation  business  has  remained
competitive as industrial and large  commercial  customers have the ability to
"by-pass" the local gas utility through the  construction of  interconnections
directly with, and the purchase of gas directly  from,  interstate  pipelines,
thereby  avoiding the delivery  charges  added by the local gas utility.  PSCo
and Cheyenne  have and will continue to  aggressively  pursue the retention of
all of these customers on their systems.

      PSCo  and  Cheyenne  extend  and  operate  their   distribution   system
primarily by virtue of non-exclusive  franchises granted by the various cities
and towns.  Such franchise  agreements are approved by their  respective state
commissions.  Because the franchises are non-exclusive,  PSCo and Cheyenne can
be faced  with the  threat of  intrusion  into  their gas  territory  by third
parties.  PSCo and Cheyenne  hold  territorial  certificates  for a portion of
their gas service  territory  giving them the exclusive  right to extend their
distribution   system  and  provide  natural  gas  sales  and   transportation
service.  However,  for the majority of their gas service  territory,  no such
territorial certificates exist.

Franchises

      PSCo held nonexclusive  franchises to provide electric or gas service or
both services in approximately  121 incorporated  cities and towns at December
31, 1997.  These  franchises  consist of 69 combined gas and electric  service
franchises,  28 electric service franchises and 24 gas service franchises.  In
1998, PSCo expects to  re-negotiate  three of the franchise  agreements  which
will be  expiring.  PSCo's  franchise  with the City of Denver  will expire in
2006.  PSCo  supplies  electric or gas  service or both  services in about 114
unincorporated communities.

      SPS held franchises to provide  electric  service in  approximately  104
cities and towns at December 31, 1997.

Foreign Investments

Yorkshire Electricity

      On April 1, 1997,  Yorkshire  Power, a subsidiary  equally owned by PSCo
and AEP,  indirectly  acquired  substantially all of the outstanding  ordinary
shares  of  Yorkshire  Electricity,  a  United  Kingdom  regional  electricity
company.   PSCo  holds  its   investment   in  Yorkshire   Power  through  its
wholly-owned  subsidiary,  NCI.  The  total  consideration  paid by  Yorkshire
Power  was   approximately   $2.4  billion  (1.5  billion  pounds   sterling).
Yorkshire  Electricity's  main businesses are the  distribution  and supply of
electricity  and the  supply of gas and its  service  territory  is one of the
region's largest with approximately 2.1 million customers.

      In July 1997,  the U.K.  government  enacted a  windfall  tax on certain
privatized  business  entities  which  is  payable  in two  installments.  The
windfall tax was a retroactive  adjustment to the privatization value based on
post-privatization  profits  during the 1992 - 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. PSCo's share of this tax is  approximately  $110.6  million.  See Note 2.
Acquisition  of  Yorkshire  Electricity  and  U.K.  Windfall  Tax in  Item  8.
Financial Statements and Supplementary Data for summary financial  information
on Yorkshire Power.

                                       15

<PAGE>

Other foreign investments

      The   Company   owns   other   foreign   investments   through   various
non-regulated  subsidiaries;  however, at this time, these investments are not
significant to the Company's  consolidated assets. See Non-Utility  Operations
below  for  a  more  detailed   discussion   on  the   Company's   non-utility
subsidiaries.

Service Company

      NCS, a wholly-owned  subsidiary of NCE, was  incorporated  in 1997 under
the laws of the State of  Delaware.  NCS is the  service  company  for the NCE
system  and  provides a variety of  administrative,  management,  engineering,
construction,  environmental and support  services.  NCS provides its services
to the NCE system generally at cost,  pursuant to service agreements  approved
by the SEC under PUHCA.

Non-Utility Operations

      NC Enterprises,  a wholly-owned  subsidiary of NCE, was  incorporated in
1997  under  the  laws  of  the  State  of  Delaware.   NC   Enterprises   was
incorporated  to serve as a holding  company for  non-utility  subsidiaries of
NCE. NC  Enterprises  currently has the following  five  subsidiaries:  Quixx,
UE, e prime,  Natural  Fuels and New  Century  Cadence.  The  table  presented
below provides certain financial  information  regarding each subsidiary of NC
Enterprises, followed by a discussion of the operations of the subsidiaries.

                                                                        New
                                                            Natural    Century
                                 Quixx     UE     e prime    Fuels     Cadence
                                 -----     --     -------    -----     -------
                                            (Millions of Dollars)

Operating revenues              $ 14.8   $ 52.3    $196.7   $   6.9    $  -
Total assets                      79.8     55.5      73.5      10.2       2.2
NC Enterprise's Net
   investment at 12/31/97         77.1     42.0      21.1       4.8       1.9

      Quixx:  Quixx was  incorporated  in 1985  under the laws of the State of
Texas.  Quixx's primary  business is investing in and developing  cogeneration
and  energy-related  projects.  Quixx also  holds  water  rights  and  certain
other  nonutility  assets.  Quixx operates,  as a division,  Amarillo  Railcar
Services, a railcar maintenance  facility that provides inspection,  light and
heavy  maintenance,  and storage for unit trains. A majority of these services
are provided  for  railcars  that  transport  coal for use by SPS.  Quixx also
finances  sales  of  heat  pumps  and  markets  other  non-utility  goods  and
services.  Quixx currently has the following wholly-owned  subsidiaries,  most
of  which  hold  partnership  interests  in  various   energy-related  limited
partnerships:

      Quixx  Jamaica,  Inc., a wholly-owned  subsidiary of Quixx,  holds a 99%
limited  partnership  interest  in KES  Jamaica,  L.P.  which  owns a facility
consisting  of two-oil  fired  combustion  turbines  located  in Montego  Bay,
Jamaica,  W.I. The remaining 1% general  partnership  interest is owned by KES
Montego,  Inc. a  wholly-owned  subsidiary of Quixx.  As of December 31, 1997,
Quixx is in the process of winding up operations of this subsidiary.

      Quixx  Jamaica  Power,  Inc., a  wholly-owned  subsidiary  of Quixx,  is
currently inactive.

      Quixx Mustang  Station,  Inc., a wholly-owned  subsidiary of Quixx,  was
created to hold Quixx's 0.5% interest in Denver City Energy Associates,  L.P.,
a  partnership  which  owns  a 50%  interest  in  Mustang  Station,  a 488  MW
combined  cycle  generating  facility  which is scheduled  for  completion  in
1998.   Quixx  will  also  hold  a  49.5%   interest  in  Denver  City  Energy
Associates,  LP through Quixx  Resources,  Inc. a  wholly-owned  subsidiary of
Quixx.

                                       16


<PAGE>

      Quixxlin Corp, a wholly-owned  subsidiary of Quixx,  was created to hold
a 0.5%  general  partnership  interest  in  Quixx  Linden,  L.P.,  which  will
construct a 23 MW natural gas fired  cogeneration  facility located in Linden,
New  Jersey.  It  is  estimated  that  this  facility  will  be  completed  in
mid-1998.  Quixx also directly holds a 49.5% limited  partnership  interest in
Quixx Linden, L.P.

      Quixx Borger Cogen, Inc., a wholly-owned  subsidiary of Quixx, will hold
a 0.5% general partnership  interest in Borger Energy Associates,  L.P., which
will own a cogeneration  plant that will be located at the Phillips  Petroleum
Refinery Complex near Borger,  Texas.  Quixx  Resources,  Inc., a wholly-owned
subsidiary of Quixx,  will hold a 49.5% limited  partnership  interest in this
same partnership.

      Quixx WPP94,  Inc., a  wholly-owned  subsidiary of Quixx,  holds a 0.33%
general  partnership  interest  in  Windpower  Partners,  1994 L.P.  Windpower
Partners,  1994  L.P.  owns a 35 MW  wind  generation  facility  in  Culberson
County,  Texas.  Quixx  also  directly  holds  a  24.67%  limited  partnership
interest in Windpower Partners, 1994 L.P.

      Quixx  Louisville,  L.L.C., a wholly-owned  subsidiary of Quixx,  owns a
facility  consisting  of two  gas-fired  boilers  providing  steam to a DuPont
plant in Louisville, Kentucky.

      Quixx  Power  Services,   Inc.,  a  wholly-owned  subsidiary  of  Quixx,
operates and maintains certain cogeneration facilities.
 
      Quixx WRR,  L.P., a  wholly-owned  subsidiary  of Quixx,  holds  Quixx's
water  rights  located in  Roberts,  Gray,  Hutchinson  and  Carson  Counties,
Texas.  Quixx  holds a 1%  general  partnership  interest  and  through  Quixx
Resources, Inc. a 99% limited partnership interest in Quixx WRR, L.P.

      Quixx holds a 50% interest in Mosbacher  Power Group and Mosbacher Power
International,   which  are  independent  power  development   companies  with
interests in the development stage in Cambodia and Colombia.

      Quixx  Carolina,  Inc., a wholly-owned  subsidiary of Quixx,  holds a 1%
general  partnership  interest  in  Carolina  Energy  Limited  Partnership,  a
waste-to-energy  cogeneration  facility.  Quixx  also  holds a 32.33%  limited
partnership  interest in this same partnership.  In June 1997, Quixx wrote off
its investment of approximately  $13.64 million in the Carolina Energy Limited
Partnership  (see Note 3.  Acquisition  and Divestiture of Investments in Item
8. Financial Statements And Supplementary Data).

      Quixx holds a 49%  limited  partnership  interest in BCH Energy  Limited
Partnership,  a  waste-to-energy  facility  located near  Fayetteville,  North
Carolina.  In December  1996,  Quixx wrote off its entire  investment  in this
project of approximately  $16 million (See Note 3. Acquisition and Divestiture
of Investments in Item 8. Financial Statements And Supplementary Data).

      UE:   UE was  incorporated  in  1985  under  the  laws of the  State  of
Texas.  UE is engaged in  engineering,  design,  construction  management  and
other miscellaneous  services. UE currently has two wholly-owned  subsidiaries
-  Universal   Utility  Services  Company  and  Precision   Resource  Company.
Universal  Utility Services  Company  provides  cooling tower  maintenance and
repair,  certain other industrial plant improvement  services,  and engineered
maintenance  of high voltage  plant  electric  equipment.  Precision  Resource
Company provides contract  professional and technical  resources for customers
in the  energy  industrial  sectors.  UE also  owns a 49%  interest  in  Vista
Environmental  Services,  LLC,  which  performs  environmental  consulting for
energy and industrial  customers in both the private and  government  sectors,
primarily in the southwestern United States.

      e prime:  e prime was  incorporated  in 1995 under the laws of the state
of Colorado.  e prime  provides  energy  related  products and services  which
include,  but are not limited to,  electric and gas  brokering,  marketing and
trading,  and  energy  consulting.  e prime  has  also  pursued  international
energy  investment   opportunities.   In  March  of  1996,  e  prime  received
authorization  from  the  FERC to act as a power  marketer.  In  September  of
1996, e prime  acquired TOG, a gas marketing  company,  with  headquarters  in
Houston and an office in Boston.  e prime and TOG have merged  operations  and
together  they provide  value-added  energy  related  products and services to

                                       17

<PAGE>

over 2,200 end use customers and utilities nationwide.  Additionally,  e prime
currently owns the following  subsidiaries  (subsidiaries formed, but inactive
have been excluded):

      TOP is a small  pipeline  company  which  connects two major  interstate
pipelines.

      YGSC owns a 47.5%  general  partnership  interest in Young Storage which
owns  and  operates  an  underground  gas  storage  facility  in  northeastern
Colorado.

      e prime Projects  International,  Inc. and e prime Operating,  Inc. were
formed  to  hold  and  operate   investments  in  EWG's  and  foreign  utility
companies,  which in 1997 included the purchase and  subsequent  sale of a 25%
interest in a 608 mw coal-fired  electric  power plant near Topar,  Karaganda,
the Republic of Kazakstan.

      e prime also holds a 50% ownership  interest in Johnstown  Cogeneration,
a limited liability company.

      Natural  Fuels:  Natural Fuels was  incorporated  in 1990 under the laws
of the State of  Colorado.  Natural  Fuels sells  compressed  natural gas as a
transportation  fuel to retail  markets,  converts  vehicles  for  natural gas
usage,   constructs  fueling  facilities,   and  sells  miscellaneous  fueling
facility   equipment.   Natural  Fuels  has  a  50%   ownership   interest  in
Natural/Total  Limited Liability Company,  which owns and operates natural gas
fueling  stations  located  at  Total  Petroleum  Gas  Stations  in  Colorado.
Natural  Fuels  has  a  25%  ownership  interest  in  Natural/Peoples  Limited
Liability  Company  which owns and  operates  one natural gas fueling  station
located  in  Castle  Rock,  Colorado.  Additionally,  Natural  Fuels has a 67%
ownership   interest  through   Natural/Total  in   Natural/Total/KN   Limited
Partnership,  a partnership which owns the profits interest in the natural gas
fueling  stations  located at Total  Petroleum  sites in the Colorado towns of
Grand Junction and Glenwood Springs.

      New Century  Cadence:  New  Century  Cadence  was  incorporated  in 1997
under the laws of the State of  Colorado.  New Century  Cadence was created to
hold a 1/3 interest in Cadence  Network LLC, an  energy-related  company which
provides energy management and consulting  services,  as well as brokering and
marketing  of  energy  commodities.  Specifically,  Cadence  Network  LLC will
provide a single  source for both  energy  management  services  and  products
designed  to lower  energy  costs  for  national  companies  that  operate  at
multiple  locations.  Cadence  Network  LLC is  equally  owned by New  Century
Cadence,  Cinergy-Cadence,  Inc. (a subsidiary of Cinergy,  Inc.) and Progress
Holdings, Inc. (a subsidiary of Florida Progress Holdings, Inc.)

Employees

      The  number of  employees  in the NCE  system at  December  31,  1997 is
presented in the table below.  Of the employees  listed  below,  approximately
2,938,  or 47%,  are  covered  under  collective  bargaining  agreements.  For
further  information,  see  Note 10.  Commitments  and  Contingencies  - Union
Contracts in Item 8. Financial Statements and Supplementary Data.

                             NCE System Employees
                             --------------------

                        PSCo                    3,160
                        SPS                     1,332
                        NCS                     1,325
                        Cheyenne                  100
                        NC Enterprises            373
                                                  ---
                          Total                 6,290
                                                =====

                                       18

<PAGE>

               Consolidated Electric Operating Statistics (NCE)

                                               Year Ended December 31,
                                               -----------------------
                                            1997        1996        1995(2)
                                            ----        ----        -------
Energy Generated, Received & Sold
  (Thousands of Kwh):
Net Generated:
  Steam, Fossil..................       33,278,721   32,116,961   37,067,838
  Combustion Turbine.............        6,595,055    6,351,117      151,294
  Pumped Storage.................          193,834      178,205       68,400
  Hydro..........................          224,898      197,660      208,104
                                           -------      -------      -------

    Total Net Generation.........       40,292,508   38,843,943   37,495,636
  Energy Used for Pumping........          300,649      276,983      109,632
                                           -------      -------      -------

    Total Net System Input.......       39,991,859   38,566,960   37,386,004
  Purchased Power and Net Interchange   11,985,546   10,295,074   10,145,620
                                        ----------   ----------   ----------

    Total System Input...........       51,977,405   48,862,034   47,531,624
  Used by Company................           77,734       88,304    1,239,914
  Other (1)......................        1,677,085    1,352,843    1,526,358
                                         ---------    ---------    ---------
    Total Energy Sold............       50,222,586   47,420,887   44,765,352
                                        ==========   ==========   ==========

Electric Sales (Thousands of Kwh):
  Residential....................        9,730,390    9,530,275    8,991,000
  Commercial.....................       13,223,936   12,832,091   12,094,269
  Industrial.....................       13,789,814   13,729,777   13,433,472
  Public Authorities.............          773,656      780,251      736,375
  Wholesale - Regulated .........       11,494,742   10,129,788    9,510,236
  Wholesale Energy Services - 
     Non-Regulated ..............        1,210,048      418,705            -
                                         ---------      -------         ----
    Total Energy Sold............       50,222,586   47,420,887   44,765,352
                                        ==========   ==========   ==========

Number of Customers at End of Period:
  Residential....................        1,285,307    1,269,322    1,237,218
  Commercial.....................          185,911      183,928      177,607
  Industrial.....................           12,888       12,830       12,274
  Public Authorities.............           81,994       80,486       79,819
  Wholesale - Regulated .........              279          235          191
  Wholesale Energy Services - 
     Non-Regulated ..............               12            6            -
                                                --         ----         ----
      Total Customers ...........        1,566,391    1,546,807    1,507,109
                                         =========    =========    =========

Electric Revenues (Thousands of Dollars):
  Residential....................       $  692,886   $  682,966   $  638,972
  Commercial.....................          735,636      738,266      701,135
  Industrial.....................          532,276      521,843      526,349
  Public Authorities.............           58,235       55,608       50,441
  Wholesale - Regulated..........          412,088      376,315      341,265
  Wholesale Energy Services - 
     Non-Regulated ..............           22,861        7,806            -
  Other Electric Revenues........           19,377       33,735       25,017
                                            ------       ------       ------
    Total Electric Revenues......       $2,473,359   $2,416,539   $2,283,179
                                        ==========   ==========   ==========

Average Annual Kwh Sales per 
  Residential Customer                       7,570        7,508        7,267
Average Annual Revenue per
  Residential Customer                     $539.08      $538.06      $516.46
Average Residential Revenue per Kwh          .0712        .0717        .0711 
Average Commercial Revenue per Kwh           .0556        .0575        .0580 
Average Industrial Revenue per Kwh           .0386        .0380        .0392 
Average Wholesale - Regulated 
  Revenue per Kwh                            .0359        .0371        .0359 
_________________________

(1)    Primarily includes net distribution and transmission line losses.
(2)    Reflects the combined historical  information of PSCo as of and for the
       year ended December 31, 1995 with the historical information of SPS as of
       and for the year ended August 31, 1995.

                                       19

<PAGE>

            Consolidated Electric Operating Statistics (PSCo) (1)

                                               Year Ended December 31,
                                               -----------------------
                                            1997        1996        1995
                                            ----        ----        ----

Energy Generated, Received & Sold
 (Thousands of Kwh):
Net Generated:
  Steam, Fossil..................       17,586,343   17,099,890   16,053,928
  Combustion Turbine.............          154,019      121,079        5,251
  Pumped Storage.................          193,834      178,205       68,400
  Hydro..........................          224,898      197,660      208,104
                                           -------      -------      -------

    Total Net Generation.........       18,159,094   17,596,834   16,335,683
  Energy Used for Pumping........          300,649      276,983      109,632
                                           -------      -------      -------

    Total Net System Input.......       17,858,445   17,319,851   16,226,051
  Purchased Power and Net Interchange   11,470,535   10,349,298    9,794,968
                                        ----------   ----------    ---------

    Total System Input...........       29,328,980   27,669,149   26,021,019
  Used by Company................           45,492       57,603       64,885
  Other (2)......................        1,659,347    1,352,843    1,526,358
                                         ---------    ---------    ---------
    Total Energy Sold............       27,624,141   26,258,703   24,429,776
                                        ==========   ==========   ==========

Electric Sales (Thousands of Kwh):
  Residential....................        6,662,679    6,606,601    6,281,911
  Commercial.....................       10,109,615    9,880,502    9,284,577
  Industrial.....................        5,511,722    5,791,608    5,747,534
  Public Authorities.............          189,141      200,070      188,363
  Wholesale - Regulated .........        4,490,895    3,361,217    2,927,391
  Wholesale Energy Services - 
     Non-Regulated ..............          660,089      418,705            -
                                           -------      -------         ----
    Total Energy Sold............       27,624,141   26,258,703   24,429,776
                                        ==========   ==========   ==========

Number of Customers at End of Period:
  Residential....................          976,629      959,249      936,759
  Commercial.....................          128,593      126,426      123,277
  Industrial.....................              339          380          378
  Public Authorities.............           81,209       79,725       79,154
  Wholesale - Regulated .........               33           26           17
  Wholesale Energy Services - 
     Non-Regulated ..............               12            6            -
                                              ----         ----         ----
      Total Customers ...........        1,186,815    1,165,812    1,139,585
                                         =========    =========    =========

Electric Revenues (Thousands of Dollars):
  Residential....................       $  503,727   $  507,233   $  477,740
  Commercial.....................          563,439      571,536      552,905
  Industrial.....................          228,925      249,774      257,189
  Public Authorities.............           26,778       25,798       23,029
  Wholesale - Regulated..........          145,561      120,478      114,514
  Wholesale Energy Services - 
     Non-Regulated ..............           10,448        7,806            -
  Other Electric Revenues........            6,318        6,365       23,719
                                             -----        -----       ------
    Total Electric Revenues......       $1,485,196   $1,488,990   $1,449,096
                                        ==========   ==========   ==========

Average Annual Kwh Sales per
  Residential Customer                       6,822        6,965        6,794
Average Annual Revenue per
  Residential Customer                     $515.78      $534.79      $516.70
Average Residential Revenue per Kwh          .0756        .0768        .0761
Average Commercial Revenue per Kwh           .0557        .0578        .0596
Average Industrial Revenue per Kwh           .0415        .0431        .0447
Average Wholesale - Regulated 
  Revenue per Kwh                            .0324        .0358        .0391
_________________________

(1) Includes year-to-date amounts through July 31, 1997 for the subsidiaries
    transferred in connection with the Merger.
(2) Primarily includes net distribution and transmission line losses.

                                       20

<PAGE>
<TABLE>
<CAPTION>

               Consolidated Electric Operating Statistics (SPS)

                                      Year ended  September 1 -
                                      December 31 December 31      Year ended August 31
                                      -----------------------      --------------------
                                          1997       1996           1996          1995 
                                          ----       ----           ----          ---- 
<S>                                   <C>          <C>          <C>           <C>
Energy Generated, Received & Sold 
  (Thousands of Kwh):
Net Generated:
  Steam, Fossil..................      15,692,378    4,994,294    14,895,995    21,013,910
  Combustion Turbine.............       6,441,036    1,747,556     6,186,155       146,043
                                        ---------    ---------     ---------       -------

    Total Net Generation.........       22,133,414   6,741,850    21,082,150    21,159,953
Purchased Power and Net Interchange       (402,504)    332,644     1,226,976       350,652
                                          --------     -------     ---------       -------

    Total System Input...........       21,730,910   7,074,494    22,309,126    21,510,605
  Used by Company, Other.........           31,862     438,190     1,420,687     1,175,029
                                            ------     -------     ---------     ---------
  Total Energy Sold..............       21,699,048   6,636,304    20,888,439    20,335,576
                                        ==========   =========    ==========    ==========

Electric Sales (Thousands of Kwh) (1):
  Residential....................        2,986,815     891,695     2,868,982     2,709,089
  Commercial.....................        2,990,488     989,580     2,886,807     2,809,692
  Industrial.....................        8,135,280   2,661,642     7,813,433     7,685,938
  Public Authorities.............          582,618     190,439       571,579       548,012
  Wholesale - Regulated .........        7,003,847   1,902,948     6,747,638     6,582,845
                                         ---------   ---------     ---------     ---------
    Total Energy Sold............       21,699,048   6,636,304    20,888,439    20,335,576
                                        ==========   =========    ==========    ==========

Number of Customers at End of Period(1):
  Residential....................          308,439     310,073       308,554       300,459
  Commercial.....................           57,298      57,502        57,204        54,330
  Industrial.....................           12,549      12,450        12,418        11,896
  Public Authorities.............              785         761           750           665
  Wholesale - Regulated .........              246         209           197           174
                                               ---         ---           ---           ---
      Total Customers ...........          379,317     380,995       379,123       367,524
                                           =======     =======       =======       =======

Electric Revenues (Thousands of Dollars)(1):
  Residential....................       $  184,372   $  54,109    $  172,214  $    161,231
  Commercial.....................          166,572      54,033       154,653       148,231
  Industrial.....................          298,754      95,494       274,117       269,160
  Public Authorities.............           31,249      10,090        29,220        27,412
  Wholesale - Regulated..........          266,527      71,663       252,145       226,751
  Other Electric Revenues........           12,881      10,190        17,048         1,298
                                            ------      ------        ------         -----
    Total Electric Revenues......       $  960,355   $ 295,579    $  899,397  $    834,083
                                        ==========   =========    ==========  ============

Average Kwh Sales per Residential
   Customer                                  9,684       2,876         9,298         9,017
Average Revenue per Residential
   Customer                                $597.76     $174.50       $558.13       $536.62
Average Residential Revenue per Kwh          .0617       .0607         .0600         .0595
Average Commercial Revenue per Kwh           .0557       .0546         .0536         .0528
Average Industrial Revenue per Kwh           .0367       .0359         .0351         .0350
Average Wholesale - Regulated Revenue
   per Kwh                                   .0381       .0377         .0374         .0344
_________________________

(1)   Presentation  of electric  revenues by class has been changed to include
      unbilled revenue in other electric revenue to conform with the current
      year presentation.

                                       21
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

             Consolidated Gas Operating Statistics (NCE and PSCo)

                                              Year Ended December 31,      
                                           NCE       PSCo         NCE and PSCo
                                          1997       1997 (3)   1996       1995
                                          ----       ----       ----       ---- 

<S>                                    <C>         <C>        <C>      <C>
Natural Gas Purchased and Sold
 (Thousands of Dth):
  Purchased from CIG.............        32,035     32,035     39,924   38,687
  Purchased from Others..........       119,652    118,128    107,374  101,259
  Purchased for Non-regulated
    Gas Marketing (1) ...........        61,248     35,189     22,807      237
                                         ------     ------     ------      ---
      Total Purchased............       212,935    185,352    170,105  140,183
  Company Use....................         1,213      1,211        520    1,330
  Other (2)......................        17,236     15,461     10,000    5,657
                                         ------     ------     ------    -----
    Total Gas Sold...............       194,486    168,680    159,585  133,196
                                        =======    =======    =======  =======

Gas Deliveries (Thousands of Dth):
  Residential....................        87,386     86,634    86,102    82,188
  Commercial ....................        47,471     46,857    51,655    50,771
  Non-regulated Gas Marketing (1)        59,629     35,189    21,828       237
                                         ------     ------    ------       ---
      Total Gas Sold.............       194,486    168,680   159,585   133,196
  Transportation.................        93,271     86,831    90,304    75,704
  Other Gas Deliveries...........            73         73     1,141     1,391
                                             --         --     -----     -----
    Total Deliveries.............       287,830    255,584   251,030   210,291
                                        =======    =======   =======   =======

Number of Customers at End of Period:
  Residential....................       928,134    902,759   902,078   872,777
  Commercial.....................        91,937     89,229    90,761    89,034
  Non-regulated Gas Marketing (1)         2,190          -     1,255         2
                                          -----        ---     -----       ---
    Total........................     1,022,261    991,988   994,094   961,813
  Transportation and Other.......         2,215      2,205     1,794       952
                                          -----      -----     -----       ---
    Total Customers..............     1,024,476    994,193   995,888   962,765
                                      =========    =======   =======   =======

Gas Revenues (Thousands of Dollars):
  Residential....................      $410,406   $407,004  $362,481  $383,719
  Commercial.....................       186,248    184,192   176,328   205,275
  Non-regulated Gas Marketing (1)       172,524     99,273    64,389       399
  Transportation.................        32,646     32,465    28,549    23,769
  Other Gas Revenues.............        14,772     10,157     8,750    11,423
                                         ------     ------     -----    ------
      Total Gas Revenues.........      $816,596   $733,091  $640,497  $624,585
                                       ========   ========  ========  ========

Average Annual Dth Sales per 
  Residential Customer ..........         94.15      95.97     97.14     95.65
Average Annual Revenue per
  Residential Customer ..........       $442.18    $450.85   $408.93   $446.58
Average  Revenue per  Dekatherm:
  Residential ...................        $4.697     $4.698    $4.210    $4.669
  Commercial ....................        $3.923     $3.931    $3.459    $3.970
  Transportation ................        $0.352     $0.375    $0.316    $0.314
_________________________
</TABLE>

(1) Includes purchases and sales by e prime and TOG.
(2) Primarily  includes  distribution and transmission line losses and net
    changes to gas in storage.
(3) Includes year-to-date amounts through July 31, 1997 for the subsidiaries
    transferred in connection with the Merger.

                                      22

<PAGE>



Item 2.  Properties

PSCo Electric Generation Property

      The PSCo electric  generating  stations  expected to be available at the
time of the  anticipated  1998 net firm system  peak demand  during the summer
season are as follows:
<TABLE>
<CAPTION>

                                                        Net Dependable
                                                           Capacity
                                            Installed        (Mw)
                                             Gross      at Time of Anticipated  Major
            Name of Station                 Capacity   1998 Net Firm System      Fuel
             and Location                     (Mw)         Peak Demand*         Source
             ------------                     ----         ------------         ------

<S>                                        <C>            <C>                 <C>
Steam:
    Arapahoe-Denver....................      262.00         246.00               Coal
    Cameo-near Grand Junction .........       77.00          72.70               Coal
    Cherokee-Denver....................      784.00         723.00               Coal
    Comanche-near Pueblo...............      725.00         660.00               Coal
    Craig-near Craig...................       86.90 (a)      83.20               Coal
    Hayden-near Hayden.................      259.00 (b)     237.00               Coal
    Pawnee-near Brush..................      530.00         511.00               Coal
    Valmont-near Boulder (Unit 5)......      188.00         178.00               Coal
    Zuni-Denver........................      115.00         107.00            Gas/Oil
                                             ------         ------                   
      Total............................    3,026.90       2,817.90         
  
Fort St. Vrain Combustion Turbine - near
  Platteville .........................      141.45         126.75                Gas
Combustion turbines (6 units-various 
  locations) ..........................      209.00         171.00                Gas
Hydro (14 units-various locations) (c).       53.35          36.55 (d)          Hydro
Cabin Creek Pumped Storage-near Georgetown   324.00 (e)     162.00              Hydro
Cherokee Diesel generators (2 units)...        5.50           5.50                Oil
                                               ----           ----                   
      Total............................    3,760.20       3,319.70              
                                           ========       ========              

________________

* A measure  of the unit  capability  planned to be  available  at the time of
the system  peak load net of seasonal  reductions  in unit  capability  due to
weather,  stream flow, fuel  availability  and station  housepower,  including
requirements for air and water quality control equipment.

(a) The gross  maximum  capability of Craig Units No. 1 and No. 2 is 894 Mw,
    of which the Company has a 9.72% undivided ownership interest.

(b) The gross  maximum  capability of Hayden Units No. 1 and No. 2 is 202.01
    Mw and 285.96 Mw, respectively,  of which the Company has a 75.5% and 37.4%
    undivided ownership interest, respectively.

(c) Includes  one station  (two units) not owned by the Company but operated
    under contract.

(d) Seasonal Hydro Plant net dependable  capabilities are based upon average
    water   conditions  and  limitations  for  each  particular   season.   The
    individual plant seasonal  capabilities are sometimes  limited by less than
    design water flow.

(e) Capability at maximum load.
</TABLE>

                                       23

<PAGE>

SPS Electric Generation Property

      The SPS  electric  generating  stations  expected to be available at the
time of the  anticipated  1998 net firm system  peak demand  during the summer
season are as follows:
<TABLE>
<CAPTION>

                                                        Net Dependable
                                                           Capacity
                                            Installed        (Mw)
                                             Gross      at Time of Anticipated  Major
            Name of Station                 Capacity   1998 Net Firm System      Fuel
             and Location                     (Mw)         Peak Demand*         Source
             ------------                     ----         ------------         ------

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

Steam:
    Harrington- near Amarillo, TX......    1,137.00       1,066.00               Coal
    Tolk - near Muleshoe, TX ..........    1,130.00       1,080.00               Coal
    Jones - near Lubbock, TX...........      512.00         486.00                Gas
    Plant X - near Earth, TX...........      465.00         444.00                Gas
    Nichols - near Amarillo, TX........      479.00         457.00                Gas
    Cunningham - near Hobbs, NM........      489.00         475.00                Gas
    Maddox - near Hobbs, NM............      123.00         118.00                Gas
    CZ-2 - near Pampa, TX..............       26.00          26.00            Purch. steam
    Moore County - near Sunray, TX.....       51.00         48.00                 Gas
                                              -----         -----                    
      Total............................    4,412.00       4,200.00

Gas Turbine:
    Carlsbad - near Carlsbad, NM.......       16.00          16.00                Gas
    CZ-1 - near Pampa, TX..............       13.00          13.00            Hot nitrogen
    Maddox - near Hobbs, NM............       76.00          76.00                Gas
    Riverview - near Borger, TX........       25.00          25.00                Gas

Diesel Engine (1 unit) - Tucumcari, NM.       13.00          13.00              Diesel
                                              -----          -----                    
      Total............................     4,555.00      4,343.00
                                            ========      ========

________________

* A measure  of the unit  capability  planned to be  available  at the time of
the system  peak load net of seasonal  reductions  in unit  capability  due to
weather,  stream flow, fuel  availability  and station  housepower,  including
requirements for air and water quality control equipment.
</TABLE>

Nuclear Generation Property

      Fort St. Vrain, near Platteville,  PSCo's only former nuclear generating
station,  ceased  operations  on August  29,  1989 and on March  22,  1996 the
physical  decommissioning  of the station was completed.  The initial phase of
the repowered  gas fired  combined  cycle steam  electric  generating  station
began  commercial  operations  on May 1, 1996 (see  Note 10.  Commitments  and
Contingencies in Item 8. Financial Statements And Supplementary Data).

Electric Transmission Property

      PSCo:  On December 31, 1997,  PSCo's  transmission  system  consisted of
approximately 112 circuit miles of 345 Kv overhead lines;  1,942 circuit miles
of 230 Kv overhead  lines;  15 circuit miles of 230 Kv underground  lines;  65
circuit miles of 138 Kv overhead  lines;  999 circuit miles of 115 Kv overhead
lines; 22 circuit miles of 115 Kv underground  lines;  331 circuit miles of 69
Kv overhead lines;  139 circuit miles of 44 Kv overhead  lines;  and 1 circuit
mile of 44 Kv  underground  lines.  PSCo  jointly  owns with  another  utility
approximately  342 circuit miles of 345 Kv overhead lines and 360 miles of 230
Kv  overhead  lines,  of  which  PSCo's  share  is 112  miles  and 147  miles,
respectively, which shares are included in the amounts listed above.

      SPS: On December  31,  1997,  SPS's  transmission  system  consisted  of
approximately 319 circuit miles of 345 Kv overhead lines;  1,598 circuit miles
of 230 Kv overhead lines;  2,540 circuit miles of 115 Kv overhead lines; 1,755
circuit miles of 69 Kv overhead  lines;  1 circuit mile of 115 Kv  underground
line; and 5 circuit miles of 69 Kv underground lines.

                                       24

<PAGE>

Interconnections

      PSCo:   PSCo's   transmission   facilities  are  located  wholly  within
Colorado.  The system is  interconnected  with the  systems  of the  following
utilities  with which PSCo has major firm purchase power  contracts;  capacity
and energy are  provided  primarily  by  generating  sources in the  locations
indicated:

      Utility                                          Location
      -------                                          --------

      Basin Electric Power Cooperative................ Southeast Wyoming
      PacifiCorp ..................................... West & Northwest U.S.
                                                       Northwest Colorado
      Platte River Power Authority.................... Northcentral Colorado
      Tri-State....................................... Southeast Wyoming and
                                                       Northwest Colorado

      PSCo has wheeling  agreements  with the above,  and with other utilities
and public power agencies,  which are utilized to provide  capacity and energy
to PSCo's system from time to time.

      PSCo is a member of the WSCC,  an  interstate  network  of  transmission
facilities  which are owned by public entities and  investor-owned  utilities.
WSCC  is  the  regional  reliability  coordinating   organization  for  member
electric  power systems in the western  United  States.  PSCo is also a member
of the  Western  Systems  Power  Pool  which is an  economic  power  pool that
operates an electronic  bulletin  board and acts as a  clearinghouse  for bulk
power transactions among over 90 member utilities and marketers.

      SPS:  SPS's  transmission  system  is  located  in parts of  Texas,  New
Mexico,  Oklahoma and Kansas.  SPS is  connected  with  utilities  west of its
service  territory  through  two HVDC  interconnections  in New Mexico and has
four  interconnecting  transmission  lines with  utilities  of the SPP.  These
interconnections are described in the following table:

      Utility                                           Location
      -------                                           --------

      El Paso Electric Company and Texas-New Mexico
         Power Company .................................Near Artesia, NM
      Public Service Company of New Mexico .............Near Clovis, NM
      Public Service Company of Oklahoma................Near Oklaunion, TX
                                                         and near Elk City, OK
      West Texas Utilities..............................Near Shamrock, TX
                                                         and near Groom TX
      WestPlains Energy.................................Near Guymon, OK
 
      SPS is a  member  of the  SPP.  Transactions  with  the SPP are  handled
through  interties  near Elk City  and  Guymon,  Oklahoma,  and  Shamrock  and
Oklaunion,  Texas.  These  interties  allow the Company to sell or to purchase
energy from the eastern electrical grid. HVDC  interconnections  link SPS with
the western  electrical  grid of the United  States.  SPS  purchases and sells
energy through HVDC interties near Artesia and Clovis, New Mexico.

      SPS is a  participant  in the FERC  approved WSPP bulk power market.  This
arrangement   provides  for   short-term   energy  and   capacity   exchanges,
transmission  services,   flexible  pricing,  and  electronic  bulletin  board
posting of available power and energy.

      It is presently anticipated that a tie line between Amarillo,  Texas and
southeastern  Colorado  will be  constructed  by the year  2001.  The tie line
would be  approximately  300 miles and the  voltage  would be 345 Kv. PSCo and
SPS have agreed with other utilities to comprehensive  procedures for regional
planning of the new  transmission  interconnection.  Following the  completion
of  the  line,  the  PSCo  and  SPS  systems  will  be  operated  as a  single
interconnected system.

                                       25

<PAGE>

Electric Distribution Property

      The distribution system of the Company's electric  subsidiaries consists
of both  overhead  lines  and  underground  distribution  systems.  PSCo  owns
approximately  220  substations  (30 of which  are  jointly  owned)  having an
aggregate  transformer  capacity of 19,167,000  Kva, of which 4,145,827 Kva is
step-up transformer  capacity at generating  stations.  SPS owns approximately
348 substations  having an aggregate  transformer  capacity of 19,277,000 Kva,
of which 5,951,000 Kva is step-up transformer capacity.

Gas Property

      The gas  property of PSCo at  December  31,  1997  consisted  chiefly of
approximately  15,362 miles of distribution mains ranging in size from 0.50 to
30 inches and related equipment.  The Denver  distribution system consisted of
8,888  miles of  mains.  Pressures  in the  system  are  varied  to meet  load
requirements  and individual house regulators are installed on each customer's
premises  to provide  uniform  flow of gas to  appliances.  PSCo also owns and
operates four gas storage facilities.

Other Property

      PSCo's steam  heating  property at December  31, 1997  consisted of 10.5
miles of transmission,  distribution and service lines in the central business
district of Denver,  including a steam  transmission line connecting the steam
heating system with Zuni.  Steam is supplied from boilers  installed at PSCo's
Denver Steam Plant which has a capability of 295,000  pounds of steam per hour
under  sustained  load and an additional  300,000  pounds of steam per hour is
available  from Zuni on a peak demand basis.  An additional  80,000 pounds per
hour can be supplied as emergency  backup through  operation of a leased steam
heat  boiler  housed at the State of  Colorado.  PSCo  also owns  service  and
office  facilities  in Denver  and  other  communities  strategically  located
throughout its service territory.

Property of Subsidiaries

      Unregulated  subsidiary  property is  approximately  1% of the total net
book value of the  properties  of the  Company and  consolidated  subsidiaries
combined.  1480 Welton, Inc. owns two buildings that are used by PSCo.

Character of Ownership

      The steam electric generating  stations,  the majority of major electric
substations  owned by the  Company and its  subsidiaries  are on land owned in
fee.  Approximately  half of the  compressor  stations and a limited number of
town border and meter  stations are also on land owned in fee.  The  remaining
major  electric  substations,  compressor  stations  and the  majority  of gas
regulator  stations and town border and meter stations are wholly or partially
on land  leased from  others or on or along  public  highways or on streets or
public places within  incorporated towns and cities (under franchises or other
rights).  PSCo's Cabin Creek Pumped Storage Hydroelectric  Generating Station,
its  Shoshone  Hydroelectric  Generating  Station and a portion of the related
intake  tunnel  are  located  on  public  lands of the  United  States.  As to
substantially  all property on or across  public  lands of the United  States,
the  Company  or  its   subsidiaries   hold  licenses  or  permits  issued  by
appropriate  Federal agencies or departments.  The Leyden gas storage facility
is located  largely on leased  property  under  leases  expiring  December 31,
2040.  The  Company  and its  utility  subsidiaries  have the power of eminent
domain  pursuant to State law to acquire  property for their  electric and gas
facilities.  The electric and gas  transmission  and  distribution  facilities
are  for  the  most  part  located  on  land  owned  by  the  Company  or  its
subsidiaries  pursuant to easements  obtained from the record holders of title
or are over or under  streets,  public  highways or other public places and on
public  lands  under  franchises  or other  rights.  The  water  rights of the
Company and its  subsidiaries are owned subject to divestment to the extent of
any abandonment thereof.

      Substantially  all of the  utility  plant  and other  physical  property
owned by the  Company's  utility  subsidiaries  is subject to the liens of the
respective  indentures  securing the mortgage  bonds of the Company's  utility
subsidiaries.

                                       26

<PAGE>

Item 3.  Legal Proceedings

      See  Note  9.   Regulatory   Matters  and  Note  10.   Commitments   and
Contingencies in Item 8. Financial Statements And Supplementary Data.

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

      NCE:  None.
      PSCo: None.
      SPS:  Omitted pursuant to General Instruction I(2)(c).

                                   PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

      The  Company's  common  stock is listed on the New York stock  exchange.
On August 1, 1997  following  the  receipt of all  required  State and Federal
regulatory  approvals,  PSCo and SPS combined to form NCE with the result that
the common  shareholders  of PSCo and SPS became  the common  shareholders  of
NCE. Pursuant to the Merger  Agreement,  each outstanding share of PSCo common
stock,  par value $5.00 per share,  was canceled and converted  into one share
of NCE common stock and each outstanding share of SPS common stock,  $1.00 par
value per share,  was  canceled  and  converted  into 0.95 of one share of NCE
common  stock.  Prior to the Merger,  PSCo and SPS common  stock was listed on
the New York,  Chicago and Pacific Stock  Exchanges.  The following table sets
forth for the periods  indicated  the  dividends  declared per share of common
stock  and  the  high  and  low  sale  prices  of  the  common  stock  on  the
consolidated  tape as reported by The Wall  Street  Journal for NCE,  PSCo and
SPS in 1997 and by the National Quotations Bureau, Inc. for SPS in 1996.

                                                 Dividends        Price Range
         NCE Year and Quarter                     Declared      High       Low
         --------------------                     --------      ----       ---
1997
    Third Quarter (from August 1, 1997)..........  $   .58  $43 3/16    $   39
    Fourth Quarter...............................      .58    49 5/8    40 1/4
                                                       ---
                                                    $ 1.16
         PSCo Year and Quarter
         ---------------------
1997
    First Quarter................................  $  .525   $40 1/8   $38 1/4
    Second Quarter...............................     .525    41 3/4    37 3/4
    Third Quarter (to August 1, 1997) (1)........     .115   42 3/16    40 1/8
                                                      ---- 
                                                    $1.165
1996
    First Quarter................................   $ .525   $36 1/2   $33 3/4
    Second Quarter...............................     .525    36 3/4    32 3/8
    Third Quarter................................     .525    36 7/8    34 3/4
    Fourth Quarter...............................     .525    39 1/2    35 1/4
                                                      ----
                                                    $ 2.10
         SPS Year and Quarter
         --------------------
1997
    First Quarter................................  $   .55   $37 1/8   $35 3/4
    Second Quarter...............................      .55    39 1/2    37 3/8
    Third Quarter (to August 1, 1997) (2)........      .46    40 1/8    37 5/8
                                                       ---
                                                    $ 1.56
1996 - Transition Period
    Fiscal Quarter ended November 30, 1996.......  $   .55   $36 3/4   $31 3/4
    Month ended December 31, 1996................        -    35 7/8    34 3/8
                                                       ---
                                                   $   .55

                                       27

<PAGE>

                                                 Dividends        Price Range
         SPS Year and Quarter                     Declared      High       Low
         --------------------                     --------      ----       ---

1996 - Fiscal Year
    Fiscal Quarter ended November 30, 1995.......  $   .55   $33 7/8  $     30
    Fiscal Quarter ended February 29, 1996.......      .55    33 7/8     32 18
    Fiscal Quarter ended May 31, 1996............      .55    34 1/8    30 5/8
    Fiscal Quarter ended August 31, 1996.........      .55    33 3/8    30 1/4
                                                       ---
                                                    $ 2.20

(1) A partial  dividend  payable to  shareholders  covering the period July
    12,  1997  through  July 31,  1997,  the day prior to the Merger  effective
    date, based on the quarterly  dividend rate of $0.525, but prorated for the
    number of days in the interim period.
(2) A partial dividend payable to shareholders  covering the period May 16,
    1997  through July 31, 1997,  the day prior to the Merger  effective  date,
    based on the quarterly  dividend rate of $0.55, but prorated for the number
    of days in the interim period.

      At December 31, 1997, the book value of the Company's  common equity was
$21.25 per share.  At February 19, 1998,  there were 83,124  holders of record
of the  Company's  common  stock and the market price of the stock was $45.50.
In November 1997,  the Company filed a  Registration  Statement on Form S-3 to
sell 9 million  shares of common  stock.  In December  1997,  the Company sold
5.9  million  shares  of  common  stock.  See  Note  4.  Capital  Stock  for a
discussion of the shareholders' rights plan.

      The Company  anticipates  declaring quarterly dividends at an annualized
rate of $2.32 per share.  However,  the dividend  level is dependent  upon the
Company's results of operations,  financial  position and other factors and is
evaluated  quarterly  by the  Board of  Directors.  See  Item 7.  Management's
Discussion  And  Analysis Of  Financial  Condition  And Results Of  Operations
(NCE).

                                       28

<PAGE>

Item 6.  Selected Financial Data (NCE)

      The NCE  selected  financial  data for  1997 and 1996 has been  prepared
from the  combination of the historical  information of PSCo and SPS as of and
for the years ended  December  31,  1997 and 1996.  The 1995,  1994,  and 1993
selected  financial  data  has been  prepared  from  the  combination  of PSCo
information  as of and for the years ended  December 31,  1995,  1994 and 1993
with the SPS  information as of and for the years ending August 31, 1995, 1994
and 1993.  Income  statement  and cash flow  information  for SPS for the four
months  ended  December  31,  1995 is  presented  in SPS's  Transition  Period
statements  in Item 8.  Financial  Statements  and  Supplementary  Data.  This
following selected  consolidated  financial data should be read in conjunction
with the consolidated  financial  statements and the  management's  discussion
and  analysis  of  financial  condition  and results of  operations  appearing
elsewhere herein.

<TABLE>
<CAPTION>
                                                   Year ended December 31,      
                                                   -----------------------      
                                     1997        1996       1995        1994        1993 
                                     ----        ----       ----        ----        ---- 
NCE                                (In Thousands, except per share data & ratio)
---
<S>                               <C>         <C>         <C>         <C>         <C>
Operating revenues:
   Electric..................     $2,473,359  $2,416,539  $2,283,179  $2,243,284  $2,146,806
   Gas.......................        816,596     640,497     624,585     624,922     628,324
   Other.....................         52,570      39,998      54,444      42,092      27,975
                                      ------      ------      ------      ------      ------
      Total..................      3,342,525   3,097,034   2,962,208   2,910,298   2,803,105
Total operating expenses.....      2,713,300   2,461,451   2,345,264   2,413,704   2,282,714
Operating income.............        629,225     635,583     616,944     496,594     520,391
Income before extraordinary item     261,487     272,341     281,492     255,545     244,574
Extraordinary item - U.K.
  windfall tax                      (110,565)          -           -           -           -
Net income...................        150,922     272,341     281,492     255,545     244,574
Per share data applicable to 
   common stock (a):
   Basic and diluted earnings
    per share (c) ...........          $2.50       $2.64       $2.77       $2.54       $2.48
   Dividends declared (b)....          $2.53       $2.18       $2.15       $2.13       $2.13
Rate of return earned on average
   common equity (income before
   extraordinary item to common)       11.6%       12.8%       14.0%       13.3%       13.4%
Total assets.................     $7,310,281  $6,617,442  $6,260,794  $6,027,106  $5,775,110
Total construction expenditures      475,497     454,968     380,407     409,485     385,830
Total common equity..........      2,353,245   2,170,040   2,064,397   1,963,654   1,873,085
Preferred stock of subsidiaries:
   Not subject to mandatory
    redemption ...............       140,002     140,008     212,688     212,688     212,688
   Subject to mandatory 
     redemption at par(including
     amounts due within one year)     39,253      39,913      41,289      42,665      45,454
SPS obligated mandatorily 
   redeemable preferred securities   100,000     100,000           -           -           -
Long-term debt of subsidiaries
   (including amounts due within
      one year)                    2,245,424   2,050,189   1,854,737   1,703,808   1,742,440
Notes payable & commercial paper     588,343     298,561     288,050     339,794     276,875

_________________

(a)    Earnings per share are based on the weighted  average  number of shares
   of common stock outstanding.
(b)    The 1997  amount  includes  dividends  declared by PSCo and SPS for the
   period January 1, 1997 through July 31, 1997 and dividends  declared by NCE
   for the period  August 1, 1997 through  December  31, 1997.  The Company is
   currently  declaring quarterly dividends at an annualized rate of $2.32 per
   share.  See  Item 5 Market  for  Registrant's  Common  Equity  and  Related
   Stockholder Matters.
(c)    The 1997  amount  is  before  the  $1.06  extraordinary  loss per share
   related to the U.K. windfall tax.

</TABLE>
                                       29

<PAGE>
<TABLE>
<CAPTION>
                                                   Year ended December 31,      
                                                   -----------------------      
                                     1997(a)     1996       1995        1994        1993 
                                     -------     ----       ----        ----        ----
PSCo                                (In Thousands, except per share data & ratio)
----
<S>                               <C>         <C>         <C>         <C>         <C>
Operating revenues:
   Electric..................     $1,485,196  $1,488,990  $1,449,096  $1,399,836  $1,337,053
   Gas.......................        733,091     640,497     624,585     624,922     628,324
   Other.....................         11,356       7,951       7,010       7,517      11,548
                                      ------       -----       -----       -----      ------
      Total..................      2,229,643   2,137,438   2,080,691   2,032,275   1,976,925
Operating income.............        337,353     324,536     295,907     245,683     259,173
Income before extraordinary item     204,042     190,346     178,856     170,269     157,360
Extraordinary item - U.K.
  windfall tax ..............       (110,565)          -           -           -           -
Dividend requirements on
  preferred stock ...........         11,752      11,848      11,963      12,014      12,031
Earnings available for common
  stock .....................         81,725     178,498     166,893     158,255     145,329
Net income...................         93,477     190,346     178,856     170,269     157,360
Total assets.................      4,994,733   4,572,648   4,351,789   4,207,832   4,057,600
Total common equity..........      1,621,399   1,438,288   1,343,645   1,267,482   1,184,183
Preferred stock:
   Not subject to mandatory 
     redemption .............        140,002     140,008     140,008     140,008     140,008
   Subject to mandatory 
     redemption at par (including
     amounts due within one year)     39,253      42,489      43,865      45,241      45,454
Long-term debt
     (including amounts due 
      within one year) ......      1,595,298   1,414,558   1,278,389   1,180,580   1,193,668
Notes payable & commercial paper     348,555     244,725     288,050     324,800     276,875

______________

(a) The 1997 information includes Cheyenne, WGI, e prime and Natural Fuels
    through July 31, 1997.  These subsidiaries were transferred to NCE in 
    connection with the Merger.

</TABLE>

SPS Selected financial data omitted pursuant to General Instruction I(2)(a).


                                   30
<PAGE>
Item 7. Management's  Discussion  and  Analysis of  Financial  Condition  and
        Results of Operations (NCE,PSCo and SPS)

Competition and Industry Outlook

      Electric  utilities in the U. S. have historically  operated in a highly
regulated  environment  in which they have an obligation  to provide  electric
service to their customers in return for an exclusive  franchise  within their
service  territories  with an  opportunity to earn a regulated rate of return.
This  regulatory  environment  is changing.  Retail  competition  for electric
service is now a reality in a few states  and many other  states  have  either
passed or proposed  legislation  that will allow all customers to choose their
energy  supplier  in the future.  Competition  within the  wholesale  electric
energy market has intensified  with  open-access  transmission and an increase
in  marketing  and  trading  activities  by  utilities  and  power  marketers.
Convergence,   consolidation   and  globalization  of  the  gas  and  electric
industries is continuing as companies  position  themselves  for  deregulation
and   competition  in  an  unbundled   energy  industry  with  energy  supply,
transmission, distribution and energy services business segments.

      Electric prices in the Company's service  territories are relatively low
in  comparison  to other parts of the U.S.,  lessening  the need for immediate
legislative  and  regulatory  change.  State  legislatures  and state  utility
commissions  in the  retail  jurisdictions  served  by the  Company's  utility
subsidiaries  have begun to address the  restructuring of the electric utility
industry,  but so far  no  actions  have  been  taken  that  are  expected  to
significantly  impact the  Company.  Overall,  the Company  believes  that the
prices its utility  subsidiaries  charge for  electricity  and the quality and
reliability  of their  service  currently  place them in a position to compete
effectively  in the energy  market.  Accomplishing  a smooth  transition  to a
competitive  electric  utility  industry  requires the  resolution  of several
important and complex issues,  including, but not limited to: 1) what segments
of the  business  will be open to  competition  and  what  will  the  rules of
competition  be;  2)  how  to  transition  from  traditional   cost-of-service
regulation to  performance-based  regulation or market-based  pricing;  3) who
will pay for the costs of  prudent  utility  investments  or past  commitments
(i.e.  stranded  costs) that will be uneconomic in a competitive  environment;
4) what  environmental  impacts  will result from  deregulation  and 5) how to
ensure safe and reliable electric  service.  The resolution of these and other
issues will likely  impact the  Company  and its utility  subsidiaries  in the
future.  The potential  negative financial impacts could include an impairment
of assets,  a loss of retail  customers,  lower profit  margins and  increased
costs of capital (see Note 1. Summary of  Significant  Accounting  Policies in
Item 8.  Financial  Statements  and  Supplementary  Data).  At this time,  the
Company and its utility  subsidiaries cannot predict when they will be subject
to changes in legislation  or regulation,  nor can they predict the impacts of
such  changes  on their  financial  position,  results of  operations  or cash
flows.  The Company  agrees with the need for change in the  industry and will
proactively support  legislation and participate in regulatory  proceedings to
protect the interests of its shareholders and its customers.

Corporate Overview - 1997

      After  two  years  of work,  the  merger  of PSCo and SPS was  completed
effective August 1, 1997,  creating a larger and more  geographically  diverse
combined service  territory and reducing  business risks related to changes in
economic,  competitive and/or climatic  conditions.  The Company can now begin
to  derive  benefits  from the more  efficient  and  economic  utilization  of
combined facilities and personnel.  Obtaining all of the regulatory  approvals
to effect the Merger and  transitioning  NCE into a  post-merger  organization
took longer than  anticipated  and,  accordingly,  the Company did not realize
the  synergy  savings  that it had  initially  hoped to achieve  in 1997.  The
Company has organized  into business  units as part of its strategy for future
growth.  The  business  units,   structured  to  focus  on  specific  customer
markets, consist of: Commodity Services,  Retail Services,  Delivery Services,
including  transmission and distribution and  International  Investments.  The
Company intends to build upon the core competencies  brought together with the
Merger.

      NCE expanded  its  international  presence  with its 50%  investment  in
Yorkshire  Power,  which  acquired  Yorkshire  Electricity,  a United  Kingdom
regional  electricity  company whose service  territory is one of the region's
largest with  approximately 2.1 million customers.  Domestically,  the Company
has invested in Cadence  Network  LLC, an  energy-related  company  which will
provide a single  source for both  energy  management

                                       31

<PAGE>

services and products designed to lower energy costs for national companies that
operate at multiple  locations.  The Company has continued to develop and expand
its gas and power marketing  activities to serve customers within and outside of
markets served by its utility  subsidiaries.  The Company's operating priorities
in 1997 continued to focus on maintaining  quality and reliable  service,  while
reducing costs and business risks.  This approach  resulted in positive earnings
for the Company and a customer refund obligation to PSCo customers in connection
with the  sharing of  electric  department  earnings  in excess of 11% return on
equity.

Earnings

      Earnings per share were $1.44  ($2.50  before the  extraordinary  item),
$2.64 and $2.77 during 1997,  1996 and 1995,  respectively.  Earnings for 1995
include  the  results  of SPS  for its  fiscal  year  ending  August  31.  The
significant decrease in 1997 was primarily  attributable to the recognition of
an  extraordinary   item  related  to  the  one-time  U.K.   windfall  tax  of
approximately  $110.6  million,  or $1.06 per share,  for its 50% ownership in
Yorkshire  Power.  However,  ongoing  operations of Yorkshire Power positively
impacted the  Company's  1997 earnings by  approximately  $25.4 million net of
borrowing  costs and income taxes,  or $0.24 per share.  Earnings  during 1997
and 1996 were negatively  impacted by the write-offs of certain investments in
waste-to-energy   cogeneration   facilities,   higher   merger  and   business
integration  costs resulting from the August 1, 1997 closing of the Merger and
electric rate decreases  instituted in 1996 and 1997.  Management  anticipates
that future operating  results will benefit from the synergies from the Merger
and  other  growth   initiatives   discussed   above.   See  Forward   Looking
Information.

Electric Operations

      The  following  table  details the annual  change in electric  operating
revenues and energy costs as compared to the  preceding  year (in thousands of
dollars).
                                                    Increase (Decrease)
                                                      From Prior Year
                                                      ---------------
                                                    1997          1996  
                                                    ----          ----  
Electric operating revenues:
 Retail ....................................      $ 20,350      $ 81,786
 Wholesale..................................        35,773        35,050
 Non-regulated power marketing..............        15,055         7,806
 Other (including unbilled revenues)........       (14,358)        8,718
                                                   -------         -----
  Total revenues............................        56,820       133,360
Fuel used in generation.....................        36,525        83,233
Purchased power.............................        20,905        23,383
                                                    ------        ------
  Net increase (decrease) in electric margin      $   (610)     $ 26,744
                                                  ========      ========

      The  following  table  summarizes  electric Kwh sales by major  customer
classes.

                                                                  % Change *
                                           Millions of Kwh Sales From Prior Year
                                           -------------------------------------
                                                 1997       1996    1997   1996 
                                                 ----       ----    ----   ---- 
Residential ...............................      9,730     9,530     2.1%  6.0%
Commercial and Industrial  ................     27,014    26,562     1.7   4.1
Public Authority ..........................        774       780    (0.8)  6.0
                                                   ---       ---
 Total Retail.............................      37,518    36,872     1.8   4.6
Wholesale..................................     11,495    10,130    13.5   6.5
Non-regulated Power Marketing..............      1,210       419     **    **
                                                 -----       ---
Total......................................     50,223    47,421     5.9   5.9
                                                ======    ======

*  Percentages are calculated using unrounded amounts
** Percentage  change is  significant,  but  presentation of the amount is not
meaningful

                                       32
<PAGE>

      Electric margin  decreased  slightly during 1997, when compared to 1996.
PSCo's retail rate  reductions  (approximately  $15.4 million)  implemented in
October 1996 and  February  1997 and the  recognition  at PSCo of an estimated
customer refund  obligation  (approximately  $16.4 million) in connection with
the  earnings  sharing in excess of 11% return on equity which  resulted  from
the settlement of the Merger  proceedings in Colorado (see Note 9.  Regulatory
Matters in Item 8. Financial  Statements and supplementary  data) were primary
contributors to the decrease.  Electric  margin was also  negatively  impacted
by  the  recognition  at  SPS  of  an  estimated  customer  refund  obligation
(approximately  $1.8 million)  related to the guaranteed  merger  savings,  as
well as  interruptible  rates  available  to  certain  classes  of retail  and
wholesale  customers.  An overall increase of  approximately  1.8% in electric
Kwh  sales  to  retail  customers  resulting  from  customer  growth  of  1.3%
minimized  the  impact of these rate  reductions.  Higher  wholesale  electric
sales  and power  marketing  activities  by  non-regulated  subsidiaries  also
contributed  to  increased  operating  revenues,  however,  the margin on such
sales is minimal.  Electric  margin  increased in 1996, when compared to 1995,
primarily due to an overall 4.6% increase in retail sales resulting  primarily
from  customer  growth of 2.6%.  The hotter  than normal late spring and early
summer  1996 in the SPS  territory  also  favorably  impacted  retail and firm
wholesale  sales.  Customer  growth and higher  economy sales by the Company's
utility   subsidiaries   and  power  marketing   activities  of  non-regulated
subsidiaries  contributed  to increased  wholesales  revenues,  but had little
impact on electric margin.

      The Company's  regulated  subsidiaries  have cost adjustment  mechanisms
which  recognize  the  majority  of the  effects  of  changes  in fuel used in
generation  and  purchased  power costs and allow  recovery of such costs on a
timely  basis.  As a result,  the  changes in revenues  associated  with these
mechanisms in 1997 and 1996,  when compared to the respective  preceding year,
had little  impact on net income.  In its  decision  on the  Merger,  the CPUC
replaced PSCo's ECA with an ICA,  effective  October 1, 1996, which allows for
a 50%/50%  sharing of certain  fuel and energy cost  increases  and  decreases
among  customers and  shareholders.  For 1997,  the ICA did not  significantly
impact electric  margin (see Note 9.  Regulatory  Matters in Item 8. Financial
Statements and Supplementary data).

      Fuel used in  generation  expense  increased  approximately  5.8% during
1997,  as compared to 1996,  primarily due to increased  generation  levels at
PSCo and SPS power  plants and higher  natural gas costs at SPS.  Fuel used in
generation  expense  increased  15.1%  during  1996,  as compared to the prior
year, primarily due to the increased natural gas and coal costs.

      Purchased  power expense  increased  4.1% and 4.8% during 1997 and 1996,
respectively,   as  compared  to  the  previous  year.   These  increases  are
primarily  due to the  amount  of power  purchased  by PSCo to meet  increased
wholesale  requirements and other customer demands,  as well as an increase in
power marketing activities, which were initiated in the third quarter of 1996.

Gas Operations

      The  following  table  details the annual  change in  revenues  from gas
sales and gas  purchased  for resale as  compared  to the  preceding  year (in
thousands of dollars).

                                                          Increase (Decrease)
                                                            From Prior Year
                                                            ---------------
                                                          1997          1996  
                                                          ----          ----  
Revenues from gas sales (including unbilled revenues)   $172,340      $ 11,211
Gas purchased for resale....................             150,128           483
                                                         -------           ---
 Net increase in gas sales margin...........            $ 22,212      $ 10,728
                                                        ========      ========

                                       33

<PAGE>

      The following  table  compares gas dekatherm  (Dth)  deliveries by major
customer classes.

                                              Millions of         % Change *
                                            Dth Deliveries      From Prior Year
                                            --------------      ---------------
                                            1997      1996         1997   1996
                                            ----      ----         ----   ----
Residential............................     87.4      86.1         1.5%    4.8%
Commercial.............................     47.5      51.7        (8.1)   (1.7)
Non-regulated gas marketing............     59.6      21.8         **      **
                                            ----      ---- 
  Total Sales..........................    194.5     159.6        21.9    19.8
Transportation, gathering and processing    93.3      91.4         2.1    18.6
                                            ----      ----
  Total................................    287.8     251.0        14.7    19.4
                                           =====     =====

*  Percentages are calculated using unrounded amounts
** Percentage  change is  significant,  but  presentation of the amount is not
   meaningful

      Gas sales margin  increased in 1997,  when  compared to 1996,  primarily
due to an increase in PSCo's base  revenues  associated  with the higher rates
effective February 1, 1997,  resulting from the 1996 rate case and an increase
in gas marketing  activities  by  non-regulated  subsidiaries.  Gas costs were
higher during 1997,  as compared to 1996,  as a result of higher  per-unit gas
prices  throughout  the  year.  Gas  sales  margin  increased  in  1996,  when
compared to 1995,  primarily  due to higher  retail gas sales  resulting  from
customer growth of 3.4% and slightly colder weather.

      Gas  transportation,  gathering and processing  revenues  increased $3.8
million  during 1997,  when compared to 1996,  primarily due to an increase in
deliveries  and  higher  transportation  rates  effective  February  1,  1997,
resulting  from PSCo's 1996 rate case.  In  addition,  the shifting of various
commercial  customers  to firm  transport  customers  of  PSCo,  some of which
became  retail   customers  of  the  Company's   non-regulated   subsidiaries,
contributed  to the increase in 1997 and 1996,  when compared to the preceding
year.

      PSCo and Cheyenne  have in place GCA  mechanisms  for natural gas sales,
which  recognize  the  majority  of the  effects of changes in the cost of gas
purchased for resale and adjust  revenues to reflect such changes in cost on a
timely  basis.  As a result,  the  changes in revenues  associated  with these
mechanisms  during  1997 and 1996 had little  impact on net  income.  However,
the  fluctuations  in gas sales  impact  the amount of gas the  Company's  gas
utilities  must  purchase  and,  therefore,   along  with  the  increases  and
decreases in the per-unit cost of gas, affect total gas purchased for resale.

Non-Fuel Operating Expenses and Other Income and Deductions

      Other operating and maintenance  expenses increased $25.8 million during
1997,  as  compared  to  1996,  primarily  due the  favorable  impact  on 1996
earnings of the settlement  agreement with the DOE resolving all spent nuclear
fuel  storage  and  disposal  issues  at Fort  St.  Vrain  (approximately  $16
million) and the  recognition  in operating  and  maintenance  expenses of the
Texas jurisdictional portion of the Thunder Basin judgment  (approximately $12
million) in accordance  with the PUCT order  received by SPS in December 1997.
The  recognition of the Thunder Basin judgment did not impact  earnings as the
costs were  included  in the  calculation  of  deferred  revenue.  The Company
expects to recover  these costs  through  SPS's fixed fuel factor (see Note 9.
Regulatory  Matters in Item 8 Financial  Statements and  Supplementary  data).
Higher operating costs from non-regulated  operations were offset, in part, by
lower  labor  and  employee   benefit  costs  and  other   general   decreases
attributable  to  the  Merger  and  the  Company's  overall  cost  containment
efforts.  Other operating and maintenance  expenses decreased $14.0 million in
1996,  primarily due to the settlement  with the DOE, lower labor and employee
benefit costs  resulting  from the hiring  freeze  instituted in late 1995 and
other general cost reductions,  offset, in part by higher operating costs from
certain  non-regulated  operations  that were,  for the most  part,  initiated
during 1996.

      Depreciation  and amortization  expense  increased $18.2 million in 1997
and $19.3 million in 1996  primarily due to the higher  depreciation  expenses
from property additions and amortization of software costs.

                                       34


<PAGE>

      Other  income  and  deductions   increased  $7.3  million  in  1997  and
decreased $30.5 million in 1996,  when compared to the preceding  year.  Other
income and  deductions  was favorably  impacted in 1997 by the  recognition of
equity earnings in Yorkshire  Power ($34.9  million),  of which  approximately
$10 million related to the change in the U.K.  corporate  income tax rate from
33% to 31% (see Note 2.  Acquisition of Yorkshire Power and U.K.  Windfall Tax
in Item 8. Financial  Statements  and  supplementary  data).  Other income and
deductions  was  negatively  impacted  by the  write-offs  in  June  1997  and
December  1996  of  certain   investments  in   waste-to-energy   cogeneration
facilities  and the  recognition  of merger  and  business  integration  costs
incurred  over  the  past  two  years.   Additionally  in  1996,  the  Company
recognized  a gain on the sale by Quixx of certain  water  rights (see Note 3.
Acquisition  and  Divestiture of  Investments in Item 8. Financial  Statements
and supplementary data).

      Interest charges and preferred  dividends increased $31.5 million during
1997, as compared to 1996,  primarily  due to interest on borrowings  utilized
to finance  capital  expenditures  and the April 1997  investment in Yorkshire
Power.  These financings  included PSCo's issuance of medium-term notes and an
increased  level  of  short-term  borrowings  by  NCE  and  its  subsidiaries.
Additionally,  dividends on SPS  obligated  mandatorily  redeemable  preferred
securities of subsidiary  trust  increased due to the October 1996 issuance of
$100 million of SPS Obligated  Mandatorily  Redeemable Preferred Securities of
a  Subsidiary  Trust.  An increase in long-term  debt used to finance  capital
expenditures  and  other  corporate  cash  requirements   served  to  increase
interest charges and preferred dividends during 1996, when compared to 1995.

Commitments and Contingencies

      Issues  relating to regulatory and  environmental  matters are discussed
in Notes 9 and 10 in Item 8.  Financial  Statements  and  Supplementary  Data.
These  matters  and the future  resolution  thereof  may impact the  Company's
future results of operations, financial position or cash flows.

      Based on a preliminary  analysis,  the Company expects to incur costs of
approximately  $50-65  million  over the next two years to modify its computer
software,  hardware and other  automated  systems used in operations  enabling
proper data processing  relating to the year 2000 and beyond.  The majority of
these  costs will be  incurred  by or  allocated  to the  Company's  operating
utilities.  The  costs  recognized  by  PSCo  and SPS  are  anticipated  to be
slightly  less  than  two-thirds  and  one-third,  respectively,  of the total
estimated  costs.  The Company  continues to evaluate  appropriate  courses of
corrective   action,   including  the  replacement  of  certain   systems.   A
significant  portion  of  these  costs  will  represent  the  redeployment  of
existing  information   technology   resources.   If  such  modifications  and
conversions  are not  completed  timely,  the  year  2000  problem  may have a
material  impact  on  the  operations  of the  Company.  Management  does  not
anticipate  these  activities  will  have a  material  adverse  impact  on the
financial position,  results of operations or cash flows of the Company or its
subsidiaries.

Common Stock Dividend

      During  1997,  the  Company  and its  subsidiaries  declared  four  full
quarterly  dividends  (two by NCE and two by PSCo and SPS prior to the Merger)
and a partial  dividend  by PSCo and SPS  covering  the stub period up through
the day prior to the Merger  effective  date. The partial  dividends  declared
by PSCo,  covering the period July 12, 1997  through  July 31, 1997,  and SPS,
covering  the period May 16, 1997  through  July 31,  1997,  were based on the
respective  quarterly  dividend  rate,  but prorated for the number of days in
the interim  period.  It is  currently  anticipated  that the Company will pay
dividends  on its  common  stock of $2.32 per share  annually.  The  Company's
common  stock  dividend  level is  dependent  upon the  Company's  results  of
operations,  financial  position,  cash flows and other factors.  The Board of
Directors of the Company will  continue to evaluate the common stock  dividend
on a quarterly basis.

                                       35

<PAGE>

Liquidity and Capital Resources

Cash Flows
                                                1997           1996       1995
                                                ----           ----       ----
Net cash provided by operating activities
 (in millions)                                 $344.4         $481.2     $558.4

      Cash provided by operating  activities  decreased in 1997, when compared
to 1996,  primarily  due to the SPS payment in April 1997 of the Thunder Basin
judgment  and an  increase in payments  to gas  suppliers  resulting  from the
higher gas costs in late 1996 and early  1997.  A portion of these  higher gas
costs  have  been  deferred  through  PSCo's  GCA and will be  recovered  from
customers  in the future.  Cash  provided by  operating  activities  decreased
$77.2 million in 1996  primarily due to the  undercollection  of purchased gas
and electric energy costs ($62.5  million) and lower cash receipts  because of
a PSCo gas refund that was applied  directly  to  customers'  accounts in late
1995.
                                                1997           1996       1995
                                                ----           ----       ----
Net cash used in investing activities
 (in millions)                                 $856.4         $443.2     $407.5

      Cash used in investing  activities  increased during 1997, when compared
to  1996,  primarily  due to  the  acquisition  of a 50%  equity  interest  in
Yorkshire Power for  approximately  $360 million and the 1996 sale by Quixx of
certain water rights.  Construction  expenditures  also  increased in 1997 and
1996, when compared to the preceding year.
                                                1997           1996       1995
                                                ----           ----       ----
Net cash provided by (used in) 
  financing activities (in millions)           $534.6         $(16.3)   $(126.0)

      Cash  provided by  financing  activities  increased  during  1997,  when
compared to 1996,  primarily due to NCE's issuance of common stock in December
1997 and PSCo's  issuance of  medium-term  notes.  The  proceeds  from the $75
million  financing by PSCo in January 1997 were used to fund its  construction
program.  The proceeds from the issuance of $250 million  medium-term notes by
PSCo in March 1997, together with additional  borrowings of approximately $110
million on its  short-term  lines of credit,  were used to fund the investment
in Yorkshire  Power. As a result of the increase in recoverable  purchased gas
and  electric  energy  costs and  reduced  cash  flows  resulting  from  lower
electric rates,  coupled with increased merger and business integration costs,
PSCo has  utilized the  proceeds  from  additional  short-term  borrowings  to
finance  ongoing  construction  expenditures.  With  the  consummation  of the
Merger effective August 1, 1997, management  anticipates that future operating
results and related cash flows will benefit from synergies  resulting from the
Merger.  Cash used in financing  activities  decreased in 1996, as compared to
1995,   primarily   due  to  the  issuance  of  additional   long-term   debt.
Additionally,  proceeds of $100 million were received in October 1996 from the
issuance of SPS obligated  mandatorily  redeemable  preferred  securities of a
subsidiary  trust.  These  combined  proceeds  were used to fund the Company's
subsidiaries'  construction programs, for other general corporate purposes and
to repay short-term indebtedness incurred for such purposes.

                                       36

<PAGE>

Prospective Capital Requirements

      The estimated cost as of December 31, 1997 of the construction  programs
of the Company and its  subsidiaries  and other capital  requirements  for the
years  1998,  1999 and 2000 are  shown in the  table  below  (in  millions  of
dollars):
                                             1998        1999      2000 
                                             ----        ----      ---- 
Electric
    Production *........................   $   192      $  128    $   71
    Transmission........................        56         107       137
    Distribution........................       130         166       138
Gas ....................................        84          73        70
General.................................        68          67        34
                                                --          --        --
      Total construction expenditures...       530         541       450
Less: AFDC..............................        15          13        10
Add: Sinking funds and debt maturities 
     and refinancings ..................       252         131       131
                                               ---         ---       ---
Total capital requirements..............   $   767      $  659    $  571
                                           =======      ======    ======

*     Capital requirements for 1998 Electric Production include  approximately
      $59 million for Fort St. Vrain repowering and  approximately $58 million
      for emission control equipment and environmental projects.

      The construction  programs of the Company's  subsidiaries are subject to
continuing  review  and  modification.   In  particular,  actual  construction
expenditures  may vary  from the  estimates  due to  changes  in the  electric
system projected load growth,  the desired reserve margin and the availability
of purchased  power,  as well as  alternative  plans for meeting the Company's
long-term  energy  needs.  In addition,  the Company's  ongoing  evaluation of
merger,   acquisition  and  divestiture  opportunities  to  support  corporate
strategies and future  requirements to install emission control  equipment may
impact   actual   capital   requirements   (see  Note  10.   Commitments   and
Contingencies  -  Environmental  Issues in Item 8.  Financial  Statements  and
Supplementary data).

Capital Sources

      At December 31, 1997,  the Company and its  subsidiaries  estimate  that
their 1998-2000  capital  requirements will be met with a combination of funds
from  external  sources  and  funds  from  operations.  The  Company  and  its
subsidiaries may meet their external capital  requirements through the sale of
common  stock by NCE,  the sale of utility  obligated  mandatorily  redeemable
preferred  securities,  the issuance of secured and unsecured  long-term debt,
including  first  mortgage  bonds of NCE  subsidiaries,  and the  issuance  of
short-term debt by NCE and its  subsidiaries.  The financing needs are subject
to  continuing  review  and  can  change  depending  on  market  and  business
conditions  and  changes,  if any,  in the  construction  programs  and  other
capital requirements of the Company and its subsidiaries.

Registration Statements

      The  Company  has  an  effective  registration  statement  covering  the
issuance  of 10  million  shares  of  common  stock  to be  issued  under  the
Company's  Dividend  Reinvestment and Cash Payment Plan. Any proceeds received
by the  Company  will be used for general  corporate  purposes.  This  program
allows for either the  purchase of shares on the open  market or the  issuance
of  new  shares.   The  Dividend   Reinvestment   Plan  allows  the  Company's
shareholders  to purchase  additional  shares of the  Company's  common  stock
through the  reinvestment  of cash  dividends  and the purchase of  additional
shares of common stock with optional cash payments.

      NCE also has an effective  registration  statement covering the issuance
of 9 million  shares of Common  Stock ($1 par value).  On December  10,  1997,
NCE sold  5.9  million  shares  under  this  registration  statement.  The net
proceeds  from  this sale  were  approximately  $251.4  million.  The  Company
expects to issue the remaining 3.1 million shares in late 1998.

                                       37
<PAGE>

Subsidiary Registration Statements

      In 1996 and in early  1997,  PSCo  established  a $250  million  Secured
Medium-Term  Note  Program,  Series B and a $150 million  Secured  Medium-Term
Note Program,  Series C pursuant to a registration  statement for the issuance
of $400 million of First  Collateral  Trust Bonds.  All securities under these
Medium-Term Note Programs have been issued.

      SPS has an  effective  shelf  registration  statement  under  which $220
million of debt securities  and/or preferred stock are available for issuance,
a portion of which is still subject to state utility commission approval.

Short-Term Borrowing Arrangements

      NCE has a $225 million credit  facility with several banks that provides
for $100 million of direct  borrowings by NCE until the  outstanding  stock of
PSCCC,  a  wholly-owned  subsidiary of PSCo, is  transferred to NCE. After the
transfer NCE will have access to $225 million of direct  borrowings  under the
credit facility.

      PSCo and its  subsidiaries  have  available  committed  and  uncommitted
lines of credit  to meet  their  short-term  cash  requirements.  PSCo and its
subsidiaries  have a credit  facility with several  banks which  provides $300
million in  committed  bank lines of credit and is used  primarily  to support
the issuance of commercial  paper by PSCo and PSCCC, and to provide for direct
borrowings  thereunder.  At December 31, 1997,  $13.4 million  remained unused
under  this  facility.  Generally,  the  banks  participating  in  the  credit
facility would have no obligation to continue  their  commitments if there has
been a  material  adverse  change  in the  consolidated  financial  condition,
operations,   business  or   otherwise   that  would   prevent  PSCo  and  its
subsidiaries  from  performing  their  obligation  under the credit  facility.
This  facility  expires on November 17, 2000.  PSCo also has  available a $125
million  line of credit  which  expires on April 30,  1998.  At  December  31,
1997, the entire amount of the facility  remained  unused.  In addition,  PSCo
has  individual  arrangements  for  uncommitted  bank  lines of  credit  which
totaled $50 million,  and all were used at December 31, 1997. These individual
arrangements  expire on December 31, 1998.  PSCo may borrow under  uncommitted
preapproved  lines of credit  upon  request;  however,  the banks have no firm
commitment  to  make  such  loans.   PSCo's   charter   allows  for  unsecured
borrowings  without  the  consent  of the  holders of  preferred  stock to the
extent   the  total  of  such   borrowings   does  not  exceed  15%  of  total
capitalization   (as   defined   therein)   except  in  the  case  of  certain
refinancings  (see  Note  7.  Short-term  Borrowing  Arrangements  in  Item 8.
Financial Statements and Supplementary Data).

      PSCCC may  periodically  issue  medium-term  notes (in  addition  to the
short-term  debt  discussed  above) to supplement  the  financing/purchase  of
PSCo's  customer  accounts  receivable  and  fossil  fuel  inventories.  As of
December  31,  1997,  PSCCC had issued  and had  outstanding  $100  million in
medium-term  notes.  The level of financing of PSCCC is tied directly to daily
changes in the level of PSCo's  outstanding  customer accounts  receivable and
monthly  changes  in fossil  fuel  inventories  and will vary  minimally  from
year-to-year  although seasonal fluctuations in the level of assets will cause
corresponding fluctuations in the level of associated financing.

      Arrangements  by SPS for committed  lines of credit,  which provide $180
million,  are  maintained  by a combination  of fee payments and  compensating
balances.  At December 31, 1997, $171 million of such balances were maintained
through a fee and $9 million required account deposits of 1 1/2% of the unused
portion of the loan  commitment.  At December 31, 1997,  $24 million  remained
unused under these lines of credit.

Accounting Pronouncements Issued But Not Yet Effective

      SFAS No. 130, Reporting  Comprehensive Income ("SFAS 130"), and SFAS No.
131,  Disclosure  about  Segments of an  Enterprise  and  Related  Information
("SFAS 131"),  address  disclosure  issues and were issued  during 1997.  They
are effective for fiscal years  beginning  after  December 15, 1997.  SFAS 130
requires  disclosure  of all changes in equity  that result from  transactions
and other economic events of the period other than  transactions  with owners.
SFAS 131 requires a public company to report  selected  information  about its
reportable  operating  segments.  Operating  segments  are  components  of  an
enterprise for which  discrete  financial  information  is available,  that is
evaluated  regularly by the chief  operating  decision-maker  within a company
for  making  operating  decisions  and  assessing  performance.   The  Company
adopted these standards effective January 1, 1998.

                                       38

<PAGE>

Item 8.  Financial Statements and Supplementary Data

           REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS

The Board of Directors of the Company  addresses its oversight  responsibility
for the consolidated  financial  statements  through its Audit Committee.  The
Audit Committee meets  regularly with the independent  public  accountants and
the  internal  auditor  to  discuss  results  of their  audit  work and  their
evaluation  of the  adequacy  of the  internal  controls  and the  quality  of
financial reporting.

In fulfilling its  responsibilities  in 1997, the Audit Committee  recommended
to the Board of Directors,  subject to shareholder approval,  the selection of
the Company's  independent  public  accountants.  The Audit Committee reviewed
the overall scope and specific plans of the  independent  public  accountants'
and internal  auditor's  respective audit plans, and discussed the independent
public accountants' management letter recommendations,  approved their general
audit fees, and reviewed their non-audit services to the Company.

The committee  meetings are designed to facilitate open  communications  among
Company management,  internal auditing,  independent public  accountants,  and
the Audit  Committee.  To ensure auditor  independence,  both the  independent
public  accountants  and  internal  auditor  have full and free  access to the
Audit Committee.


/s/ Danny H. Conklin
Danny H. Conklin, Chairman
Audit Committee

February 24, 1998


                                       39

<PAGE>

                             REPORT OF MANAGEMENT

The  accompanying  financial  statements  of New Century  Energies,  Inc.  and
subsidiaries  have been  prepared  by Company  personnel  in  conformity  with
generally accepted  accounting  principles  consistent with the Uniform System
of Accounts of the Federal  Energy  Regulatory  Commission.  The integrity and
objectivity of the data in these financial  statements are the  responsibility
of  management.  Financial  information  contained  elsewhere  in this  Annual
Report on Form 10-K is consistent with that in the financial statements.

The accompanying  financial statements have been audited by independent public
accountants.   Management  has  made  available  to  its  independent   public
accountants  all the Company's  and its  subsidiaries'  financial  records and
related data and has provided to them  representations  we believe to be valid
and appropriate.

The Company  maintains a system of internal control over financial  reporting,
including the safeguarding of assets against unauthorized acquisition,  use or
disposition,  which  is  designed  to  provide  reasonable  assurance  to  the
Company's  management  and Board of Directors  regarding  the  preparation  of
reliable  published  financial  statements  and such asset  safeguarding.  The
system  includes  a  documented   organizational  structure  and  division  of
responsibility,  established  policies  and  procedures  including  a code  of
conduct to foster a strong ethical climate, which are communicated  throughout
the  Company,  and the careful  selection,  training  and  development  of our
people.  Internal  auditors  monitor the  operation  of the  internal  control
system and report  findings and  recommendations  to management  and the Audit
Committee  of the Board of  Directors,  and  corrective  actions  are taken to
address control  deficiencies and other opportunities for improving the system
as they are  identified.  The board,  operating  through its Audit  Committee,
which is composed  entirely of directors  who are not officers or employees of
the Company, provides oversight to the financial reporting process.

There are inherent  limitations in the effectiveness of any system of internal
control,  including the  possibility of human error and the  circumvention  or
overriding  of  controls.  Accordingly,  even an  effective  internal  control
system can  provide  only  reasonable  assurance  with  respect  to  financial
statement  preparation.  Further,  because of changes in conditions,  internal
control system effectiveness may vary over time.

The Company  assessed its internal  control  system as of December 31, 1997 in
relation to criteria for effective  internal control over financial  reporting
described  in  "Internal  Control  -  Integrated   Framework"  issued  by  the
Committee of Sponsoring  Organizations  of the Treadway  Commission.  Based on
the results of its assessment,  the Company  believes that, as of December 31,
1997,  the  Company's  system of  internal  control  over  external  financial
reporting,   including  the   safeguarding  of  assets  against   unauthorized
acquisition, use or disposition, met those criteria.


/s/ Teresa S. Madden                      /s/ Bill D. Helton
Teresa S. Madden                          Bill D. Helton
Principal Accounting Officer              Chief Executive Officer

February 13, 1998


                                      40

<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, 1997 and 1996,
and the related  consolidated  statements of income,  shareholders' equity and
cash  flows for each of the  three  years in the  period  ended  December  31,
1997.  These financial  statements and the schedule  referred to below are the
responsibility of the Company's  management.  Our responsibility is to express
an opinion on these  financial  statements  and schedule  based on our audits.
We did not audit the consolidated  financial statements of Southwestern Public
Service  Company for the years ended  December  31, 1996 and August 31,  1995,
included in the  consolidated  financial  statements of New Century  Energies,
Inc.,  which  statements  reflect  total assets  constituting  31% in 1996 and
total revenues  constituting  31% and 30% in 1996 and 1995,  respectively,  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, 1997 and 1996,  and the results of their
operations  and their  cash  flows for each of the three  years in the  period
ended  December 31, 1997, in conformity  with  generally  accepted  accounting
principles.

Our  audits  were made for the  purpose  of  forming  an  opinion on the basic
financial  statements  taken as a whole.  The schedule  listed in the index of
financial   statements  is  presented  for  purposes  of  complying  with  the
Securities  and  Exchange  Commission's  rules  and is not  part of the  basic
financial  statements.  This  schedule  has  been  subjected  to the  auditing
procedures  applied in our audits of the basic  financial  statements  and, in
our  opinion,  fairly  states in all  material  respects  the  financial  data
required  to  be  set  forth  therein  in  relation  to  the  basic  financial
statements taken as a whole.


                                                        ARTHUR ANDERSEN LLP
Denver, Colorado
February 13, 1998


                                      41

<PAGE>


                 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
                            (Thousands of Dollars)
                          December 31, 1997 and 1996

                                    ASSETS

                                                             1997       1996 
                                                             ----       ---- 
Property, plant and equipment, at cost:
   Electric ..........................................   $6,703,863  $6,448,993
   Gas................................................    1,136,231   1,035,394
   Steam and other....................................      120,322     115,766
   Common to all departments..........................      437,636     418,262
   Construction in progress...........................      318,124     260,943
                                                            -------     -------
                                                          8,716,176   8,279,358
   Less: accumulated depreciation ....................    3,182,800   2,990,275
                                                          ---------   ---------
     Total property, plant and equipment..............    5,533,376   5,289,083
                                                          ---------   ---------


 
Investments, at cost:
   Investment in Yorkshire Power and other
     unconsolidated subsidiaries (Note 2) ............      295,316      29,672
   Other..............................................       71,411      51,324
                                                             ------      ------
    Total investments.................................      366,727      80,996
                                                            -------      ------


Current assets:
   Cash and temporary cash investments................       72,623      50,015
   Accounts receivable, less reserve for uncollectible
     accounts ($5,355 at December 31, 1997; $6,623 at
     December 31, 1996) . ............................      315,539     285,912
   Accrued unbilled revenues..........................      110,877     106,198
   Recoverable purchased gas and electric energy costs
      - net ..........................................      129,292      47,003
   Materials and supplies, at average cost............       68,411      66,748
   Fuel inventory, at average cost....................       23,162      27,059
   Gas in underground storage, at cost (LIFO).........       47,394      42,826
   Prepaid expenses and other.........................       56,868      46,773
                                                             ------      ------
    Total current assets..............................      824,166     672,534
                                                            -------     -------
Deferred charges:
   Regulatory assets (Note 1).........................      430,475     466,111
   Unamortized debt expense ..........................       20,833      20,839
   Other..............................................      134,704      87,879
                                                            -------      ------
    Total deferred charges............................      586,012     574,829
                                                            -------     -------
                                                         $7,310,281  $6,617,442
                                                         ==========  ==========


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


                                       42

<PAGE>

                 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
                            (Thousands of Dollars)
                          December 31, 1997 and 1996

                           CAPITAL AND LIABILITIES

                                                             1997       1996 
                                                             ----       ---- 

Common stock (Note 4).................................   $1,694,195  $1,396,849
Retained earnings.....................................      659,050     773,191
                                                            -------     -------
    Total common equity...............................    2,353,245   2,170,040

Preferred stock of subsidiaries (Note 4):
   Not subject to mandatory redemption................      140,002     140,008
   Subject to mandatory redemption at par.............       39,253      39,913
SPS obligated mandatorily redeemable preferred
   securities of subsidiary trust holding solely 
   subordinated debentures of SPS (Note 5) ...........      100,000     100,000
Long-term debt of subsidiaries (Note 6)...............    1,987,955   1,879,928
                                     -                    ---------   ---------
                                                          4,620,455   4,329,889
                                                          ---------   ---------

Noncurrent liabilities:
   Employees' postretirement benefits other than 
   pensions (Note 12) ................................       62,716      58,551
   Employees' postemployment benefits (Note 12).......       27,953      27,551
                                                             ------      ------
    Total noncurrent liabilities......................       90,669      86,102
                                                             ------      ------

Current liabilities:
   Notes payable and commercial paper (Note 7)........      588,343     298,561
   Long-term debt due within one year.................      257,469     170,261
   Preferred stock subject to mandatory redemption 
   within one year ...................................        2,576       2,576
   Accounts payable...................................      298,469     317,260
   Dividends payable..................................       68,296      36,973
   Customers' deposits................................       27,993      27,283
   Accrued taxes......................................       66,587      78,989
   Accrued interest...................................       52,615      46,948
   Current portion of accumulated deferred income taxes
     (Note 13) .......................................       27,391       8,143
   Other..............................................       87,380     106,464
                                                             ------     -------
    Total current liabilities.........................    1,477,119   1,093,458
                                                          ---------   ---------

Deferred credits:
   Customers' advances for construction...............       53,041      50,635
   Unamortized investment tax credits ................      106,147     111,647
   Accumulated deferred income taxes (Note 13)........      922,341     906,354
   Other..............................................       40,509      39,357
                                                             ------      ------
    Total deferred credits............................    1,122,038   1,107,993
                                                          ---------   ---------
 
Commitments and contingencies (Notes 9 and 10)........    ---------  ----------
                                                         $7,310,281  $6,617,442
                                                         ==========  ==========


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

                                       43

<PAGE>

                 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF INCOME
                (Thousands of Dollars, Except per Share Data)
            Years ended December 31, 1997, 1996 and 1995 (Note 1)


 
                                                      1997     1996      1995 

Operating revenues:
   Electric................................... $2,473,359 $2,416,539 $2,283,179
   Gas........................................    816,596    640,497    624,585
   Other......................................     52,570     39,998     54,444
                                                   ------     ------     ------
                                                3,342,525  3,097,034  2,962,208

Operating expenses:
   Fuel used in generation....................    671,805     635,280   552,047
   Purchased power............................    531,487     510,582   487,199
   Cost of gas sold...........................    543,291     393,163   392,680
   Other operating and maintenance expenses...    594,359     568,581   582,608
   Depreciation and amortization..............    243,078     224,865   205,584
   Taxes (other than income taxes) ...........    129,280     128,980   125,146
                                                  -------     -------   -------
                                                2,713,300   2,461,451 2,345,264
                                                ---------   --------- ---------
Operating  income.............................    629,225     635,583   616,944

Other income and deductions:
   Merger expenses............................    (34,088)   (21,107)    (4,827)
   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)    34,166        389        (47)
   Miscellaneous income and deductions - net..    (11,215)     1,771        930
                                                  -------      -----        ---
                                                  (27,189)   (34,493)    (3,944)

Interest charges and preferred dividends 
  of subsidiaries:
   Interest on long-term debt.................    165,560    144,067    132,331
   Other interest.............................     32,389     23,479     25,107
   Allowance for borrowed funds used during 
     construction ............................    (10,921)    (5,945)    (5,776)
   Dividends on SPS obligated mandatorily 
     redeemable preferred securities of
     subsidiary trust holding solely 
     subordinated debentures of SPS ..........      7,850      1,526          -
   Dividend requirements on preferred stock of
     subsidiaries ............................     11,752     11,969     16,841
                                                   ------     ------     ------
                                                  206,630    175,096    168,503
                                                  -------    -------    -------

Income before income taxes and extraordinary
  item .......................................    395,406    425,994    444,497

Income taxes (Note 13)........................    133,919    153,653    163,005
                                                  -------    -------    -------

Income before extraordinary item..............    261,487    272,341    281,492
Extraordinary item -U.K. windfall tax (Note 2)   (110,565)         -          -
                                                 --------        ---       ----
Net income....................................   $150,922   $272,341   $281,492
                                                 ========   ========   ========

Weighted average common shares outstanding....    104,805    103,059    101,804

Basic and diluted earnings per share of common
 stock outstanding:
   Income before extraordinary item...........    $  2.50    $  2.64    $  2.77
   Extraordinary item.........................      (1.06)         -          -
                                                    -----        ---        ---
   Net income.................................    $  1.44    $  2.64    $  2.77
                                                  =======    =======    =======

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

                                       44

<PAGE>
<TABLE>
<CAPTION>

                 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
               (Thousands of Dollars, Except Share Information)
            Years ended December 31, 1997, 1996 and 1995 (Note 1)

                               Common Stock, $1 par value     Paid in    Retained
                                Shares         Amount         Capital    Earnings      Total 
                                ------         ------       ----------   --------      ----- 
<S>                            <C>           <C>             <C>         <C>         <C>
Balance at January 1, 1995..   101,026,607   $ 101,027      $1,205,535   $ 657,092   $1,963,654
Net income..................             -           -               -     281,492      281,492
Dividends declared on common
  stock ....................             -           -               -    (218,606)    (218,606)
Issuance of common stock
  Employees' Savings Plan...       310,546         310           9,395           -        9,705
  Dividend Reinvestment Plan       889,331         889          27,133           -       28,022
  Management Incentive Plans         3,657           4             107           -          111
Other.......................             -           -               -          19           19
SPS transitional period to
 calendar year-end (Note 1)
  Net income................             -           -               -      28,573       28,573
  Dividends declared on common
  stock ....................             -           -               -     (22,505)     (22,505)
  Other.....................             -           -           1,108           -        1,108
                                       ---         ---           -----         ---        -----

Balance at December 31, 1995   102,230,141     102,230       1,243,278     726,065    2,071,573
Net 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
  Management Incentive 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
Net income..................             -           -               -     150,922      150,922
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
  Management Incentive 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   $2,353,245
                               ===========   =========      ==========   =========   ==========


Authorized  shares of common stock were 260 million at December 31, 1997, 1996
and 1995.
</TABLE>

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

                                       45

<PAGE>

                 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Thousands of Dollars)
            Years ended December 31, 1997, 1996 and 1995 (Note 1)

                                                       1997     1996      1995
                                                       ----     ----      ----
Operating activities:
   Net income...................................    $150,922  $272,341 $281,492
   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..............     253,263   225,264  206,439
     Amortization of investment tax credits.....      (5,501)   (7,506)  (5,598)
     Deferred income taxes......................      52,211    78,962   48,887
     Write-off of investments in cogeneration
      projects (Note 3) ........................      16,052    15,546        -
     Equity in earnings of Yorkshire Power and
      other unconsolidated subsidiaries, net....     (31,168)     (389)      47
     Allowance for equity funds used during
      construction .............................           1      (936)  (4,011)
     Change in accounts receivable..............     (29,627)  (92,600)  34,829
     Change in inventories......................      (2,334)   23,479      837
     Change in other current assets.............     (97,063)  (47,226)   2,475
     Change in accounts payable.................     (18,791)  141,771  (21,756)
     Change in other current liabilities........     (15,356)  (85,321)  33,628
     Change in deferred amounts.................     (46,134)  (34,617) (20,385)
     Change in noncurrent liabilities...........       4,567    (9,725)  (5,367)
     Other......................................       2,832     2,139    6,858
                                                       -----     -----    -----
       Net cash provided by operating activities     344,439   481,182  558,375

Investing activities:
   Construction expenditures....................    (475,497) (454,968)(380,407)
   Allowance for equity funds used during
     construction ..............................          (1)      936    4,011
   Proceeds from disposition of property, plant
     and equipment .............................       2,117    24,292    2,470
   Payment for purchase of companies, net of cash
     acquired (Note 3) .........................           -     3,649        -
   Investment in Yorkshire Power (Note 2).......    (362,342)       -        -
   Purchase of other investments................     (32,560)  (17,790) (38,468)
   Sale of other investments....................      11,844       664    4,898
                                                      ------       ---    -----
       Net cash used in investing activities....    (856,439) (443,217)(407,496)

Financing activities:
   Proceeds from sale of common stock (Note 4)..     286,869    30,115   28,030
   Proceeds from sale of long-term notes and 
     bonds (Note 6) ............................     419,819   359,715  178,064
   Proceeds from sale of SPS obligated mandatorily
    redeemable preferred securities of subsidiary
    trust holding solely subordinated debentures
    of SPS                                                 -   100,000        -
   Redemption of long-term notes and bonds......    (227,577) (175,298) (61,593)
   Short-term borrowings - net..................     289,782  (105,739) (51,744)
   Retirement of preferred stock of subsidiaries        (665)   (1,636)  (1,376)
   Dividends on common stock....................    (233,620) (223,413)(217,372)
                                                    --------  -------- -------- 
       Net cash provided by (used in) financing 
        activities .............................     534,608   (16,256)(125,991)
                                                     -------   ------- -------- 
       Net increase in cash and temporary cash
        investments ............................      22,608    21,709   24,888
       Cash and temporary cash investments at 
        beginning of year ......................      50,015    51,553   26,665
       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 ............................    $ 72,623  $ 50,015 $ 51,553
                                                    ========  ======== ========


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

                                       46

<PAGE>

Item 7.  Management's  Discussion  and  Analysis of  Financial  Condition  and
         Results of Operations (PSCo)

      Discussion  related to PSCo's  Commitments and  Contingencies is covered
within NCE's Management's  Discussion and Analysis of Financial  Condition and
Results of Operations.  See Forward Looking Information.

Merger

      Effective  August 1, 1997,  following  receipt of all required state and
Federal  regulatory  approvals,  PSCo and SPS merged in a tax-free  "merger of
equals"  transaction and became  wholly-owned  subsidiaries of NCE, which is a
registered  holding  company under PUHCA.  This  transaction was accounted for
as a  pooling  of  interests  for  accounting  purposes.  Effective  with  the
Merger,  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.  See
Note 1.  Summary  of  Significant  Accounting  Policies  in Item 8.  Financial
Statements and supplementary  data for additional  discussion  regarding PSCo,
the Merger and the transfer of Cheyenne, WGI, e prime and Natural Fuels.

      The  consolidated  statements  of  income  and cash  flows  reflect  the
results of  operations  of Cheyenne,  WGI, e prime and Natural  Fuels  through
July 31, 1997.  Where relevant,  additional  information has been presented to
discuss the impact of the transfer of these subsidiaries.

Earnings Available for Common Stock

      Earnings were $81.7  million,  $178.5  million and $166.9 million during
1997,  1996 and  1995,  respectively.  The  significant  decrease  in 1997 was
primarily  attributable to the recognition of an extraordinary item related to
the one-time U.K.  windfall tax of  approximately  $110.6  million for its 50%
ownership in Yorkshire Power.  Income before the extraordinary  item increased
$13.7  million  as a result  of  continued  customer  growth  contributing  to
increased  electric and gas sales,  lower operating and  maintenance  expenses
resulting from the Merger and cost containment  efforts, as well as the equity
earnings  in ongoing  operations  at  Yorkshire  Power.  Earnings in 1996 were
favorably  impacted  by  the  effects  of  the  February  9,  1996  settlement
agreement  with the DOE  resolving all spent nuclear fuel storage and disposal
issues at Fort St. Vrain (see Note 10.  Commitments  and  Contingencies - Fort
St. Vrain in Item 8. Financial Statements and Supplementary  Data),  increased
electric and gas sales and lower operating and maintenance  expenses resulting
from PSCo's cost containment efforts.

Electric Operations

      The  following  table  details the annual  change in electric  operating
revenues and energy costs as compared to the  preceding  year (in thousands of
dollars).
                                          Increase (Decrease) From Prior Year 
                                                   1997                  1996 
                                                   ----                  ---- 
                                                 Cheyenne
                                        PSCo     & e prime    Total
                                        ----     ---------    -----
Electric operating revenues:
 Retail...........................   $(15,167)   $(16,305)  $(31,472) $ 43,478
 Wholesale - regulated............     25,083           -     25,083     5,964
 Non-regulated power marketing....          -       2,642      2,642     7,806
 Other (including unbilled revenues)      (25)        (22)       (47)  (17,354)
                                          ---         ---        ---   ------- 
  Total revenues..................      9,891     (13,685)    (3,794)   39,894
Fuel used in generation...........      3,264           -      3,264    13,447
Purchased power...................     13,340      (9,866)     3,474     8,470
                                       ------      ------      -----     -----
  Net increase (decrease)in electric 
    margin .......................    $(6,713)   $ (3,819)  $(10,532) $ 17,977
                                      =======    ========   ========  ========

                                       47

<PAGE>

   The following table compares electric Kwh sales by major customer classes.

                             Millions of Kwh Sales   % Change From Prior Year *
                             ---------------------   --------------------------
                                                            1997          1996
                                                            ----          ----
                               1997        1996    Consolidated PSCo Only
                               ----        ----    ------------ ---------
Residential ..............     6,663       6,607        0.8%     2.1%     5.2%
Commercial and Industrial     15,621      15,672       (0.3)     1.3      4.3
Public Authority .........       189         200       (5.5)    (4.6)     6.2
                                 ---         ---
  Total Retail............    22,473      22,479        -        1.5      4.5
Wholesale - Regulated.....     4,491       3,361       33.6     33.6     14.8
Non-regulated Power
 Marketing ...............       660         419       57.7      -        -
                                 ---         ---
Total.....................    27,624      26,259        5.2      5.8      7.5
                              ======      ======

*  Percentages are calculated using unrounded amounts

      Electric margin decreased in 1997, when compared to 1996,  primarily due
to the retail rate  reductions  (approximately  $15.4 million)  implemented in
October 1996 and February 1997 and the  recognition  of an estimated  customer
refund  obligation  (approximately  $16.4  million)  in  connection  with  the
earnings  sharing in excess of 11% return on equity,  which  resulted from the
settlement  of the Merger  proceedings  in  Colorado  (see Note 9.  Regulatory
Matters in Item 8. Financial  Statements  and  Supplementary  Data).  Electric
margin,  however,  was  favorably  impacted  by an overall  increase in PSCo's
retail  sales  of 1.5%  resulting  primarily  from  customer  growth  of 1.8%.
Higher  wholesale  electric  sales also  contributed  to  increased  operating
revenues,  however,  the margin on such sales is minimal.  Electric  operating
revenues  increased  in  1996,  when  compared  to 1995,  primarily  due to an
overall  4.5%  increase in retail  sales  resulting  primarily  from  customer
growth of 2.3%.  Higher economy sales by PSCo and power  marketing  activities
of  non-regulated  subsidiaries  contributed  to  the  increase  in  wholesale
revenues but had little impact on electric margin.

      PSCo has cost adjustment  mechanisms which recognize the majority of the
effects of changes in fuel used in generation  and  purchased  power costs and
allow  recovery  of such  costs  on a timely  basis.  In its  decision  on the
Merger,  the CPUC replaced PSCo's ECA with an ICA,  effective October 1, 1996,
which allows for a 50%/50%  sharing of certain fuel and energy cost  increases
and decreases  among  customers and  shareholders.  For 1997,  the ICA did not
significantly  impact electric margin (see Note 9. Regulatory  Matters in Item
8. Financial Statements and Supplementary Data).

      Fuel used in  generation  expense  increased  slightly  during 1997,  as
compared to 1996,  due to increased  generation  levels at PSCo's power plants
offset, in part, by lower coal supply costs.  Fuel used in generation  expense
increased $13.4 million during 1996, as compared to the prior year,  primarily
due to higher generation levels.

      Purchased  power expense  increased  slightly during 1997 and 1996, when
compared to the respective  preceding year, primarily due to purchases to meet
increased  wholesale  requirements,  other customer demands and  non-regulated
power  marketing  sales  commitments.  The  increase in 1997 was,  offset,  in
part,  by the  recognition  of only seven months of Cheyenne and e prime costs
in 1997.


                                       48

<PAGE>


Gas Operations

      The  following  table  details the annual  change in  revenues  from gas
sales and gas  purchased  for resale as  compared  to the  preceding  year (in
thousands of dollars).

                                            Increase (Decrease) From Prior Year
                                            -----------------------------------
                                                      1997              1996 
                                                      ----              ---- 
                                                    Cheyenne
                                                  Natural Fuels
                                                      WGI &
                                             PSCo    e prime     Total 
                                             ----    -------     ----- 
 
Revenues from gas sales 
 (including unbilled revenues) ........    $62,504  $26,538    $89,042  $11,211
Gas purchased for resale...............     44,500   30,082     74,582      483
                                            ------   ------     ------      ---
  Net increase (decrease) in gas sales
   margin .............................    $18,004  $(3,544)   $14,460  $10,728
                                           =======  =======    =======  =======

   The  following  table  compares gas  dekatherm  (Dth)  deliveries  by major
customer classes.

                                 Millions of   % Change From Prior Year*
                                               -------------------------
                                Dth Deliveries          1997               1996
                                --------------          ----               ----
                                 1997    1996   Consolidated PSCo Only
                                 ----    ----   ----------------------
Residential...................   86.6    86.1       0.6%       1.5%        4.8%
Commercial....................   46.9    51.7      (9.3)      (7.1)        1.7
Non-regulated gas marketing...   35.2    21.8      61.2        -           **
                                 ----    ----  
  Total sales.................  168.7   159.6       5.7       (1.7)       19.8
Transportation, gathering and 
  processing .................   86.9    91.4      (5.0)       3.1        18.6
                                 ----    ----
  Total.......................  255.6   251.0       1.8        -          19.4
                                =====   =====

*  Percentages are calculated using unrounded amounts
** Percentage  change is  significant,  but  presentation of the amount is not
   meaningful

      Gas sales margin  increased in 1997,  when  compared to 1996,  primarily
due to an increase in PSCo's base  revenues  associated  with the higher rates
effective  February 1, 1997,  resulting from the 1996 rate case. Gas marketing
activities  by  non-regulated   subsidiaries   favorably  contributed  to  the
increase in gas sales  margin.  Gas sales margin  increased  during  1996,  as
compared  to  the  prior  year,  primarily  due to  higher  retail  gas  sales
resulting  from  customer   growth  of  3.4%  and  slightly   colder  weather.
Increased  gas  marketing   activities  by  non-regulated   subsidiaries  also
favorably impacted gas sales margin.

      Gas  transportation,  gathering and processing  revenues  increased $3.6
million  during 1997,  when compared to 1996,  primarily due to an increase in
transport  deliveries and higher  transportation  rates effective  February 1,
1997, resulting from the Company's 1996 rate case.  Transportation,  gathering
and  processing  revenues  increased  $4.7 million in 1996 primarily due to an
increase  in  transport  deliveries  resulting  from the  shifting  of various
commercial  customers to firm transport customers which accelerated in October
1995 with the implementation of the new gas rates.

      PSCo  has  in  place  a GCA  mechanism  for  natural  gas  sales,  which
recognizes  the  majority  of  the  effects  of  changes  in the  cost  of gas
purchased  for resale and adjusts  revenues to reflect such changes in cost on
a timely basis.  As a result,  the changes in revenues  associated  with these
mechanisms in 1997 and 1996,  when compared to the respective  preceding year,
had  little  impact on net  income.  However,  the  fluctuations  in gas sales
impact the amount of gas PSCo must  purchase  and,  therefore,  along with the
increases  and  decreases  in the  per-unit  cost of  gas,  affect  total  gas
purchased  for resale.  The higher  per-unit  average  cost of gas  throughout
1997, along with an increase in the quantity of gas purchased,  contributed to
the increase in cost of gas  purchased  for resale.  In 1996,  the increase in
the quantity of gas purchased was offset  substantially  by the lower per-unit
average cost of gas for the year.


                                       49
<PAGE>

Non-Fuel Operating Expenses and Other Income and Deductions

      Other operating and maintenance  expenses  decreased $8.8 million during
1997 as compared to 1996,  primarily  due to lower labor and employee  benefit
costs,  the  recognition  in 1997 of only  seven  months  of  costs  from  the
subsidiaries  that were transferred to NCE effective with the Merger and other
general  reductions  resulting from the Merger and cost  containment  efforts.
These decreases were offset,  in part, by the favorable impact of the February
9, 1996  settlement  agreement  with the DOE  resolving all spent nuclear fuel
storage and disposal  issues at Fort St. Vrain (See Note 10.  Commitments  and
Contingencies   -  Fort  St.  Vrain  in  Item  8.  Financial   Statements  and
Supplementary  Data).  In  addition to the  settlement,  other  operating  and
maintenance  expenses  for 1996 were  favorably  impacted  by lower  labor and
employee  benefit costs resulting from the hiring freeze  instituted in August
1995 and other general cost reductions  offset,  in part, by higher  operating
costs from  non-regulated  operations that were, for the most part,  initiated
during 1996.

      Depreciation  and amortization  expense  increased $13.8 million in 1997
and $13.3  million  in 1996  primarily  due to the  depreciation  of  property
additions and the higher amortization of software costs.

      Income  taxes  decreased  $5.5  million in 1997,  as  compared  to 1996,
primarily  due to lower  pre-tax  income.  Additional  income tax  expense was
recognized  in  1997  due  to  higher   non-deductible  merger  and  executive
severance  costs.  The increase in income taxes in 1996,  as compared to 1995,
was primarily due to higher pre-tax income,  offset, in part, by the write-off
of additional  investment tax credits for retired  property and additional tax
benefits at PSRI.

      Other income and deductions  increased  $27.4 million during 1997,  when
compared  to 1996,  primarily  due to the  recognition  of equity  earnings in
Yorkshire  Power  ($34.9  million),  of which  approximately  $10  million  is
related to the change in the U.K.  corporate  income tax rate from 33% to 31%.
See Note 2.  Acquisition  of Yorkshire  Electricity  and U.K.  Windfall Tax in
Item 8.  Financial  Statements  and  Supplementary  Data.  Merger and business
integration  costs  increased in 1997 and 1996 $7.5 million and $7.1  million,
respectively,  when compared to the preceding  year. The 1997 amount  included
executive  severance  costs and other costs which resulted from the closing of
the Merger  effective  August 1, 1997. While costs associated with the Merger,
transition  planning and  implementation  have  negatively  impacted  earnings
during 1997 and 1996,  management  anticipates that future  operating  results
will benefit from synergies resulting from the Merger.

      Interest  charges  increased $26.5 million during 1997, when compared to
1996,  primarily  due to interest on  borrowings  utilized to finance  capital
expenditures  and  the  April  1997  investment  in  Yorkshire  Power.   These
financings  included the issuance of medium-term  notes and an increased level
of short-term borrowings.

Liquidity and Capital Resources

Cash Flows
                                                1997         1996       1995
                                                ----         ----       ----
Net cash provided by operating activities
  (in millions) ...........................   $263.9         $327.6    $385.7

      Cash provided by operating  activities  decreased in 1997, when compared
to 1996,  primarily due to the increase in payments to gas suppliers resulting
from the  higher  gas costs in late 1996 and early  1997.  A portion  of these
higher  gas costs have been  deferred  through  the GCA and will be  recovered
from  customers  in  the  future.   Cash  provided  by  operating   activities
decreased  $58.1  million  in 1996  primarily  due to the  undercollection  of
purchased  gas and  electric  energy  costs  ($40.8  million)  and lower  cash
receipts  because of a gas refund  that was  applied  directly  to  customers'
accounts in late 1995.

                                                1997         1996       1995
                                                ----         ----       ----
Net cash used in investing activities 
  (in millions) ...........................    $721.7        $307.1    $284.6

      Cash used in investing  activities  increased during 1997, when compared
to  1996,  primarily  due to  the  acquisition  of a 50%  equity  interest  in
Yorkshire  Power for  approximately  $360 million.  Construction


                                       50
<PAGE>

expenditures  also  increased in 1997 and 1996,  when  compared to the preceding
year.  Proceeds from the sale of certain  Fuelco  properties in 1996 reduced the
net cash used in investing activities.

                                                1997         1996       1995
                                                ----         ----       ----
Net cash provided by (used in) 
  financing activities (in millions)          $467.3         $(25.8)   $(92.3)

      Cash  provided by  financing  activities  increased  during  1997,  when
compared to 1996,  primarily  due to PSCo's  issuance of medium term notes and
capital  contributions by NCE. The proceeds from the $75 million  financing in
January 1997 were used to fund its  construction  program.  The proceeds  from
the issuance of $250 million  medium term notes in March 1997,  together  with
additional  borrowings of  approximately  $110 million on its short-term lines
of credit,  were used to fund the acquisition of Yorkshire  Power. As a result
of the increase in  recoverable  purchased  gas and electric  energy costs and
reduced  cash  flows  resulting  from  lower  electric  rates,   coupled  with
increased  merger  and  business  integration  costs,  PSCo has  utilized  the
proceeds   from   additional   short-term   borrowings   to  finance   ongoing
construction  expenditures.  With the  consummation  of the  Merger  effective
August 1, 1997,  management  anticipates  that  future  operating  results and
related  cash flows will  benefit from  synergies  resulting  from the Merger.
Cash used in  financing  activities  decreased  in 1996,  as compared to 1995,
primarily due to the issuance of additional  long-term  debt.  These  combined
proceeds  were used to fund PSCo's  construction  program,  for other  general
corporate  purposes  and to repay  short-term  indebtedness  incurred for such
purposes.

Prospective Capital Requirements

      The estimated cost as of December 31, 1997 of the construction  programs
of PSCo and its  subsidiaries  and other  capital  requirements  for the years
1998, 1999 and 2000 are shown in the table below (in millions of dollars):

                                             1998        1999      2000 
                                             ----        ----      ---- 
Electric
    Production *........................   $   162      $  107    $   61
    Transmission........................        26          23        20
    Distribution........................        96         125       100
Gas ....................................        80          70        67
General.................................        60          60        29
                                                --          --        --
      Total construction expenditures...       424         385       277
Less: AFDC..............................        12          11         7
Add: Sinking funds and debt maturities 
     and refinancings ..................       252          41       131
                                               ---          --       ---
Total capital requirements..............   $   664      $  415    $  401
                                           =======      ======    ======

*     Capital requirements for 1998 Electric Production include  approximately
      $59 million for Fort St. Vrain repowering and  approximately $52 million
      for emission control equipment and environmental projects.

      The  construction  programs of PSCo and its  subsidiaries are subject to
continuing  review  and  modification.   In  particular,  actual  construction
expenditures  may vary  from the  estimates  due to  changes  in the  electric
system projected load growth,  the desired reserve margin and the availability
of purchased power, as well as alternative  plans for meeting PSCo's long-term
energy needs. In addition,  PSCo's ongoing  evaluation of merger,  acquisition
and  divestiture  opportunities  to support  corporate  strategies  and future
requirements to install emission  control  equipment may impact actual capital
requirements  (see Note 10.  Commitments  and  Contingencies  -  Environmental
Issues in Item 8. Financial Statements and Supplementary Data).


                                      51

<PAGE>


Capital Sources

      At December  31, 1997,  PSCo and its  subsidiaries  estimate  that their
1998-2000  capital  requirements  will be met with a combination of funds from
external  sources and funds from  operations.  PSCo and its  subsidiaries  may
meet  their  external  capital   requirements  through  the  sale  of  utility
obligated  mandatorily  redeemable  preferred  securities,   the  issuance  of
secured or unsecured  long-term debt,  including first collateral trust bonds,
and  the  issuance  of  short-term  debt by PSCo  and  its  subsidiaries.  The
financing needs are subject to continuing  review and can change  depending on
market and  business  conditions  and  changes,  if any,  in the  construction
programs and other capital requirements of PSCo and its subsidiaries.

Registration Statements

      In 1996 and in early  1997,  PSCo  established  a $250  million  Secured
Medium-Term  Note Program,  Series B, and a $150 million  Secured  Medium-Term
Note Program,  Series C, pursuant to a registration statement for the issuance
of $400 million of First  Collateral  Trust Bonds.  All securities under these
Medium-Term Note Programs have been issued.

Indentures

      PSCo's  Indenture  dated as of December 1, 1939 (the "1939  Indenture"),
which is a mortgage on its electric and gas  properties,  permits the issuance
of additional  first  mortgage  bonds to the extent of 60% of the value of net
additions  to  PSCo's   utility   property,   provided  net  earnings   before
depreciation,  taxes on income and interest  expense for a recent twelve month
period are at least 2.5 times the annual  interest  requirements  on all bonds
to  be   outstanding.   The  1939  Indenture  also  permits  the  issuance  of
additional  bonds on the basis of retired first mortgage  bonds, in some cases
with no  requirement  to satisfy such net earnings test. At December 31, 1997,
the amount of net additions  would permit (and the net earnings test would not
prohibit)  the  issuance  of  approximately  $455  million  of new bonds at an
assumed  annual  interest rate of 6.70%.  At December 31, 1997,  the amount of
retired bonds would permit the issuance of $669.5 million of new bonds.

      PSCo's  Indenture dated as of October 1, 1993 (the "1993  Indenture") is
a second  mortgage on its electric  properties.  Generally,  so long as PSCo's
1939 Indenture remains in effect,  first collateral trust bonds will be issued
under the 1993  Indenture  on the basis of the deposit  with the trustee of an
equal  principal  amount  of  first  mortgage  bonds  issued  under  the  1939
Indenture.  If the bonds issued under the 1939  Indenture  are to be issued on
the basis of property  additions,  first  collateral trust bonds may be issued
under the 1993 Indenture only if net earnings  before  depreciation,  taxes on
income,  interest expenses and non-recurring charges for a recent twelve-month
period  are at  least  2  times  annual  interest  requirements  on all  first
mortgage  bonds  (other  than  bonds  held  by  the  trustee  under  the  1993
Indenture)  and all first  collateral  trust  bonds to be  outstanding.  As of
December 31,  1997,  coverage  under the net earnings  test was 4.9 times such
annual interest requirements.

Restated Articles of Incorporation

      PSCo's  Restated  Articles of  Incorporation  prohibit  the  issuance of
additional preferred stock without preferred shareholder approval,  unless the
gross  income  available  for the  payment of  interest  charges  for a recent
twelve  month  period is at least  1.5  times  the  total  of:  1) the  annual
interest  requirements on all indebtedness to be outstanding for more than one
year; and 2) the annual  dividend  requirements  on all preferred  stock to be
outstanding.   At  December  31,  1997,  gross  income  available  under  this
requirement  would permit PSCo,  if allowed  under  provisions of its Restated
Articles of Incorporation,  to issue  approximately $2.6 billion of additional
preferred  stock at an assumed  annual  dividend  rate of 6.00%.  Coverage  of
gross income to interest charges was 5.38 at December 31, 1997.

      PSCo's  Restated  Articles  of  Incorporation  also  prohibit,   without
preferred  shareholder  approval,  the  issuance or  assumption  of  unsecured
indebtedness,  other  than for  refunding  purposes,  greater  than 15% of the
aggregate of: 1) the total principal  amount of all bonds or other  securities
representing secured indebtedness of PSCo, then outstanding;  and 2) the total
of the  capital  and  surplus  of PSCo,  as then  recorded  on its  books.  At

                                       52

<PAGE>

December 31, 1997,  PSCo had  outstanding  unsecured  indebtedness,  including
subsidiary  indebtedness  with the credit  support  of PSCo,  in the amount of
$261.6  million.  The  maximum  amount  permitted  under this  limitation  was
approximately $483.6 million at December 31, 1997.

Short-Term Borrowing Arrangements

      PSCo and its  subsidiaries  have  available  committed  and  uncommitted
lines of credit  to meet  their  short-term  cash  requirements.  PSCo and its
subsidiaries  have a credit  facility with several  banks which  provides $300
million in  committed  bank lines of credit and is used  primarily  to support
the issuance of commercial  paper by PSCo and PSCCC, and to provide for direct
borrowings  thereunder.  At December 31, 1997,  $13.4 million  remained unused
under  this  facility.  Generally,  the  banks  participating  in  the  credit
facility would have no obligation to continue  their  commitments if there has
been a  material  adverse  change  in the  consolidated  financial  condition,
operations,   business  or   otherwise   that  would   prevent  PSCo  and  its
subsidiaries  from  performing  their  obligation  under the credit  facility.
This  facility  expires on November 17, 2000.  PSCo also has  available a $125
million  line of credit  which  expires on April 30,  1998.  At  December  31,
1997, the entire amount of the facility  remained  unused.  In addition,  PSCo
has  individual  arrangements  for  uncommitted  bank  lines of  credit  which
totaled $50 million,  and all were used at December 31, 1997. These individual
arrangements  expire on December 31, 1998.  PSCo may borrow under  uncommitted
preapproved  lines of credit  upon  request;  however,  the banks have no firm
commitment  to  make  such  loans.   PSCo's   charter  allows  for  short-term
borrowings to the extent the total of such  borrowings  does not exceed 15% of
total capitalization.  (see Note 7. Short-term Borrowing  Arrangements in Item
8. Financial Statements and Supplementary Data).

      PSCCC may  periodically  issue  medium-term  notes (in  addition  to the
short-term  debt  discussed  above) to supplement  the  financing/purchase  of
PSCo's  customer  accounts  receivable  and  fossil  fuel  inventories.  As of
December  31,  1997,  PSCCC had issued  and had  outstanding  $100  million in
medium-term  notes.  The level of financing of PSCCC is tied directly to daily
changes in the level of PSCo's  outstanding  customer accounts  receivable and
monthly  changes in fossil fuel  inventories and will vary minimally from year
to year  although  seasonal  fluctuations  in the level of assets  will  cause
corresponding fluctuations in the level of associated financing.

                                       53

<PAGE>

Item 8. Financial Statements and Supplementary Data (PSCo)

                   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,  1997 and 1996,  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,  1997.
These  financial  statements  and  the  schedule  referred  to  below  are the
responsibility of the Company's  management.  Our responsibility is to express
an opinion on these financial statements and schedule 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, 1997 and 1996,  and the results
of their  operations  and their cash flows for each of the three  years in the
period  ended  December  31,  1997,  in  conformity  with  generally  accepted
accounting principles.

Our  audits  were made for the  purpose  of  forming  an  opinion on the basic
financial  statements  taken as a whole.  The schedule  listed in the index of
financial   statements  is  presented  for  purposes  of  complying  with  the
Securities  and  Exchange  Commission's  rules  and is not  part of the  basic
financial  statements.  This  schedule  has  been  subjected  to the  auditing
procedures  applied in our audits of the basic  financial  statements  and, in
our  opinion,  fairly  states in all  material  respects  the  financial  data
required  to  be  set  forth  therein  in  relation  to  the  basic  financial
statements taken as a whole.



                                                        ARTHUR ANDERSEN LLP
Denver, Colorado
February 13, 1998

                                       54

<PAGE>


                      PUBLIC SERVICE COMPANY OF COLORADO
                               AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
                            (Thousands of Dollars)
                          December 31, 1997 and 1996

                                    ASSETS

                                                            1997        1996 
                                                            ----        ---- 
 
Property, plant and equipment, at cost:
   Electric ..........................................   $4,088,447  $3,931,413
   Gas................................................    1,100,003   1,035,394
   Steam and other....................................       78,740      78,225
   Common to all departments..........................      432,840     418,262
   Construction in progress...........................      170,503     181,597
                                                            -------     -------
                                                          5,870,533   5,644,891
   Less: accumulated depreciation ....................    2,145,673   2,045,996
                                                          ---------   ---------
     Total property, plant and equipment..............    3,724,860   3,598,895
                                                          ---------   ---------

Investments, at cost:
   Investment in Yorkshire Power (Note 2).............      286,703           -
   Other..............................................       43,311      46,550
                                                             ------      ------
    Total investments.................................      330,014      46,550
                                                            -------      ------

Current assets:
   Cash and temporary cash investments................       18,909       9,406
   Accounts receivable, less reserve for uncollectible
    accounts ($2,272 at December 31, 1997; $4,049 at
    December 31, 1996) ...............................      183,063     218,132
   Accrued unbilled revenues .........................       94,284      85,894
   Recoverable purchased gas and electric energy costs
     - net ...........................................      103,197      31,288
   Materials and supplies, at average cost............       48,030      48,972
   Fuel inventory, at average cost....................       20,862      24,739
   Gas in underground storage, at cost (LIFO).........       46,576      42,826
   Prepaid expenses and other.........................       47,686      41,790
                                                             ------      ------
    Total current assets..............................      562,607     503,047
                                                            -------     -------

Deferred charges:
   Regulatory assets (Note 1).........................      310,658     348,566
   Unamortized debt expense ..........................       10,800      10,975
   Other..............................................       55,794      64,615
                                                             ------      ------
    Total deferred charges............................      377,252     424,156
                                                            -------     -------
                                                         $4,994,733  $4,572,648
                                                         ==========  ==========



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


                                       55

<PAGE>

                      PUBLIC SERVICE COMPANY OF COLORADO
                               AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
                            (Thousands of Dollars)
                          December 31, 1997 and 1996

                           CAPITAL AND LIABILITIES

                                                               1997      1996 
                                                               ----      ---- 
 


Common stock (Notes 1 and 4)..........................   $1,302,119  $1,048,447
Retained earnings.....................................      319,280     389,841
                                                            -------     -------
    Total common equity...............................    1,621,399   1,438,288

Preferred stock (Note 4):
   Not subject to mandatory redemption................      140,002     140,008
   Subject to mandatory redemption at par.............       39,253      39,913
Long-term debt (Note 6)...............................    1,338,138   1,259,528
                                                          ---------   ---------
                                                          3,138,792   2,877,737
                                                          ---------   ---------

Noncurrent liabilities:
   Employees' postretirement benefits other than
    pensions (Note 12) ...............................       58,695      55,677
   Employees' postemployment benefits (Note 12).......       25,031      25,182
                                                             ------      ------
    Total noncurrent liabilities......................       83,726      80,859
                                                             ------      ------

Current liabilities:
   Notes payable and commercial paper (Note 7)........      348,555     244,725
   Long-term debt due within one year.................      257,160     155,030
   Preferred stock subject to mandatory redemption 
     within one year .................................        2,576       2,576
   Accounts payable...................................      189,998     254,256
   Dividends payable..................................       40,975      36,973
   Customers' deposits................................       21,888      21,441
   Accrued taxes......................................       42,549      58,990
   Accrued interest...................................       39,177      33,797
   Current portion of accumulated deferred income taxes
     (Note 13) .......................................       19,872       4,560
   Other..............................................       88,655      77,868
                                                             ------      ------
    Total current liabilities.........................    1,051,405     890,216
                                                          ---------     -------

Deferred credits:
   Customers' advances for construction...............       51,830      50,269
   Unamortized investment tax credits ................       99,355     105,928
   Accumulated deferred income taxes (Note 13)........      534,246     539,082
   Other..............................................       35,379      28,557
                                                             ------      ------
    Total deferred credits............................      720,810     723,836
                                                            -------     -------
 
Commitments and contingencies (Notes 9 and 10)........   
                                                         ----------  ----------
                                                         $4,994,733  $4,572,648
                                                         ==========  ==========



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

                                       56

<PAGE>
                      PUBLIC SERVICE COMPANY OF COLORADO
                               AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF CAPTALIZATION
               (Thousands of Dollars, Except Share Information)
                          December 31, 1997 and 1996

                                                               1997      1996 
                                                               ----      ---- 
Common shareholder's equity:
   Common stock, $5 par value, authorized 100 shares
     in 1997 and 160,000,000 shares in 1996,
     outstanding 100 shares in 1997 and 64,818,759
     shares in 1996 (Note 1) .........................   $        1  $  324,094
   Paid in capital....................................    1,302,118     724,353
   Retained earnings..................................      319,280     389,841
                                                            -------     -------
    Total common shareholder's equity.................    1,621,399   1,438,288
                                                          ---------   ---------
Preferred stock (Note 4):
                           Shares Issued and Outstanding      
                           -----------------------------      
                                 1997        1996 
                                 ----        ---- 
$100 Par Value, Authorized
  3,000,000 Shares
  Not subject to mandatory 
  redemption
     4.20% series               100,000     100,000            10,000    10,000
     4.25% series(includes
           $7,500 premium)      174,997     175,000            17,507    17,508
     4.50% series                65,000      65,000             6,500     6,500
     4.64% series               159,950     160,000            15,995    16,000
     4.90% series               150,000     150,000            15,000    15,000
     4.90% 2nd series           150,000     150,000            15,000    15,000
     7.15% series               250,000     250,000            25,000    25,000
                                -------     -------            ------    ------
                              1,049,947   1,050,000           105,002   105,008
                              ---------   ---------           -------   -------
   Subject to mandatory redemption
     7.50% series               216,000     216,000            21,600    21,600
     8.40% series               202,294     208,892            20,229    20,889
                                -------     -------            ------    ------
                                418,294     424,892            41,829    42,489
   Less: Preferred stock 
     subject to mandatory
    redemption within one year  (25,760)    (25,760)           (2,576)   (2,576)
                                -------     -------            ------    ------ 
                                392,534     399,132            39,253    39,913
                                -------     -------            ------    ------
$25 Par Value, Authorized
    4,000,000 Shares
   Not subject to mandatory
   redemption
     8.40% series               1,400,000   1,400,000          35,000    35,000
                                ---------   ---------          ------    ------
    Total preferred stock       2,842,481   2,849,132         179,255   179,921
                                ---------   ---------         -------   -------
Long-term debt (Note 6):
Public Service Company of Colorado:
   First Mortgage Bonds
    5-7/8% retired July 1, 1997.......................              -    35,000
    6-3/4% due July 1, 1998...........................         25,000    25,000
    6% due January 1, 2001............................        102,667   102,667
    8-1/8% due March 1, 2004..........................        100,000   100,000
    Pollution Control Series A and B, 5-7/8% due 
     March 1, 2004 ...................................         22,000    22,500
    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 August 1, 1997 - March 5, 2007 ........        423,500   183,500
   Unamortized premium................................              4        13
   Unamortized discount...............................         (4,670)   (5,032)
   Capital lease obligations,  6.68% - 11.21% due in 
     installments  through May 31, 2025...............         44,392    49,070
                                                               ------    ------
                                                           $1,464,143 $1,263,968
                                                           ---------- ----------
         The accompanying notes to consolidated financial statements
             are an integral part of these financial statements.
                                       57
<PAGE>
                      PUBLIC SERVICE COMPANY OF COLORADO
                               AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF CAPTALIZATION (continued)
               (Thousands of Dollars, Except Share Information)
                          December 31, 1997 and 1996


                                                               1997      1996 
                                                               ----      ---- 
Long-term debt (continued)
Cheyenne Light, Fuel and Power Company (Note 1):
   First Mortgage Bonds
   7-7/8% due April 1, 2003...........................        $     -   $ 4,000
   7-1/2% due January 1, 2024.........................              -     8,000
   Industrial Development Revenue Bonds, 7-1/4% due
     September 1, 2021 ...............................              -     7,000

PS Colorado Credit Corporation, Inc.:
   Unsecured Medium-Term Notes, Series A
    5.91% - 6.14%% due November 24, 1997 - December
     15, 1998 ........................................        100,000   100,000

1480 Welton, Inc.:
   13.25% secured promissory note, due in installments
   through  October 1, 2016 ..........................         31,155    31,506

Natural Fuels Corporation (Note 1):
   Capital  lease  obligations,  4.21% - 11.11% due in
   installments  through November 5, 2000.............              -        84
                                                                  ---        --
                                                            1,595,298 1,414,558
Less:  maturities due within one year.................        257,160   155,030
                                                              -------   -------
    Total long-term debt..............................      1,338,138 1,259,528
                                                            --------- ---------

Total capitalization..................................     $3,138,792 $2,877,737
                                                           ========== ==========



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

                                      58

<PAGE>


                      PUBLIC SERVICE COMPANY OF COLORADO
                               AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
                            (Thousands of Dollars)
                 Years ended December 31, 1997, 1996 and 1995



                                                  1997        1996       1995
                                                  ----        ----       ----

Operating revenues:
   Electric..................................  $1,485,196 $1,488,990 $1,449,096
   Gas........................................    733,091    640,497    624,585
   Other......................................     11,356      7,951      7,010
                                                   ------      -----      -----
                                                2,229,643  2,137,438  2,080,691

Operating expenses:
   Fuel used in generation....................    198,706    195,442    181,995
   Purchased power............................    493,902    490,428    481,958
   Gas purchased for resale...................    467,745    393,163    392,680
   Other operating and maintenance expenses...    391,177    400,008    410,095
   Depreciation and amortization..............    168,451    154,631    141,380
   Taxes (other than income taxes) ...........     81,496     82,899     81,319
   Income taxes (Note 13) ....................     90,813     96,331     95,357
                                                   ------     ------     ------
                                                1,892,290  1,812,902  1,784,784
                                                ---------  ---------  ---------
Operating income..............................    337,353    324,536    295,907

Other income and deductions:
   Merger expenses............................    (18,661)   (11,210)    (4,067)
   Equity earnings in Yorkshire Power (Note 2)     34,926          -          -
   Miscellaneous income and deductions - net..    (13,374)   (13,260)    (3,794)
                                                  -------    -------     ------ 
                                                    2,891    (24,470)    (7,861)

Interest charges:
   Interest on long-term debt.................    118,438     95,826     89,110
   Other interest.............................     24,117     17,238     23,393
   Allowance for borrowed funds used during
     construction ............................     (6,353)    (3,344)    (3,313)
                                                   ------     ------     ------ 
                                                  136,202    109,720    109,190
                                                  -------    -------    -------

Income before extraordinary item..............    204,042    190,346    178,856
Extraordinary item -U.K. windfall tax (Note 2)   (110,565)         -          -
                                                 --------        ---        ---
Net income....................................     93,477    190,346    178,856
Dividend requirements on preferred stock......     11,752     11,848     11,963
                                                   ------     ------     ------
Earnings available for common stock........... $   81,725 $  178,498 $  166,893
                                               ========== ========== ==========



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

                                       59

<PAGE>
<TABLE>
<CAPTION>

                      PUBLIC SERVICE COMPANY OF COLORADO
                               AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
               (Thousands of Dollars, Except Share Information)
                 Years ended December 31, 1997, 1996 and 1995


                               Common Stock, $5 par value   Paid in     Retained
                                 Shares      Amount         Capital     Earnings    Total
                                 ------      ------         -------     --------    -----

<S>                           <C>            <C>            <C>         <C>       <C>
Balance at January 1, 1995..  62,154,594    $310,772        $648,496    $308,214  $1,267,482
Net income..................           -           -               -     178,856     178,856
Dividends declared
  Common stock..............           -           -               -    (128,587)   (128,587)
  Preferred stock, $100 par
  value ....................           -           -               -      (9,004)     (9,004)
  Preferred stock, $25 par
  value ....................           -           -               -      (2,940)     (2,940)
Issuance of common stock
  Employees' Savings Plan...     310,546       1,553           8,152           -       9,705
  Dividend Reinvestment Plan     889,331       4,447          23,575           -      28,022
  Management Incentive Plan.       3,657          19              92           -         111
                                   -----          --              --         ---         ---

Balance at December 31, 1995  63,358,128     316,791         680,315     346,539   1,343,645
Net 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
Net income..................           -           -               -      93,477      93,477
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)   (327,986)        327,986           -           -
   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   $   1,302,118  $  319,280  $1,621,399
                                     ===  ==========   =============  ==========  ==========


Authorized  shares of  common  stock  were 100 at  December  31,  1997 and 160
million at December 31, 1996 and 1995.
</TABLE>

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

                                       60

<PAGE>

                      PUBLIC SERVICE COMPANY OF COLORADO
                               AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Thousands of Dollars)
                 Years ended December 31, 1997, 1996 and 1995


                                                     1997       1996      1995
                                                     ----       ----      ----

Operating activities:
  Net income...................................    $ 93,477  $190,346 $ 178,856
  Adjustments to reconcile net income to net
   cash provided by operating activities (Note 1):
    Extraordinary item - U.K. windfall tax (Note 2) 110,565         -         -
     Depreciation and amortization..............    173,047   159,400   145,370
     Amortization of investment tax credits.....     (5,219)   (7,256)   (5,348)
     Deferred income taxes......................     37,390    60,899    39,170
     Equity in earnings in Yorkshire Power......    (34,926)        -        -
     Allowance for equity funds used during
      construction .............................          6      (757)   (3,782)
     Change in accounts receivable..............    (15,378)  (88,680)   38,734
     Change in inventories......................     (2,163)   20,542     4,246
     Change in other current assets.............    (52,914)  (31,169)    7,618
     Change in accounts payable.................     (5,413)   88,473   (20,922)
     Change in other current liabilities........    (15,870)  (36,615)   24,230
     Change in deferred amounts.................    (21,913)  (19,550)  (20,385)
     Change in noncurrent liabilities...........      3,367    (9,779)   (5,367)
     Other......................................       (144)    1,760     3,279
                                                       ----     -----     -----
       Net cash provided by operating activities    263,912   327,614   385,699

Investing activities:
   Construction expenditures....................   (352,273) (321,162) (285,516)
   Allowance for equity funds used during
     construction ..............................         (6)      757     3,782
   Proceeds from disposition of property, plant
     and equipment .............................      3,187    20,454     2,470
   Investment in Yorkshire Power (Note 2).......   (362,342)        -        -
   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................    (19,224)  (11,485)  (10,249)
   Sale of other investments....................     11,162       664     4,898
                                                     ------       ---     -----
       Net cash used in investing activities....   (721,725) (307,123) (284,615)

Financing activities:
   Proceeds from sale of common stock (Note 4)..     20,517    30,115    28,030
   Contribution of capital by NCE...............    273,300         -         -
   Proceeds from sale of long-term notes and 
     bonds (Note 6) ............................    412,220   217,415   101,860
   Redemption of long-term notes and bonds......   (205,550)  (83,356)  (44,713)
   Short-term borrowings - net..................    127,530   (43,325)  (36,750)
   Redemption of preferred stock................       (665)   (1,376)   (1,376)
   Dividends on common stock (Notes 4 and 15)...   (148,279) (133,394) (127,352)
   Dividends on preferred stock.................    (11,757)  (11,857)  (11,973)
                                                    -------   -------   ------- 
       Net cash provided by (used in) financing
       activities                                   467,316   (25,778)  (92,274)
                                                    -------   -------   ------- 
       Net increase (decrease) in cash and 
       temporary cash investments ..............      9,503    (5,287)    8,810
       Cash and temporary cash investments at
       beginning of year .......................      9,406    14,693     5,883
                                                      -----    ------     -----
       Cash and temporary cash investments at 
        end of year ............................    $18,909   $ 9,406 $  14,693
                                                    =======   ======= =========


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

                                       61
<PAGE>

Item 7.  Management's  Discussion  and  Analysis of  Financial  Condition  and
         Results of Operations (SPS)

      The following  narrative  analysis discusses SPS's results of operations
comparing  the  most  recent  fiscal  year  ending  December  31,  1997 to the
immediately  preceding  fiscal year ending  August 31,  1996.  SPS changed its
fiscal year in early 1997 and then filed a Transition  Report on Form 10-K for
the period  September  1, 1996 to December 31,  1996.  Additional  information
has been presented where  meaningful,  however,  certain  information has been
omitted  pursuant  to  General  Instructions  I(2)(a).  Discussion  related to
Commitments  and   Contingencies   and  Liquidity  and  Capital  Resources  is
discussed  in  NCE's   Management's   Discussion  and  Analysis  of  Financial
Condition and Results of Operations.  See Forward Looking Information.

Merger

      Effective  August 1, 1997,  following  receipt of all required state and
Federal  regulatory  approvals,  SPS and PSCo merged in a tax-free  "merger of
equals"  transaction and became  wholly-owned  subsidiaries of NCE, which is a
registered  holding  company under PUHCA.  This  transaction was accounted for
as a  pooling  of  interests  for  accounting  purposes.  Effective  with  the
Merger, Quixx and UE, previously wholly-owned  subsidiaries,  were transferred
through  the  sale  by SPS of all of the  outstanding  common  stock  of  such
subsidiaries  at net book value, to NC  Enterprises,  an intermediate  holding
company of NCE. See Note 1 in Item 8. Financial  Statements and  Supplementary
Data for  additional  discussion  of SPS,  the  Merger  and the sale of UE and
Quixx.  The  statements  of income  and cash  flows  reflect  the  results  of
operations of Quixx and UE through July 31, 1997.

Earnings Available for Common Stock

      Earnings  available for common stock were $75.6 million,  $103.3 million
and $114.6 million during 1997, 1996 and 1995,  respectively.  The significant
decrease in 1997 was  primarily  due to the  recognition  of higher merger and
business  integration  costs,  the June 1997  write-off  of  Quixx's  and UE's
investments  in the Carolina  Energy  Project and the  recognition  of a $11.7
million  gain on the sale of certain  water  rights by Quixx in 1996 (see Note
3. Acquisition and Divestiture of Investments in Item 8. Financial  Statements
and Supplementary  Data).  While costs associated with the Merger,  transition
planning and implementation  have negatively impacted earnings during 1997 and
1996,  management  anticipates that future operating results will benefit from
synergies resulting from the Merger.

      The lower  earnings  during the  Transition  Period,  as compared to the
same period in 1995,  was primarily due to the write-off of the BCH project in
December 1996 (see Note 3.  Acquisition and Divestiture of Investments in Item
8.  Financial  Statements  and  Supplementary  Data).  Earnings  applicable to
common stock decreased $11.3 million in 1996, compared to 1995,  primarily due
to the  recognition  of merger  and  business  integration  costs  and  higher
operating and maintenance expenses related to utility operations.

Operating Revenues

Electric Operations

      Substantially  all of SPS's  operating  revenues result from the sale of
electric energy.  The principal factors impacting  revenues are the amount and
price of energy  sold.  The  following  table  details  the  annual  change in
electric  operating  revenues  and energy  costs as compared to the  preceding
fiscal year (thousands of dollars).


                                       62
<PAGE>

                                    Increase (Decrease) From Prior Year
                                    -----------------------------------
                                          1997       1996
                                          ----       ----
Electric operating revenues:
 Retail...........................     $50,743    $24,170
 Wholesale........................      14,382     25,394
 Other (including unbilled revenues)    (4,167)    15,750
                                        ------     ------
  Total revenues..................      60,958     65,314
Fuel used in generation...........      56,076     46,971
Purchased power...................      (3,509)    12,769
                                        ------     ------
  Net increase in electric margin.     $ 8,391    $ 5,574
                                       =======    =======


The following table compares electric Kwh sales by major customer classes.

                             Millions of Kwh Sales   % Change From Prior Year*
                             ---------------------   -------------------------
                                1997     1996           1997     1996
                                ----     ----           ----     ----
Residential ..............     2,987    2,869           4.1%     5.9%
Commercial  ..............     2,990    2,887           3.6      2.7
Industrial  ..............     8,135    7,813           4.1      1.7
Public Authority .........       583      571           2.1      4.2
                                 ---      ---
  Total Retail............    14,695   14,140           3.9      2.8
Wholesale.................     7,004    6,748           3.8      2.5
                               -----    -----           
Total.....................    21,699   20,888           3.9      2.7
                              ======   ======

* Percentages are calculated using unrounded amounts.

      Electric  operating  revenues  increased  $61.0 million or 6.8% in 1997,
when  compared to 1996,  primarily  due to the pass  through to  customers  of
higher  fuel costs and the costs  related to the  Thunder  Basin  judgment,  a
portion of which were recorded as an operating expense and increased  electric
sales.  However,  under  the  various  state  regulatory  approvals,   SPS  is
required to provide  credits to retail  customers over five years for one-half
of the measured non-fuel operation and maintenance  expense savings associated
with the Merger.  SPS will  provide a  guaranteed  minimum  annual  savings to
retail  customers  of $3.0  million  in Texas,  $1.2  million  in New  Mexico,
$100,000  in  Oklahoma  and  $10,000 in Kansas.  Electric  operating  revenues
increased  7.8% in 1996,  when compared to 1995,  primarily due to higher fuel
used in generation and increased  retail and wholesale  sales,  which resulted
from a hotter  than  normal  late  spring and early  summer.  Annual  customer
growth over the past three years was approximately 1%.

      Fuel used in  generation  expense  increased  $56.1  million or 13.4% in
1997, when compared to 1996,  primarily due to increased  generation levels at
SPS's  power  plants  and  higher  prices  of  natural  gas as  SPS  purchased
approximately  40% of its gas supply  requirements  on the spot market  during
1997.  Fuel used in  generation  expense  increased  $47.0 million or 12.7% in
1996,  when  compared to 1995,  due to increases in natural gas and coal costs
and higher electric sales.

      SPS has fuel cost adjustment  mechanisms which recognize the majority of
the effects of changes in fuel used in generation  and  purchased  power costs
and allow recovery of such costs on a timely basis.  As a result,  the changes
in revenues  associated with these  mechanisms in 1997 and 1996, when compared
to the respective  preceding  year, had little impact on net income.  However,
in 1996,  SPS was ordered by the PUCT to refund back to customers $1.9 million
of disallowed  fuel costs and $5.4 million of margin credits on non-firm sales
(see  Note  9.  Regulatory  Matters  in  Item  8.  Financial   Statements  and
Supplementary Data).

      Purchased  power  decreased $3.5 million in 1997, when compared to 1996,
primarily  due to the  increased  availability  and  efficiency of SPS's power
plants.  Purchased  power  increased  $12.8 million in 1996,  when compared to
1995, to meet the demands of its customers.  SPS generates  substantially  all
of its power for sale to

                                       63
<PAGE>

its firm retail and wholesale  customers and sells non-firm energy as the market
demands. Similarly, SPS purchases low-cost non-firm energy when available.

Other Operating Revenues

      Other operating  revenues decreased $13.5 million or 41.6% in 1997, when
compared  to  1996,  with  the sale of  Quixx  and UE in  connection  with the
Merger as  discussed  above.  Other  operating  revenues in 1997  include only
seven  months of Quixx and UE  operations  compared to twelve  months in 1996.
Other  operating  revenues  decreased  $15.0 million in 1996, when compared to
1995,  primarily  due  to  UE's  lower  revenues  for  engineering  and  other
services.

Non-Fuel Operating Expenses

      Other operating and maintenance  expenses increased $1.6 million in 1997
as compared to the prior year.  This  increase  includes the $12.1  million of
Thunder Basin judgment  costs,  which SPS expects to recover through its fixed
fuel factor,  net of lower labor and employee  benefit costs  attributable  to
staffing  reductions in connection with the Merger and SPS's cost  containment
efforts.  Other  operating and  maintenance  expenses  decreased $7.4 million,
when compared to 1995,  primarily  due to UE's lower cost of revenues  offset,
in part, by higher steam production  maintenance  expenses associated with the
acquisition of TNP electric properties.

      Depreciation  and  amortization  expense  increased $0.6 million in 1997
and $5.6  million  in 1996,  primarily  due to the  depreciation  of  property
additions.  The sale of Quixx and UE in connection  with the Merger,  resulted
in lower  depreciation  for those  subsidiaries  in 1997. The 1996 increase in
depreciation  was  attributable to depreciation of construction  completed not
classified,  amortization  of the TNP  acquisition  adjustment  and  increased
depreciation for Quixx property additions.

      Income taxes  decreased  $16.5 million in 1997 and $2.4 million in 1996,
primarily  due to lower  pre-tax  income.  Additional  income tax  expense was
recognized in both years for  non-deductible  merger and  executive  severance
costs  resulting  in an  effective  income  tax of 39.2% in 1997 and  38.2% in
1996.

Other Income and Deductions

      Other  income  and  deductions  decreased  $31.9  million  in  1997,  as
compared  to  1996,  primarily  due to the  write-off  of  investments  in the
Carolina Energy Project by Quixx and UE totaling  approximately $16.1 million,
the  recognition of the $11.7 million gain on the sale of certain water rights
by Quixx in 1996 and higher  merger and business  integration  expenses.  (see
Note 3.  Acquisition  and  Divestiture  of  Investments  in Item 8.  Financial
Statements and Supplementary Data).

      Other income and  deductions  decreased  $14.4 million in the Transition
Period in 1996,  as compared to the same period in 1995,  primarily due to the
December  1996  write-off  of  Quixx's   investment  in  the  BCH  Project  of
approximately  $15.5  million.  Other  income and  deductions  increased  $1.4
million in 1996,  as compared to 1995,  primarily  due to the gain on the sale
of water  rights by Quixx in 1996,  reduced by the  recognition  of merger and
business integration expenses.

Interest Charges

      Interest  charges  increased  $6.5  million in 1997 and $8.1  million in
1996,  primarily  due to  interest  on  borrowings  used  to  finance  capital
expenditures.  In  October  1996,  Southwestern  Public  Service  Capital I, a
wholly owned trust,  issued $100 million of 7.85% Trust Preferred  Securities,
Series A, due  September 1, 2036.  The expense for these  securities  is shown
as Dividends on SPS obligated  mandatorily  redeemable preferred securities of
subsidiary  trust  holding  solely  subordinated  debentures of SPS. The funds
from this financing were used to reduce short-term debt.



                                      64

<PAGE>

Item 8. Financial Statements and Supplementary Data (SPS)

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


TO SOUTHWESTERN PUBLIC SERVICE COMPANY:

We have audited the accompanying  consolidated  balance sheet and statement of
capitalization   of   Southwestern   Public  Service  Company  (a  New  Mexico
corporation) as of December 31, 1997, and the related  consolidated  statement
of income,  shareholder's  equity and cash flows for the period ended December
31, 1997.  These financial  statements and the schedule  referred to below are
the  responsibility  of the Company's  management.  Our  responsibility  is to
express an opinion on these  financial  statements  and schedule  based on our
audit.

We  conducted  our  audit  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  audit  provides  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,  1997,  and the results of their  operations  and
their cash flows for the period ended  December 31, 1997, in  conformity  with
generally accepted accounting principles.

Our  audit  was made for the  purpose  of  forming  an  opinion  on the  basic
financial  statements  taken as a whole.  The schedule  listed in the index of
financial   statements  is  presented  for  purposes  of  complying  with  the
Securities  and  Exchange  Commission's  rules  and is not  part of the  basic
financial  statements.  This  schedule  has  been  subjected  to the  auditing
procedures applied in our audit of the basic financial  statements and, in our
opinion,  fairly states in all material  respects the financial  data required
to be set forth therein in relation to the basic  financial  statements  taken
as a whole.


                                                        ARTHUR ANDERSEN LLP
Denver, Colorado
February 13, 1998


                                       65

<PAGE>


                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Southwestern Public Service Company:

We have audited the consolidated  balance sheet and statement of  capitalization
of Southwestern  Public Service Company and subsidiaries as of December 31, 1996
and the related consolidated statements of income, shareholder's equity and cash
flows for the four months ended December 31, 1996 and the years ended August 31,
1996  and  1995.  These  financial  statements  are  the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

We  conducted  our  audits in  accordance  with  generally  accepted  auditing
standards.  Those  standards  require  that we plan and  perform  the audit to
obtain  reasonable  assurance about whether the financial  statements are free
of  material  misstatement.  An audit  includes  examining,  on a test  basis,
evidence  supporting the amounts and disclosures in the financial  statements.
An  audit  also  includes   assessing  the  accounting   principles  used  and
significant  estimates made by  management,  as well as evaluating the overall
financial  statement  presentation.  We  believe  that our  audits  provide  a
reasonable basis for our opinion.

In our opinion, such consolidated  financial statements present fairly, in all
material  respects,  the financial  position of  Southwestern  Public  Service
Company  and  subsidiaries  at  December  31,  1996,  and the results of their
operations  and their cash flows 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)

                                       66

<PAGE>


                     SOUTHWESTERN PUBLIC SERVICE COMPANY
                         CONSOLIDATED BALANCE SHEETS
                            (Thousands of Dollars)
                          December 31, 1997 and 1996

                                    ASSETS

                                                             1997        1996 
                                                             ----        ---- 
 

Property, plant and equipment, at cost:
   Electric ..........................................    $2,557,579 $2,517,579
   Other (Note 1).....................................             -     37,542
   Construction in progress...........................       144,452     79,346
                                                             -------     ------
                                                           2,702,031  2,634,467
   Less: accumulated depreciation ....................       987,487    944,279
                                                             -------    -------
    Total property, plant and equipment...............     1,714,544  1,690,188
                                                           ---------  ---------

 
Investments, at cost:
   Notes receivable from affiliate (Note 1)...........       119,036          -
   Other..............................................         5,832     34,446
                                                               -----     ------
    Total investments.................................       124,868     34,446
                                                             -------     ------

Current assets:
   Cash and temporary cash investments................           986     40,610
   Accounts receivable, less reserve for uncollectible
    accounts ($2,442 at December 31, 1997; $2,574 at
    December 31, 1996) ...............................        96,548     67,779
   Accrued unbilled revenues .........................        15,468     20,304
   Recoverable electric energy costs - net............        23,086     15,715
   Materials and supplies, at average cost............        16,337     17,776
   Fuel inventory, at average cost....................         2,301      2,320
   Prepaid expenses and other.........................         3,367      4,984
                                                               -----      -----
    Total current assets..............................       158,093    169,488
                                                             -------    -------

Deferred charges:
   Regulatory assets (Note 1).........................       119,244    117,546
   Unamortized debt expense ..........................         9,395      9,864
   Other..............................................        55,349     23,262
                                                              ------     ------
    Total deferred charges............................       183,988    150,672
                                                             -------    -------
                                                          $2,181,493 $2,044,794
                                                          ========== ==========



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

                                     67

<PAGE>

                     SOUTHWESTERN PUBLIC SERVICE COMPANY
                         CONSOLIDATED BALANCE SHEETS
                            (Thousands of Dollars)
                          December 31, 1997 and 1996

                           CAPITAL AND LIABILITIES

                                                             1997        1996 
                                                             ----        ---- 
 


Common stock (Notes 1 and 4)..........................   $  348,402  $  348,402
Retained earnings.....................................      349,988     383,350
                                                            -------     -------
    Total common equity...............................      698,390     731,752

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)...............................      620,598     620,400
                                                            -------     -------
                                                          1,418,988   1,452,152
                                                          ---------   ---------

Noncurrent liabilities:
   Employees' postretirement benefits other than 
   pensions (Note 12) ................................        3,800       2,874
   Employees' postemployment benefits (Note 12).......        2,446       2,369
                                                              -----       -----
    Total noncurrent liabilities......................        6,246       5,243
                                                              -----       -----

Current liabilities:
   Notes payable and commercial paper (Note 7)........      154,244      53,836
   Notes payable to affiliates (Note 7)...............       25,160           -
   Long-term debt due within one year.................          173      15,231
   Accounts payable...................................      107,465      63,004
   Dividends payable..................................       22,546           -
   Customers' deposits................................        5,471       5,842
   Accrued taxes......................................       28,051      19,999
   Accrued interest...................................       12,715      13,151
   Current portion of accumulated deferred income
    taxes (Note 13) ..................................       10,740       3,583
   Other..............................................        7,415      28,596
                                                              -----      ------
    Total current liabilities.........................      373,980     203,242
                                                            -------     -------

Deferred credits:
   Unamortized investment tax credits ................        5,469       5,719
   Accumulated deferred income taxes (Note 13)........      372,447     367,272
   Other..............................................        4,363      11,166
                                                              -----      ------
    Total deferred credits............................      382,279     384,157
                                                            -------     -------

Commitments and contingencies (Notes 9 and 10)........   
                                                         ----------  ----------
                                                         $2,181,493  $2,044,794
                                                         ==========  ==========



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

                                       68

<PAGE>

                     SOUTHWESTERN PUBLIC SERVICE COMPANY
                  CONSOLIDATED STATEMENTS OF CAPITALIZATION
             (Thousands of Dollars, Except Per Share Information)
                          December 31, 1997 and 1996


                                                               1997      1996 
                                                               ----      ---- 


Common shareholder's equity:
   Common stock,$1 par value, authorized 200 shares
   in 1997 and 100,000,000 shares in 1996,
   outstanding 100 shares in 1997 and 40,917,908
   shares in 1996 ....................................   $        -  $   40,918
   Paid in capital....................................      348,402     307,484
   Retained earnings..................................      349,988     383,350
                                                            -------     -------
    Total common shareholders equity..................      698,390     731,752
                                                            -------     -------
 
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:
   5.70% retired February 1, 1997.....................            -      15,000
   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% and 3.95% at December 31, 1997
    and 1996, respectively) due July 1, 2011..........       44,500      44,500
    variable rate (6.435% effective December 31, 1997
     and 1996, respectively)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.........................         (161)       (417)
Other.................................................          286         527
Unamortized discount and premium-net..................       (1,154)     (1,279)
                                                             ------      ------ 
                                                            620,771     635,631
Less: maturities due within one year..................          173      15,231
                                                                ---      ------
    Total long-term debt..............................      620,598     620,400
                                                            -------     -------

Total capitalization..................................   $1,418,988  $1,452,152
                                                         ==========  ==========

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

                                       69

<PAGE>

                     SOUTHWESTERN PUBLIC SERVICE COMPANY
                               AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF INCOME
                            (Thousands of Dollars)
     Years ended December 31, 1997 and August 31, 1996 and 1995 (Note 1)



                                                     1997     1996      1995 
                                                     ----     ----      ---- 

Operating revenues:
   Electric....................................  $ 960,355  $ 899,397 $ 834,083
   Other.......................................     18,928     32,403    47,434
                                                    ------     ------    ------
                                                   979,283    931,800   881,517

Operating expenses:
   Fuel used in generation.....................    473,099    417,023   370,052
   Purchased power.............................     14,501     18,010     5,241
   Other operating & maintenance expenses......    166,761    165,129   172,513
   Depreciation and amortization...............     70,331     69,781    64,204
   Taxes (other than income taxes) ............     46,515     45,518    43,827
   Income taxes (Note 13) .....................     48,795     65,297    67,648
                                                    ------     ------    ------
                                                   820,002    780,758   723,485
                                                   -------    -------   -------
Operating income...............................    159,281    151,042   158,032

Other income and deductions:
   Merger expenses.............................    (15,427)    (7,878)        -
   Write-off of investment in Carolina Energy  
   Project (Note 3) ...........................    (16,052)         -         -
   Miscellaneous income and deductions
   - net (Note 3) .............................      4,877     13,226     3,917
                                                     -----     ------     -----
                                                   (26,602)     5,348     3,917

Interest charges:
   Interest on long-term debt..................     46,356     47,045    43,221
   Other interest..............................      7,444      6,088     1,714
   Allowance for borrowed funds used during
    construction ..............................     (4,546)    (2,516)   (2,463)
   Dividends on SPS obligated mandatorily
   redeemable preferred securities of
   subsidiary trust holding solely subordinated 
   debentures of SPS ..........................      7,850          -         -
                                                     -----        ---       ---
                                                    57,104     50,617    42,472
                                                    ------     ------    ------

Net income.....................................     75,575    105,773   119,477
Dividend requirements on preferred stock.......          -      2,494     4,878
                                                       ---      -----     -----
Earnings available for common stock............   $ 75,575   $103,279  $114,599
                                                  ========   ========  ========


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

                                       70

<PAGE>

                     SOUTHWESTERN PUBLIC SERVICE COMPANY
                               AND SUBSIDIARIES
                      CONSOLIDATED 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 consolidated financial statements
              are an integral part of these financial statements

                                       71

<PAGE>
<TABLE>
<CAPTION>

                     SOUTHWESTERN PUBLIC SERVICE COMPANY
                               AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
               (Thousands of Dollars, Except Share Information)
    Year ended December 31, 1997, four months ended December 31, 1996 and
                years ended August 31, 1996 and 1995 (Note 1)


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

<S>                            <C>           <C>          <C>           <C>          <C>       
Balance at September 1, 1994   40,917,908    $ 40,918     $ 306,376     $ 348,878    $ 696,172
Net income..................            -           -             -       119,477      119,477
Dividends declared
  Common stock..............            -           -             -       (90,019)     (90,019)
  Cumulative preferred stock            -           -             -        (4,878)      (4,878)
                                      ---         ---           ---        ------       ------ 

Balance at August 31, 1995..   40,918,908      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
                                      ===  ==========    ==========  =============   =========


Authorized  shares of  common  stock  were 200 at  December  31,  1997 and 100
million at December 31, 1996, August 31, 1996 and 1995.

</TABLE>

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

                                      72

<PAGE>


                     SOUTHWESTERN PUBLIC SERVICE COMPANY
                               AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
               (Thousands of Dollars, Except Share Information)
     Years ended December 31, 1997, and August 31, 1996 and 1995 (Note 1)


                                                      1997      1996      1995
                                                      ----      ----      ----

Operating activities:
   Net income...................................    $75,575   $105,773 $119,477
   Adjustments to reconcile net income to net
    cash provided by operating activities (Note 1):
     Depreciation and amortization..............     76,929    65,448    61,069
     Write off of investment in Carolina Energy 
     Project (Note 3) ..........................     16,052         -         -
     Amortization of investment tax credits.....       (250)     (250)     (250)
     Deferred income taxes......................      3,587    16,423     9,717
     Allowance for equity funds used during
      construction .............................         (5)      (60)     (229)
     Change in accounts receivable..............    (39,842)   (4,697)   (3,905)
     Change in inventories......................        301       134    (3,409)
     Change in other current assets.............     (3,061)   (7,688)   (5,143)
     Change in accounts payable.................     45,683    10,024      (834)
     Change in other current liabilities........    (10,000)   (7,271)    9,398
     Change in deferred amounts.................    (48,934)  (11,381)    8,160
     Other......................................        276    13,571    (4,753)
                                                        ---    ------    ------ 
       Net cash provided by operating activities    116,311   180,026   189,298

Investing activities:
   Construction expenditures....................    (118,550) (111,986) (94,662)
   Allowance for equity funds used during
    construction ...............................           5        60      229
   Proceeds from disposition of property, plant 
    and equipment ..............................      (2,371)        -        -
   Proceeds from the sale of Quixx and UE, net 
    of cash disposed (Note 1) ..................     (29,567)        -        -
   Purchase of other investments................      (4,639)   (1,768) (28,219)
   Acquisition of TNP properties (Note 3).......           -   (29,200)       -
                                                         ---   -------      ---
       Net cash used in investing activities....    (155,122) (142,894)(122,652)

Financing activities:
   Proceeds from sale of long-term notes and bonds        -     60,000   76,204
   Redemption of long-term notes and bonds......    (14,986)    (4,445) (16,880)
   Short-term borrowings - net..................    100,564     69,624  (14,994)
   Retirement of preferred stock................          -    (75,434)       -
   Dividends on common stock (Notes 4 and 15)...    (86,391)   (90,020) (90,020)
   Dividends on preferred stock.................          -     (2,494)  (4,878)
                                                        ---     ------   ------ 
       Net cash used in financing activities....       (813)   (42,769) (50,568)
                                                       ----    -------  ------- 
       Net (decrease) increase  in cash and 
        temporary cash investments .............    (39,624)    (5,637)  16,078
       Cash and temporary cash investments at 
        beginning of year ......................     40,610     36,860   20,782
                                                     ------     ------   ------
       Cash and temporary cash investments at 
        end of year ............................   $    986  $  31,223 $ 36,860
                                                   ========  ========= ========


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

                                       73

<PAGE>

                     SOUTHWESTERN PUBLIC SERVICE COMPANY
                               AND SUBSIDIARIES
                    CONSOLIDATED 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 consolidated financial statements
              are an integral part of these financial statements.

                                       74

<PAGE>


                  NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1997

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

      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.  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.

      The NCE  consolidated  financial  statements  reflect the accounting for
the Merger as a pooling of  interests.  The Company's  consolidated  financial
statements  include the  consolidated  financial  statements for both PSCo and
SPS as of and for the years ended  December 31, 1997 and 1996.  The  Company's
1995 consolidated  statement of income combines the consolidated  statement of
income for PSCo for the year ended  December  31,  1995 with the  consolidated
statement  of income  for SPS for the year  ended  August  31,  1995.  Certain
items have been  reclassified  in the  consolidated  financial  statements  to
conform to the presentation used by the Company.

      On April 22,  1997,  SPS  changed  its fiscal  year from a  twelve-month
period  ending  August 31 to a  twelve-month  period  ending  December 31. SPS
filed  a  Transition  report  on Form  10-K  for the  period  September  1, to
December 31, 1996 (the transition  period).  The fiscal year periods presented
in  SPS's  consolidated  statements  of  income  and  cash  flows  are for the
twelve-months ending December 31, 1997, August 31, 1996 and August 31, 1995.

Business, Utility Operations and Regulation

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

      Regulatory Assets and Liabilities

      The Company's regulated  subsidiaries prepare their financial statements
in accordance  with the provisions of SFAS 71, as amended.  SFAS 71 recognizes
that   accounting   for  rate   regulated   enterprises   should  reflect  the
relationship  of  costs  and  revenues   introduced  by  rate  regulation.   A
regulated  utility may defer  recognition  of a cost (a  regulatory  asset) or
recognize an  obligation  (a  regulatory  liability)  if it is probable  that,
through the  ratemaking  process,  there will be a  corresponding  increase or
decrease in revenues.  During 1996, NCE's  subsidiaries  adopted SFAS No. 121,
Accounting  for the Impairment of Long-Lived  Assets and Long-Lived  Assets to
be Disposed Of, which imposed stricter criteria for the continued  recognition
of regulatory assets

                                       75

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

on the  balance  sheet by  requiring  that such  assets be  probable of future
recovery at each balance  sheet date.  The adoption of this  statement did not
have a  material  impact on the  Company's  results of  operations,  financial
position or cash flows.

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

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
Early retirement costs..............         8,008          6,645         1,363
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
Thunder Basin judgment (Note 9).....         5,912              -         5,912
Other...............................         9,991          2,540         7,451
                                             -----          -----         -----
  Total.............................      $430,475       $310,658      $119,244
                                          ========       ========      ========

1996                                        NCE           PSCo            SPS 
                                            ---           ----            --- 
Income taxes (Note 13)..............      $179,757       $ 98,355      $ 81,403
Nuclear decommissioning costs.......        89,731         89,731             -
Employees' postretirement benefits
  other than pensions (Note 12).....        57,641         54,449         3,192
Early retirement costs..............        17,232         15,505         1,727
Employees' postemployment benefits
 (Note 12) .........................        24,797         24,797             -
Demand-side management costs........        43,779         41,462         2,317
Unamortized debt reacquisition costs        39,794         19,914        19,880
Other...............................        13,380          4,353         9,027
                                            ------          -----         -----
  Total.............................      $466,111       $348,566      $117,546
                                          ========       ========      ========

      The  regulatory  assets of the Company's  regulated  subsidiaries  as of
December 31, 1997 and 1996 are  reflected in rates  charged to customers  over
periods  ranging from two to thirty years.  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.  The Company
believes  its  utility  subsidiaries  will  continue  to be  subject  to  rate
regulation.  In the event that a portion  of the  Company's  operations  is no
longer  subject  to the  provisions  of SFAS 71,  as a result  of a change  in
regulation or the effects of competition,  the Company's subsidiaries could be
required to write-off  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.

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

      Approximately  550  employees  elected to  participate  in PSCo's  early
retirement  enhancement  program, of which approximately 370 employees elected
the  early   retirement   benefit.   The  total  cost  of  the   program   was

                                       76

<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


approximately  $39.7 million.  These costs were deferred and,  effective April
1, 1994,  are being  amortized  to  expense  over  approximately  4.5 years in
accordance  with  rate  regulatory   treatment.   This   amortization   period
represents  the  participants'  average  remaining  years of  service to their
expected retirement date.

      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 and is assessing
the  impact  of  this  decision  on  the  future   recovery  of  the  electric
jurisdictional  portion of postemployment benefit costs totaling approximately
$14.6  million.  PSCo  believes  that it will be successful on appeal and that
the  associated  regulatory  asset  is  realizable.   If  PSCo  is  ultimately
unsuccessful, these amounts will be written off.

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

      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.

      As  of  December  31,  1997,  SPS  has  approximately  $5.9  million  in
regulatory  assets  associated with the Thunder Basin  judgment.  The judgment
amount  paid is  recoverable  from  customers  subject  to review  by  various
regulatory  agencies (see Note 9.  Regulatory  Matters - Electric and Gas Cost
Adjustments).

      Recovered/Recoverable Purchased Gas and Electric Energy Costs -Net

      The Company's utility  subsidiaries have adjustment  mechanisms in place
which allow for the  recovery of certain  purchased  gas and  electric  energy
costs in excess of the level of such costs included in base rates.  Currently,
these cost adjustment tariffs are revised  periodically,  as prescribed by the
appropriate  regulatory agencies,  for any difference between the total amount
collected  under the clauses and the  recoverable  costs incurred (see Note 9.
Regulatory Matters - Electric and Gas Cost Adjustments).

      Other Property

      Property,  plant and equipment includes  approximately $18.4 million and
$25.4 million,  respectively, for costs associated with the engineering design
of 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 and preferred stock in accordance with a CPUC rate order.

Non-utility Subsidiaries and International Investments

      The  Company's  non-utility  subsidiaries  are  principally  involved in
engineering,   design  and  construction   management,   non-regulated  energy
services,  including gas and power  marketing,  the  management of real estate
and certain life insurance  policies,  the financing of certain current assets
of  PSCo  and  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.  Acquisition of Yorkshire  Electricity  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.

                                       77

<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.

Consolidation

      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.

Basic and Diluted Earnings Per Share

      Effective for periods ending after December 15, 1997, the FASB issued
SFAS No. 128 "Earnings per Share" which changed the methodology for
calculating and reporting earnings per share ("EPS"), and required
restatement of all prior-period EPS data.  Basic and Diluted EPS of common
stock is computed and presented for each year based upon the weighted average
number of common shares outstanding on the consolidated income statements.
The dilutive effect of NCE stock options, the only dilutive securities and
applicable only to NCE, was immaterial and, accordingly, the computed Basic
and Diluted EPS result in the same EPS.

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.

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.

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

NCE                                              1997        1996        1995 
                                                 ----        ----        ----

Income taxes ...............................   $ 99,938    $117,121    $108,750
Interest....................................   $230,507    $197,073    $182,913


PSCo                                             1997        1996        1995 
                                                 ----        ----        ----

Income taxes, including amounts paid to NCE    $ 75,439    $ 66,871    $ 58,662
Interest....................................   $172,470    $144,533    $140,823


SPS                                              1997        1996        1995 
                                                 ----        ----        ----
 
Income taxes, including amounts paid to NCE    $ 37,752    $ 50,250    $ 50,088
Interest....................................   $ 56,486    $ 52,540    $ 42,090

                                       78

<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      Non-cash Transactions:

      Prior to the Merger,  shares of PSCo's  common  stock  (250,058 in 1997,
274,934 in 1996 and  310,546 in 1995),  valued at the market  price on date of
issuance  (approximately  $10  million  for each  year),  were  issued  to the
Employees'  Savings  and Stock  Ownership  Plan of Public  Service  Company of
Colorado  and  Participating  Subsidiary  Companies.  The  estimated  issuance
values were  recognized  in other  operating  expenses  during the  respective
preceding years.

      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.  Acquisition and Divestiture
of  Investments).  During 1995, a $40.5 million PSCo capital lease  obligation
was recognized in connection with a 30-year gas storage facility agreement.

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  2.6%-2.9% for the years ended December 31, 1997, 1996 and
1995.  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.

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).


                                      79

<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


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, 1997 and 1996  exceeded the LIFO cost by
approximately $36.0 million and $52.2 million, respectively.

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:

                                                             1997        1996 
                                                             ----        ---- 
                                                          (Thousands of Dollars)

Cash surrender value of contracts.....................     $408,425    $359,136
Borrowings against contracts..........................      405,285     356,421
                                                            -------     -------
   Net investment in life insurance contracts.........     $  3,140     $ 2,715
                                                           ========     =======

      On August 2, 1996, Congress passed legislation that will phase out tax
benefits associated with certain COLI policies.  The legislation had minimal
impact on the Company's COLI policies as all policies were entered into prior
to July 1, 1986 and were grandfathered under the legislation.

2.  Acquisition of Yorkshire Electricity and U.K. Windfall Tax (NCE and PSCo)

      During  the  second  quarter  of 1997,  Yorkshire  Power,  a  subsidiary
equally  owned by PSCo and AEP,  acquired  indirectly  all of the  outstanding
ordinary  shares  of  Yorkshire   Electricity,   a  United  Kingdom   regional
electricity  company.  PSCo  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  April  1,  1997.  PSCo's  equity
earnings in Yorkshire Power is 50%, the same as its ownership share.

      The total  consideration  paid by Yorkshire Power was approximately $2.4
billion  (1.5  billion  pounds  sterling).  The  acquisition  was  financed by
Yorkshire  Power through a  combination  of  approximately  25% equity and 75%
debt,   including   the   assumption   of  the  existing   debt  of  Yorkshire
Electricity.  The funds for the  acquisition  were  obtained  from  PSCo's and
AEP's  investment  in  Yorkshire  Power of  approximately  $360  million  (220
million pounds sterling) each, with the remainder  obtained by Yorkshire Power
through  the  issuance of  non-recourse  debt.  PSCo funded its entire  equity
investment in Yorkshire  Power through $250 million of publicly issued secured
medium-term notes with varying  maturities and drawings of approximately  $110
million on its short-term  lines of credit  pursuant to its short-term  credit
agreement with Bank of America, as agent.

      In July 1997,  the U.K.  government  enacted a  windfall  tax on certain
privatized  business  entities  payable  in two  installments  with the  first
payment  in  December  1997  and the  second  installment  a year  later.  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.  PSCo's share of this tax is approximately $110.6 million.


                                      80

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

    Yorkshire Power:
      Operating revenues.......................    $1,492.9
                                                   --------

      Operating income.........................       202.3
                                                      -----

      Income before extraordinary item.........        69.8
      Extraordinary item - U.K. windfall tax...      (221.1)
                                                     ------ 
      Net loss.................................    $ (151.3)
                                                   ======== 

    PSCo's equity in the earnings (losses):
      Extraordinary item -  U.K. windfall tax..    $ (110.6)
      Equity in earnings of Yorkshire Power (1)        34.9
                                                       ----
                                                   $  (75.7)
                                                   ======== 

  (1)  Includes the impact of approximately  $10 million related to the change
     in the U.K. corporate income tax rate from 33% to 31%.

      PSCo's   investment   in  Yorkshire   Power  at  December  31,  1997  is
approximately   $287  million.   Summarized   balance  sheet  information  for
Yorkshire Power as of December 31, 1997 is presented below (in millions):

    Assets:
      Property, plant and equipment............    $1,644.6
      Current assets...........................       602.2
      Other assets.............................     1,895.4
                                                    -------
                                                   $4,142.2
                                                   ========

    Capitalization and Liabilities:
      Common shareholders' equity..............    $  542.1
      Long-term debt...........................       704.3
      Other non-current liabilities............       488.7
      Current liabilities......................     2,407.1
                                                    -------
                                                   $4,142.2
                                                   ========

      The unaudited pro forma  financial  information  presented below assumes
that the  investment in Yorkshire  Power was acquired on the first day of each
respective  period.  The pro forma adjustments  include  recognition of equity
in the  estimated  earnings of Yorkshire  Power,  an  adjustment  for interest
expense on debt  associated  with PSCo's  investment  in  Yorkshire  Power and
related  income taxes.  The estimated  earnings of Yorkshire  Power 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 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.

                                       81

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      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 before       Earnings before
                                       Extraordinary Item     Extraordinary Item
                                       1997            1996       per share (1)
                                       ----            ----       -------------
                                    NCE    PSCo     NCE    PSCo    1997    1996
                                    ---    ----     ---    ----    ----    ----
Income before
  extraordinary item..........    $261.5  $204.0  $272.3  $190.3   $2.50   $2.64
                                                                   =====   =====
Pro forma adjustments:

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

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

Pro forma result..............    $247.9  $190.4  $277.8  $195.8   $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.

3. Acquisition and Divestiture of Investments

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.

                                       82

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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  have been valued at their estimated fair
market  values as of the date of  acquisition.  These  companies are primarily
engaged in gas brokering and marketing  activities and are  subsidiaries  of e
prime.

Acquisition of TNP Properties (NCE and 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.

Acquisition of Young Gas Storage Company (NCE and PSCo)

      On June 25, 1995,  PSCo  acquired all of the  outstanding  stock of YGSC
for $6.3  million.  The  acquisition  was  accounted  for using  the  purchase
method.  On February 1, 1996,  PSCo  contributed the common stock of YGSC to e
prime.  YGSC owns a 47.5% interest in Young  Storage,  which owns and operates
an underground gas storage facility in northeastern Colorado.

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  2,600,000  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 $.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.

                                       83

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Common Stock Issuance

      In December 1997,  5.9 million  common shares were issued,  resulting in
net  proceeds  (after  deducting  issuance  costs)  of  $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 debt and for general corporate purposes.

Preferred Stock of NCE

      NCE has 20 million  shares of preferred  stock  authorized.  At December
31, 1997, the Company has not registered or issued any of the preferred stock.

Preferred Stock of Subsidiaries
                                                1997                1996      
                                                ----                ----      
                                          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   100,000  $ 10,000
     4 1/4% series (includes $7,500
            premium) ...............     174,997     17,507   175,000    17,508
     4 1/2% series..................      65,000      6,500    65,000     6,500
     4.64% series...................     159,950     15,995   160,000    16,000
     4.90% series...................     150,000     15,000   150,000    15,000
     4.90% 2nd series...............     150,000     15,000   150,000    15,000
     7.15% series...................     250,000     25,000   250,000    25,000
                                         -------     ------   -------    ------

     Total..........................   1,049,947   $105,002 1,050,000  $105,008
                                       =========   ======== =========  ========

   Subject to mandatory redemption (2):
     7.50% series ..................     216,000   $ 21,600   216,000  $ 21,600
     8.40% series...................     202,294     20,229   208,892    20,889
                                         -------     ------   -------    ------
                                         418,294     41,829   424,892    42,489
   Less: Preferred stock subject to
      mandatory redemption within
      one year......................     (25,760)    (2,576)  (25,760)   (2,576)
                                         -------     ------   -------    ------ 
       Total........................     392,534   $ 39,253   399,132  $ 39,913
                                         =======   ========   =======  ========

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 1,400,000  $ 35,000
     ====                              =========   ======== =========  ========

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

(1) The PSCo  preferred  stock may be  redeemed  at the option of PSCo upon at
least 30, but not more than 60, days' notice in accordance  with the following
schedule of prices,  plus an amount equal to the accrued dividends to the date
fixed for redemption;  $100 par value,  $101 per share, $25 par value,  $25.25
per share.

(2) Mandatory  redemption  for 7.50% series:  $101.50 per share on or prior to
August  31,  1998,  reducing  each year  thereafter  by $0.25 per share  until
August  31,  2003,  after  which  the  redemption  price  is $100  per  share;
mandatory  redemption for 8.40% series:  $101.75 per share on or prior to July
31, 1998, and reducing each year  thereafter by $0.25 per share until July 31,
2004,  after which the redemption price is $100 per share. In 1998 and in each
year thereafter,  PSCo must offer to repurchase 12,000 shares of the 7.50% and
13,760 shares of the 8.40% series subject to mandatory  redemption at $100 per
share,  plus accrued  dividends to the date set for repurchase.  In 1997, PSCo
repurchased  6,598 shares of the 8.40% cumulative  preferred series subject to
mandatory  redemption.  In 1996 and 1995,  PSCo  repurchased  13,760 shares of
the 8.40% cumulative preferred series subject to mandatory redemption.

(3) 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,  issuable from time to time in such series
and having such designations,  preferences,  limitations,  and relative rights
as the Board of Directors may determine.

                                       84

<PAGE>

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

      In October 1996,  Southwestern  Public Service Capital I, a wholly-owned
Trust of SPS, issued  4,000,000  shares of 7.85% Trust  Preferred  Securities,
Series  A for  $100  million.  The sole  asset  of the  trust is $103  million
principal  amount of SPS's 7.85% Deferred  Interest  Subordinated  Debentures,
Series A, due  September 1, 2036.  Holders of the  securities  are entitled to
receive  quarterly  dividends  at an annual  rate of 7.85% of the  liquidation
preference  value of $25. The  securities  are redeemable at the option of SPS
on October 21, 2001 at 100% of the principal  amount  outstanding plus accrued
interest.  The  securities are shown as SPS obligated  mandatorily  redeemable
preferred   securities  of  subsidiary   trust  holding  solely   subordinated
debentures of SPS on the  consolidated  balance sheets.  The net proceeds were
used to reduce short-term debt.

6. Long-Term Debt of Subsidiaries (NCE, PSCo and SPS)
                                                               1997      1996
                                                               ----      ----
                                                          (Thousands of Dollars)
   First Mortgage Bonds:
     5-70% retired February 1, 1997.....................    $     -    $ 15,000
     5-7/8% retired July 1, 1997........................          -      35,000
     6-3/4% due July 1, 1998............................     25,000      25,000
     6.875% 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
     8-1/8% due March 1, 2004...........................    100,000     100,000
     5-7/8% due March 1, 2004...........................     22,000      22,500
     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 (3.80% and 7-1/4% at December 31, 1997
     and 1996) 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 (3.80% at December 31, 1997)due
      March 1, 2027 ....................................     10,000           -
     6.02% - 9.25% secured medium-term notes, due August
      1, 1997 - March 5, 2007...........................    423,500     183,500
   Other secured long-term debt 13.25%, due in
      installments  through October 1, 2016.............     31,155      31,506
   Pollution control obligations, securing pollution 
      control revenue bonds:
     Not collateralized by First Mortgage Bonds:
       Variable rate (4.30% and 3.95% at December 31, 1997
       and 1996), due July 1, 2011......................     44,500      44,500
       Variable  rate (6.435%  effective  at December 31,
        1997 and 1996), 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:........................       (161)       (417)
   Unsecured Medium-Term Notes:
       5.91% - 6.14%, due November 24, 1997 - December 
        15, 1998 .......................................    100,000     100,000
   Capital lease obligations, 4.21% - 11.21% due in
     installments through May 31, 2025..................     44,747      49,154
   Other................................................        286         527
   Unamortized discount and premium-net.................     (5,820)     (6,298)
                                                             ------      ------ 
                                                          2,245,424   2,050,189
Less: maturities due within one year....................    257,469     170,261
                                                            -------     -------
                                                         $1,987,955  $1,879,928
                                                         ==========  ==========

     The First Mortgage Bonds include all long-term  bonds and notes  (including
First Collateral Trust Bonds) issued by the Company's utility subsidiaries under
various mortgage indentures. Substantially all properties of the

                                       85

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Company's utility  subsidiaries,  other than expressly  excepted  property,  are
subject to the liens securing the First Mortgage Bonds.

      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  the  Company'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.

      The annual  maturities  and sinking  fund  requirements  during the five
years subsequent to December 31, 1997 are (in thousands):

          Year           Maturities     Sinking Fund Requirements       Total
          ----           ----------     -------------------------       -----
NCE       1998             $257,469             $   560              $258,029
          1999              134,454                 560               135,014
          2000               31,725               1,310                33,035
          2001              140,969               1,310               142,279
          2002               16,806               2,810                19,616

PSCo      1998             $257,160             $   500              $257,660
          1999               44,191                 500                44,691
          2000               31,656               1,250                32,906
          2001              140,969               1,250               142,219
          2002               16,806               2,750                19,556

SPS       1998             $    173             $     -              $    173
          1999               90,113                   -                90,113
          2000                    -                   -                     -
          2001                    -                   -                     -
          2002                    -                   -                     -

      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, 1997 and 1996 is as follows (in thousands of dollars,  except
interest rates):

                                                             1997        1996 
                                                             ----        ---- 
NCE
   Notes payable to banks ..............................   $147,500    $ 18,478
   Commercial paper ....................................    440,843     280,083
                                                            -------     -------
                                                           $588,343    $298,561
                                                           ========    ========

Weighted average interest rate at year end..............      5.74%       5.94%

PSCo
   Notes payable to banks ..............................   $ 50,000    $ 18,375
   Commercial paper ....................................    286,599     226,350
   Note payable to affiliates (by NCI to Quixx) ........     11,956           -
                                                             ------         ---
                                                           $348,555    $244,725
                                                           ========    ========

Weighted average interest rate at year end..............     5.78%       5.63%


                                       86

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                                                             1997        1996 
                                                             ----        ---- 
SPS
   Commercial paper ....................................   $154,244    $53,836
   Note payable to affiliates (UE) .....................      9,000          -
   Note payable to affiliates (Quixx) ..................     16,160          -
                                                             ------        ---
                                                           $179,404    $53,836
                                                           ========    =======

Weighted average interest rate at year end..............      5.60%      5.65%

Bank Lines of Credit and Compensating Bank Balances

      In August 1997,  NCE entered into a $225 million  credit  facility  with
several  banks.  The  credit  facility  provides  for $100  million  of direct
borrowings by NCE until the outstanding  common stock of PSCCC, a wholly-owned
subsidiary  of PSCo,  is  transferred  to NCE.  The  credit  facility  expires
August 11, 2002.  After the transfer,  NCE will have access to $225 million of
direct borrowings under the credit facility.

      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  $125 million in  committed  lines of credit and expires on April 30,
1998.  SPS has two credit  facilities  which provide $180 million in committed
bank lines of credit and expire  February 27 and 28, 1998.  It is planned that
at maturity  these lines of credit will be replaced  with a $200  million line
of credit.

      Borrowings  permitted  under the committed  bank lines of credit totaled
$705  million at December  31,  1997,  of which $9 million of SPS's  committed
bank lines of credit required  account  deposits of 1 1/2% of the unused portion
of the loan commitment.

      Arrangements by the Company and its  subsidiaries for committed lines of
credit are  maintained  by a  combination  of fee  payments  and  compensating
balances.  Arrangements  for  uncommitted  lines  of  credit  have  no  fee or
compensating balance requirements.

      Individual  PSCo  arrangements  for  uncommitted  bank  lines of  credit
totaled $50 million at December  31,  1997,  of which all were used.  PSCo and
SPS may borrow under  uncommitted  preapproved  lines of credit upon  request;
however, the banks have no firm commitment to make such loans.

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, 1997 and 1996.  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.

                                       87

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                                              1997                  1996     
                                              ----                  ----     
                                        Carrying   Fair     Carrying       Fair
                                        Amount     Value     Amount       Value
                                        ------     -----     ------       -----
NCE                                              (Thousands of dollars)

Investments, at cost................    $36,010    $36,072   $30,249  $  30,416
Preferred stock of subsidiaries 
  subject to mandatory redemption ..     41,829     42,893    42,489     43,685
SPS obligated mandatorily redeemable
 preferred securities of subsidiary
 trust holding solely subordinated 
 debentures of SPS .................    100,000    104,752   100,000     99,520
Long-term debt of subsidiaries......  2,206,372  2,251,523 2,001,035  2,059,972

PSCo

Investments, at cost................    $36,010    $36,072   $30,249    $30,416
Preferred stock subject to mandatory
 redemption ........................     41,829     42,893    42,489     43,685
Long-term debt......................  1,555,572  1,604,160 1,370,423  1,404,972

SPS

SPS obligated mandatorily redeemable
 preferred securities of subsidiary
 trust holding solely subordinated
 debentures of SPS ................    $100,000  $ 104,752 $ 100,000  $  99,520
Long-term debt......................    621,800    625,348   630,612    655,000

      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  estimated  fair  values of  preferred  stock  subject to  mandatory
redemption,  the 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, 1997 and 1996.  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  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).

      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.

      SPS has an interest rate swap  agreement,  which,  in effect,  fixes the
interest  rate on a  $25,000,000  notional  amount at 6.435%.  Amounts paid or
received  under this  agreement  are accrued as interest  rates change and are
recognized  over  the  life of the  agreement  as an  adjustment  to  interest
expense.  SPS is exposed to interest rate risk in the event of  nonperformance
by counterparties; however, SPS does not anticipate such nonperformance.

                                       88

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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)

Merger Rate Filings

      The discussion  below summarizes the significant  conditions  imposed by
the state  utility  regulatory  commissions  in Colorado,  Texas,  New Mexico,
Wyoming, Oklahoma and Kansas in their respective approvals of the Merger.

PSCo

      The  CPUC  decision   approving  the  Merger   established  a  five-year
performance  based regulatory plan and acknowledged that the Merger was in the
public  interest.  The major provisions of the decision include the following,
some of which are discussed in other sections of this note:

     - a $6 million  annual  electric  rate  reduction,  which was  instituted
      October 1, 1996,  followed by an additional $12 million annual  electric
      rate  reduction  effective with the  implementation  of new gas rates on
      February 1, 1997;
     - an  annual  electric  department  earnings  test  with the  sharing  of
      earnings  in excess of an 11%  return on equity for the  calendar  years
      1997-2001 and the implementation of a Quality of Service Plan;
     - a freeze in base  electric  rates for the period  through  December 31,
      2001 with the flexibility to make certain other rate changes,  including
      those  necessary  to allow for the  recovery  of DSM,  QF  capacity  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; and
     - the replacement of the ECA with an ICA.

      On January 20,  1998,  the CPUC  approved the recovery of $16 million in
merger costs incurred  through May 31, 1997, the allocation  methodologies  of
merger  costs and the  recovery of  payments  associated  with a  transmission
agreement  with a wholesale  customer.  PSCo will  request  approval  from the
CPUC for the merger costs  incurred  subsequent to May 31, 1997 as part of the
electric  department  earnings test  expected to be filed in mid-1998.  Merger
costs  attributable to Colorado  electric  retail  customers will be amortized
monthly through December 31, 2001 as part of the electric  department earnings
test.  Merger  costs  attributable  to  Colorado  gas  retail  customers  were
included in the gas rate case approved by the CPUC, discussed below.

SPS

      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,  $1.2  million in New  Mexico,  $100,000 in
Oklahoma and $10,000 in Kansas and $1.5 million to wholesale customers.

Cheyenne

      The WPSC  approved  the merger on August 16, 1996.  Cheyenne  agreed not
to file a retail  electric  rate  case  for two  years  after  the  merger  is
consummated.  Cheyenne  expects to file a combined gas and electric  rate case
with the WPSC in 1999 after the two year moratorium expires.

                                       89

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Rate Cases

PSCo
Retail - Gas

      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.  A decision from the Denver  District  Court is expected in the last
half of 1998.

Wholesale - FERC

      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.  On March 29, 1997,  the FERC issued an order  accepting for filing and
suspending  certain  proposed rate changes.  Settlement  agreements  have been
reached with all parties and filed with the FERC,  which,  results in a slight
decrease  in  rates   overall.   A  final  order   accepting  the   settlement
agreements,  subject to PSCo making certain compliance  filings,  was received
in June 1997. On October 3, 1997,  PSCo filed the required  compliance  filing
with  the  FERC  to  unbundle  the  wholesale  generation,   transmission  and
ancillary services prices in the wholesale power agreements.

SPS

New Mexico

      On November 17,  1997,  the NMPUC  issued an order  investigating  SPS's
rates.  SPS is  required  to file a rate case by May 5,  1998.  In the  order,
the NMPUC  determined  that  because  of the rapid  changes  occurring  in the
electric  industry  there is a need for the NMPUC to 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.

Wholesale - FERC

      On December 19, 1989,  the FERC issued its final order  regarding a 1985
wholesale rate case. SPS appealed  certain  portions of the order that related
to  recognition  in rates of the reduction of the federal income tax rate from
46% to 34%.  The United  States  Court of Appeals for the District of Columbia
Circuit  remanded the case directing the FERC to reconsider  SPS's claim of an
offsetting  cost and  limiting the FERC's  actions.  The FERC issued its Order
on Remand in July  1992,  the  required  filings  were made and a hearing  was
completed in February  1994. In October  1994,  the  administrative  law judge
("ALJ")  issued a favorable  initial  decision  that, if approved by the FERC,
would  result  in  a  substantial   revenue   recovery  for  SPS.   Negotiated
settlements  with SPS's partial  requirements  customers and TNP were approved
by the FERC in July 1993 and September  1993,  respectively,  and SPS received
approximately  $2.8 million,  including  interest.  In a settlement with SPS's
New Mexico rural electric cooperative  customers,  SPS received  approximately
$7.0 million,  including  interest.  The FERC approved this settlement in July
1995.  Resolutions  of these matters with the remaining  wholesale  customers,
the Golden Spread member cooperatives and Lyntegar Electric Cooperative,  have
not been  achieved.  SPS is awaiting a final  order from the FERC.  SPS cannot
reasonably  estimate the remaining amount  recoverable from these proceedings;
however,  a favorable  resolution could materially improve its earnings in the
period in which it is resolved.

                                       90

<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Cheyenne

      On May 12,  1997,  Cheyenne  filed an  application  with the WPSC for an
overall  annual  increase  in  retail  gas  revenues  of  approximately  $1.25
million.  On September  23, 1997,  the WPSC approved an increase in retail gas
revenues  of  approximately  $1.19  million  with an 11.71%  return on equity,
effective October 1, 1997.

Electric and Gas Cost Adjustment Mechanisms

PSCo

      During 1994 and 1995, the CPUC conducted  several  proceedings to review
issues  related to the ECA. The CPUC opened a docket to review whether the ECA
should be maintained in its then present form,  altered or eliminated,  and on
January  8, 1996,  combined  this  docket  with the  merger  docket  discussed
above.  The CPUC decision on the Merger  modified and replaced the ECA with an
ICA. The ICA,  which became  effective  October 1, 1996,  allows for a 50%/50%
sharing  of  certain  fuel and  energy  cost  increases  and  decreases  among
customers  and  shareholders.  As of  December  31,  1997,  PSCo has  deferred
approximately $0.7 million,  as recoverable fuel and energy costs.  Management
does not believe the cost adjustment  mechanism will have a significant impact
on the Company's results of operations, financial position or cash flows.

      The CPUC  had a docket  to  review  and  prescribe  a  standardized  GCA
process to determine  the  prudence of gas  commodity  and  pipeline  delivery
service  costs  incurred by gas  utilities.  Other  issues  addressed  in this
docket  included  whether the GCA should be  maintained  in its present  form,
altered  or  eliminated.  The  CPUC  issued  an order  on May 7,  1997,  which
provides  for the current  GCA to be  maintained  and the  adoption of certain
standardized  filing and gas purchase reporting  requirements.  On January 30,
1998, the CPUC issued another Notice of Proposed  Rulemaking  seeking comments
on various  customer notice and reporting  requirements  related to changes in
gas costs.

SPS

Texas

      A PUCT substantive rule requires periodic  examination of SPS's fuel and
purchased  power costs,  the  efficiency of the use of such fuel and purchased
power,   fuel   acquisition   and  management   policies  and  purchase  power
commitments.  Under  the  PUCT's  regulations,  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.  SPS  will  file a  reconciliation  in  1998  for  the
generation and fuel management  activities of approximately $690 million,  for
the period from  January  1995 through  December  1997.  At December 31, 1997,
SPS had approximately  $22.9 million in  underrecovered  fuel costs associated
with the Texas retail  jurisdiction.  Currently,  Texas retail  customers  are
being surcharged for approximately  $6.4 million of such  underrecovered  fuel
costs.  This surcharge  does not include the Thunder Basin judgment  discussed
below.

      On  May  1,  1995,  SPS  filed  with  the  PUCT  a  petition  for a fuel
reconciliation  for the months of January  1992  through  December  1994.  The
PUCT  issued an order in January  1996  requiring  SPS to make a $3.9  million
fuel refund  consisting of $2.1 million of  overrecovered  fuel costs and $1.8
million of  disallowed  fuel  costs for the  period.  This  refund was made in
April  1996.  Additionally,   the  order  required  SPS  to  pass  through  to
customers  100% of margins from non-firm  off-system  opportunity  sales as of
January  1995.  Prior  PUCT  rulings  had  allowed  SPS to retain 25% of these
margins.  The 100% flow  through is required by PUCT rules,  absent of waiver.
A motion for  rehearing on the fuel  disallowance  (which was adjusted to $1.9
million)  was  subsequently  denied  by the PUCT and SPS was  ordered  to flow
through 100% of the non-firm  off-system sales margin effective with the first
billing  cycle  after the date of the order.  Upon appeal by SPS to the Travis
County  District Court in May 1996, the PUCT's decision on the disallowed fuel
costs was upheld.  SPS appealed the decision and on January 29, 1998 the Texas
Court of Appeals  upheld the PUCT  decision  to disallow  fuel  costs.  SPS is
evaluating its  alternatives,  including filing an appeal to the Supreme Court
of Texas.


                                       91

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      SPS was named as a defendant in a case  entitled  Thunder Basin Coal Co.
vs.  Southwestern  Public Service Co., No. 93-CV304B (D. Wyo.). On November 1,
1994,  the jury  returned  a verdict  in favor of  Thunder  Basin and  awarded
damages of  approximately  $18.8  million.  SPS  appealed  the judgment to the
Tenth  Circuit  Court of Appeals and, on January 7, 1997,  that Court found in
favor of  Thunder  Basin and  upheld  the  judgment.  SPS  filed a motion  for
rehearing  which was denied.  In February 1997, SPS recorded the liability for
the judgment  including  interest and court costs. The amount of approximately
$22.3 million was paid in April 1997.

      On  September  17,  1996,   the  FERC  issued  an  order   granting  SPS
conditional  approval  to  collect  the  FERC  jurisdictional  portion  of the
Thunder Basin  judgment from  wholesale  customers.  On October 24, 1997,  the
NMPUC   issued  an  order   granting   recovery  of  the  New  Mexico   retail
jurisdictional  portion of the judgment.  On May 1, 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.  In November 1997,
the PUCT issued a decision  which denied  recovery of the  judgment  through a
surcharge,  on the grounds  that the costs are not  classified  as fuel costs.
In  1997,  SPS  expensed  approximately  $12.1  million  of the  Texas  retail
jurisdictional  portion of the Thunder Basin  judgment and recognized an equal
amount as deferred  revenue in  anticipation  of future  recovery  through the
fuel reconciliation proceeding.

      SPS  believes  that  recovery of the  Thunder  Basin costs for the Texas
retail  jurisdiction will be approved in a fuel  reconciliation  proceeding in
1998, but cannot predict the ultimate outcome.  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  $8.9  million,   of  which  $4.8  million  net  savings  is
attributable to Texas retail jurisdictional customers.

New Mexico

      On October 24,  1997,  the NMPUC  approved a fixed fuel factor for SPS's
New Mexico retail  jurisdiction,  effective  January 1998. This will employ an
over/under  fuel  collection  calculation  made on a monthly  basis.  SPS will
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 NMPUC a report of SPS's fuel and purchase power costs,  which will include
the current  over/under  recovery  balance and will  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.

Electric Department Earnings Test and Quality of Service Plan

PSCo

      The CPUC's  decision on the Merger  implemented  an electric  department
earnings  test with the  sharing  of  earnings  in excess of an 11%  return on
equity for the calendar years 1997-2001 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 CPUC's decision on the Merger also implemented a QSP which provides
for bill credits totaling up to $5 million in year one and increasing to $11
million in year five, if PSCo does not achieve certain performance measures
relating to electric reliability, customer complaints and telephone response
to inquiries.  On October 15, 1997, the CPUC issued an order addressing the
implementation of a reward mechanism in the QSP which 

                                       92

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

provides up to $3 million of annual rewards if PSCo achieves certain performance
measures relating to electric reliability.

      As of December 31, 1997, PSCo recorded an estimated customer refund
obligation of approximately $16.4 million related to the electric department
earnings test, net of QSP rewards.

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
clean  up  of  contamination  from  certain  hazardous   substances.   In  all
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 intends to pursue  recovery from other
Potentially  Responsible  Parties  ("PRPs").  To the extent such costs are not
recovered,  PSCo  currently  believes it is  probable  that such costs will be
recovered  through the rate  regulatory  process.  To the extent any costs are
not  recovered  through the options  listed  above,  PSCo would be required to
recognize an expense for such unrecoverable amounts.

      Under  the  Comprehensive   Environmental  Response,   Compensation  and
Liability Act ("CERCLA"),  the U.S.  Environmental  Protection  Agency ("EPA")
identified,  and a Phase II  environmental  assessment  revealed,  low  level,
widespread  contamination  from  hazardous  substances  at the  Barter  Metals
Company  ("Barter")  properties located in central Denver. For an estimated 30
years,  PSCo  sold  scrap  metal  and  electrical   equipment  to  Barter  for
reprocessing.  PSCo  has  completed  the  cleanup  of  this  site at a cost of
approximately  $9  million  and  has  received  responses  from  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 some of the policies.  PSCo plans to appeal the Colorado Court of Appeals
decision  to  the  Colorado  Supreme  Court.  Previously,  PSCo  had  received
certain  insurance  settlement  proceeds  from other  insurance  providers for
Barter and other  contaminated  sites and a portion of those funds  remains to
be  allocated to this site by the trial  court.  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  PRP's.  On
December 16, 1997, the U. S. District Court awarded summary  judgment in favor
of the remaining  PRPs,  on the basis 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.  Furthermore,  PSCo expects to recover  additional
expenditures through the sale of the Barter property.

      PCB  presence  was  identified  in the  basement of an  historic  office
building  located in downtown  Denver.  The Company was negotiating the future
cleanup  with the  current  owners;  however,  on October 5, 1993,  the owners
filed a civil action  against PSCo in the Denver  District  Court.  The action
alleged  that  PSCo was  responsible  for the PCB  releases  and  additionally
claimed other damages in  unspecified  amounts.  On August 8, 1994, the Denver
District  Court  entered  a  judgment   approving  a  $5.3  million  offer  of
settlement  between  PSCo and the building  owners  resolving  all claims.  In
December 1995,  complaints were filed by PSCo against all applicable insurance
carriers in the Denver

                                       93

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

District  Court.  On June 30, 1997,  the Court ruled in favor of the carriers on
summary judgment motions  addressing late notice and other issues. On August 27,
1997,  PSCo filed an appeal of the decision with the Colorado  Court of Appeals.
Two carriers  were  excluded  from this  proceeding;  subsequently,  one carrier
received approval to be dismissed on the same basis as the other carriers.  PSCo
intends to pursue recovery from the remaining carrier.

      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 fully  intends to 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's and SPS's  facilities must comply with the
Phase II  requirements,  which will be effective in the year 2000.  Currently,
these  regulations  permit  compliance with 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) 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.  PSCo
and SPS will be required to modify certain  boilers by the year 2000 to reduce
the NOx  emissions  in  order  to  comply  with  Phase  II  requirements.  The
estimated  Phase  II  costs  for  future  plant   modifications  to  meet  NOx
requirements is  approximately  $14.4 million for PSCo's Cherokee Unit 1 and 2
and Arapahoe  Unit 3. SPS  installed  two new gas  turbines at its  Cunningham
Station  in  1997.  The two  gas  turbine  units  have  undergone  performance
testing to meet the  requirements of the air quality permit.  The test results
indicated  the  units  may  not  be  in  compliance   with  certain   emission
limitations.  SPS is working with the vendor and the New Mexico  Environmental
Department to insure compliance with all permit limits.

      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.

Hayden Steam Electric Generating Station

      On May 21,  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 make
certain  payments  totaling  $4.25  million  to the U.S.  Treasury  and  other
organizations  (PSCo's  portion was  approximately  $2.3  million) and 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.

Craig Steam Electric Generating Station

      On October 9, 1996,  a  conservation  organization  filed a complaint in
the U.S.  District  Court  pursuant to provisions of the Federal Clean Air Act
(the "Act")  against the joint owners of the Craig Steam  Electric  Generating
Station located in western  Colorado.  Tri-State  Generation and  Transmission
Association,  Inc.  is the  operator  of the

                                       94

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Craig  station and PSCo owns an undivided  interest  (acquired in April 1992) in
each of two units at the station  totaling  approximately  9.7%.  The  plaintiff
alleged that: 1) the station  exceeded the 20% opacity  limitations in excess of
14,000 six minute  intervals  during the period extending from the first quarter
of 1991 through the second  quarter of 1996, and 2) the owners failed to operate
the station in a manner  consistent with good air pollution  control  practices.
The complaint seeks, among other things, civil monetary penalties and injunctive
relief.  The Act provides for penalties of up to $25,000 per day per  violation,
but the level of penalties imposed in any particular  instance is discretionary.
A settlement conference was held in February 1998. Resolution of this matter may
require installation of 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.

Pepsi Center

      Hazardous  substances  resulting from  manufactured gas plant operations
have been  identified  at the future  site of the  proposed  Pepsi  Center,  a
sports  arena to be located in lower  downtown  Denver.  The site  owners have
approached  PSCo,  seeking  recovery  of most of the costs of  cleanup  of the
site.  Total  estimated  soil  cleanup  costs  range  from $1-2  million.  The
estimate does not include  potential  costs to clean up affected  ground water
contamination, if any exists.  PSCo's insurance carriers have been notified.

Fort St. Vrain

      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 site were released for unrestricted use.

      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.  This  request  is  being  reviewed  by the NRC and PSCo
anticipates approval in late-1998.

      As a result of the DOE  settlement,  coupled  with a complete  review of
expected remaining  decommissioning costs and establishment of the anticipated
refund to customers,  pre-tax  earnings for 1996 were  positively  impacted by
approximately  $16  million.  In  accordance  with the 1991 CPUC  approval  to
recover certain  decommissioning  costs, 50% of any cash amounts received from
the DOE as part of a  settlement,  net of costs  incurred  by PSCo,  including
legal  fees,  is to be refunded or  credited  to  customers.  At December  31,
1997,  a  $5.3  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.

                                       95

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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, 1997, the total estimated obligations,  based on 1997 prices, for
PSCo were  approximately  $849 million,  and for SPS were  approximately  $1.3
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.  During
1996, PSCo  renegotiated  contracts with its primary gas pipeline supplier and
committed to continue  purchasing firm transportation and gas storage services
through  2002.  At December  31,  1997,  PSCo has minimum  annual  obligations
under  such  contracts  of  approximately   $213  million  in  1998  declining
thereafter for a total  estimated  commitment of  approximately  $409 million.
The  combined  PSCo and Cheyenne  minimum  annual  obligation  at December 31,
1997,  under such  contracts is  approximately  $216 million in 1998 declining
thereafter for a total  estimated  commitment of  approximately  $415 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 to various regional power pools.

      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.  In general,  these  contracts  provide for
capacity  and  energy  payments  which  approximate  the cost of the  sellers.
Total  capacity and energy  payments  associated  with such  contracts for NCE
were $477  million,  $473 million,  and $451  million;  for PSCo such payments
were $452 million,  $453 million and $445 million;  and, for SPS such payments
were  $15  million,  $20  million  and $6  million  in 1997,  1996  and  1995,
respectively.

      At December 31, 1997,  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
  1998..............................        $  144,973   $  184,772  $  329,745
  1999..............................           157,741      175,046     332,787
  2000..............................           156,106      163,989     320,095
  2001..............................           154,926      142,302     297,228
  2002..............................           142,629      130,534     273,163
  2003 and thereafter...............         1,248,877    1,137,900   2,386,777
                                             ---------    ---------   ---------
   Total............................        $2,005,252   $1,934,543  $3,939,795
                                            ==========   ==========  ==========

                                       96

<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


                                                            Regional
                                                   QFs     Utilities       Total
                                                   ---     ---------       -----
 
PSCo
  1998..............................        $  140,466   $  176,757  $  317,223
  1999..............................           140,852      166,620     307,472
  2000..............................           138,937      155,226     294,163
  2001..............................           137,480      142,301     279,781
  2002..............................           124,878      130,534     255,412
  2003 and thereafter...............           864,510    1,137,901   2,002,411
                                               -------    ---------   ---------
   Total............................        $1,547,123   $1,909,339  $3,456,462
                                            ==========   ==========  ==========

SPS
  1998..............................          $  4,507     $     -     $  4,507
  1999..............................            16,889           -       16,889
  2000..............................            17,169           -       17,169
  2001..............................            17,446           -       17,446
  2002..............................            17,751           -       17,751
  2003 and thereafter...............           384,367           -      384,367
                                               -------                  -------
   Total............................          $458,129     $     -     $458,129
                                              ========     ======      ========

      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.  In conjunction  with the  agreement,  the NMPUC has
initiated  Case  2651 to  investigate  whether  the  agreement  constitutes  a
security, or the guarantee of a security,  under the New Mexico Public Utility
Act. 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.  Post  hearing  briefs were
filed.  The hearing examiner's recommendation is expected during 1998.

      EPE requested a declaratory  judgment regarding the condemnation stating
that it is not a legal  condemnation.  During the first  quarter of 1997,  the
governor  of New  Mexico  signed and issued  legislation  regarding  municipal
condemnations  which allows the City to complete  its action  against EPE. The
City has not completed its  condemnation as it is awaiting a determination  of
the stranded costs allocated to the system.

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 has

                                       97

<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

commitments related to the purchase of materials, plant and equipment additions,
DSM  expenditures  and other various items  resulting  from the normal course of
business.

Employee Matters

      Several  employee  lawsuits  have  been  filed  against  PSCo  involving
alleged  discrimination  or  workers'  compensation  issues  which have arisen
during the normal course of business.  Also,  lawsuits have been filed against
PSCo  alleging  breach  of  certain   fiduciary   duties  to  employees.   The
plaintiffs  lawsuits are in various  stages of  litigation  and/or  appeal(s),
including  settlement  discussions,  with the  appropriate  state and  federal
judicial  courts.  PSCo  intends to contest,  or is actively  contesting,  all
such  lawsuits,  and believes  the  ultimate  outcome will not have a material
adverse impact on the Company's results of operations,  financial  position or
cash flow.

      During 1996, ninety former  Information  Technology and Systems ("IT&S")
employees  filed a lawsuit  against the Company.  The  complaint  alleged that
PSCo unfairly  amended its severance plan in connection  with a  restructuring
in late 1994 to exclude the IT&S  function/positions that were outsourced to a
subsidiary of IBM,  effective  February 1, 1995. On June 16, 1997,  the Denver
District  Court  issued a decision in favor of the former IT&S  employees  and
awarded  approximately  $1.6 million in severance  costs and, in a judgment on
October  10,  1997,  the former  IT&S  employees  were  awarded  interest  and
attorney fees as well,  making the total  judgment  against PSCo $2.1 million.
An  additional  case  with 153  former  IT&S  employees  was  filed  asserting
identical  claims.  Settlement  on both  cases  was  achieved  in early  1998.
During 1997,  PSCo accrued  related costs,  including  estimated  interest and
attorney  fees.  In early 1998,  an additional  lawsuit,  asserting  identical
claims, was filed on behalf of 18 former IT&S employees.

      Certain employees terminated as part of PSCo's 1991/1992  organizational
analysis  asserted breach of contract and promissory  estoppel with respect to
job  security and breach of the  covenant of good faith and fair  dealing.  Of
the 21 actions filed,  the trial court  directed  verdicts in favor of PSCo in
19 cases.  A jury  entered  verdicts  adverse to PSCo in two cases  which were
subsequently  appealed by PSCo.  On February 6, 1997,  the  Colorado  Court of
Appeals  issued  a  decision  on all  issues  in favor of PSCo and on April 3,
1997, the employees  appealed the decision of the Colorado Court of Appeals to
the Colorado  Supreme  Court.  In October  1997,  the Colorado  Supreme  Court
denied the petition for appeal, effectively ending this lawsuit.

      During 1996,  complaints were filed by seventeen  plaintiffs,  allegedly
on behalf of all non-managerial,  non-clerical women in the Company's regional
facilities.   The  complaints  assert  that  the  Company  has  engaged  in  a
company-wide pattern and practice of sexual  discrimination,  including sexual
harassment  and  retaliation.  During  July 1997,  the  Company  resolved  all
issues related to this matter and accrued all related estimated costs.

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   1,082  employees,   or  47%  of  PSCo's  total
workforce,  are  represented  by the  International  Brotherhood of Electrical
Workers, ("IBEW"), Local 111.

      During 1996,  the IBEW,  Local 111 filed several  grievances  before the
National  Labor   Relations  Board  relating  to  the  employment  of  certain
non-union  personnel  to  perform  services  for  PSCo.  A  decision  has been
entered  on  three of the  multiple  grievances,  with two of those  decisions
requiring  that PSCo pay union wage rates on new  construction  jobs performed
by  outside  vendors.  PSCo had filed suit  seeking  to  reverse  one of these
decisions  and   challenging  the   subcontracting   provision  of  the  labor
agreement,  all of the outstanding  subcontracting  grievances and both of the
existing  adverse  decisions,  as violations of federal law. During 1997, PSCo
and the union reached a settlement  resolving all issues and PSCo withdrew its
previously filed lawsuit.

                                       98

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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  850 employees,  or 55% of
SPS's total workforce, are represented by the IBEW, Local 602.

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 1998 to 2025.  The net
book  value of  property  under  capital  leases was $44.7  million  and $44.4
million  for NCE and  PSCo,  respectively  at  December  31,  1997,  and $49.2
million for NCE and PSCo at December 31, 1996.  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 1997, 1996 and 1995
was $36.2  million,  $26.9 million and $25.4 million,  respectively,  for NCE;
$31.1 million,  $25.0 million and $23.5 million,  respectively,  for PSCo; and
$4.3 million,  $3.7 million and $3.9  million,  respectively,  for SPS.  SPS's
rental expense for the Transition Period was $1.2 million.

      Estimated future minimum lease payments at December 31, 1997 are as
follows (thousands of dollars):

Capital Leases
                                                          NCE        PSCo 
                                                          ---        ---- 
1998 ..............................................    $ 9,505     $ 9,346
1999...............................................      8,050       7,890
2000...............................................      5,137       5,092
2001...............................................      5,035       5,035
2002...............................................      4,820       4,820
All years thereafter...............................     76,358      76,358
                                                        ------      ------
    Total future minimum lease payments                108,905     108,541
    Less amounts representing interest.............     64,158      64,149
                                                        ------      ------
    Present value of net minimum lease payments....    $44,747     $44,392
                                                       =======     =======

Operating Leases
                                              NCE        PSCo         SPS 
                                              ---        ----         --- 
1998 .................................     $23,036     $19,841     $ 2,426
1999..................................      19,143      16,176       2,389
2000..................................      15,767      13,227       2,284
2001..................................       9,631       7,567       1,944
2002..................................       4,408       4,058         235
All years thereafter.................       18,392      17,899           -
                                            ------      ------         ---
    Total future minimum lease payments    $90,377     $78,768     $ 9,278
                                           =======     =======     =======

      PSCo has in place a leasing  program which includes a provision  whereby
PSCo  indemnifies  the lessor for all  liabilities  which might arise from the
acquisition, use, or disposition of the leased property.


                                       99

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Year 2000 Costs

      Based on a preliminary  analysis,  the Company expects to incur costs of
approximately  $50-65  million  over the next two years to modify its computer
software,  hardware and other  automated  systems used in operations  enabling
proper data processing  relating to the year 2000 and beyond.  The majority of
these  costs will be  incurred  by or  allocated  to the  Company's  operating
utilities.  The  costs  recognized  by  PSCo  and SPS  are  anticipated  to be
slightly  less  than  two-thirds  and  one-third,  respectively,  of the total
estimated  costs.  The Company  continues to evaluate  appropriate  courses of
corrective   action,   including  the  replacement  of  certain   systems.   A
significant  portion  of  these  costs  will  represent  the  redeployment  of
existing  information   technology   resources.   If  such  modifications  and
conversions  are not  completed  timely,  the  year  2000  problem  may have a
material  impact  on  the  operations  of the  Company.  Management  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.

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, 1997 are:

                                    Plant                Construction
                                     in     Accumulated    Work in
                                   Service Depreciation   Progress   Ownership %
                                   ------- ------------   --------   -----------
                                        (Thousands of Dollars)

   Hayden Unit 1................   $38,452     $30,735     $ 10,867      75.50
   Hayden Unit 2................    58,356      34,204        1,846      37.40
   Hayden Common Facilities.....     4,002         453        7,520      53.10
   Craig Units 1 & 2............    57,662      24,665           47       9.72
   Craig Common Facilities Units
      1 & 2 ....................    10,181       3,164           28       9.72
   Craig Common Facilities Units
      1,2 & 3 ..................     8,780       3,503           19       6.47
   Transmission Facilities, 
     Including Substations          79,330      23,402           84   42.0-73.0
                                    ------      ------           --
                                  $256,763    $120,126     $ 20,411
                                  ========    ========     ========

      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  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.

                                      100

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

12. Employee Benefits (NCE, PSCo and SPS)

Pensions

      The  Company  and  its  subsidiaries  maintain  noncontributory  defined
benefit  pension  plans  which  cover  substantially  all  employees.   As  of
December 31, 1997,  PSCo and SPS have separate  employee  pension  plans.  NCS
and other NCE  affiliates  participated  in these plans during  1997.  Certain
new NCE pension plans will be established in 1998.

The net  pension  expense  for  these  plans in  1997,  1996,  1995 and  SPS's
transition period was comprised of:

1997                                    NCE         PSCo        SPS     
----                                    ---         ----        ---     
                                           (Thousands of Dollars)

Service cost.......................   $  18,418    $ 13,360   $ 5,058
Interest cost on projected benefit 
  obligation ......................      68,327      48,245    20,082
Actual return on plan assets.......    (189,597)   (102,719)  (86,878)
Amortization of net transition assets
 over 15-17 year periods* .........      (7,238)     (3,674)   (3,564)
Deferral and other items...........     100,192      47,535    52,657
                                        -------      ------    ------
   Net pension expense (benefit)...    $ (9,898)    $ 2,747  $(12,645)
                                       ========     =======  ======== 

                                                                          SPS
                                                                      Transition
1996                                     NCE        PSCo       SPS      Period
----                                     ---        ----       ---      ------
                                           (Thousands of Dollars)

Service cost.......................    $ 21,226     $14,317  $  6,846  $  2,390
Interest cost on projected benefit 
 obligation .......................      66,503      46,497    20,266     7,066
Actual return on plan assets.......    (133,301)    (74,646)  (53,666)  (22,878)
Amortization of net transition assets
 over 15-17 year periods* .........      (7,238)     (3,674)   (3,564)   (1,188)
Deferral and other items...........      59,217      24,362    30,973    14,601
                                         ------      ------    ------    ------
   Net pension expense (benefit)...    $  6,407     $ 6,856  $    855   $    (9)
                                       ========     =======  ========   ======= 
 
1995                                     NCE        PSCo       SPS 
----                                     ---        ----       --- 
                                           (Thousands of Dollars)

Service cost.......................    $ 18,203     $11,659  $  6,606
Interest cost on projected benefit 
 obligation .......................      65,574      46,570    19,563
Actual return on plan assets.......    (161,443)   (123,531)  (37,912)
Amortization of net transition assets
 over 15-17 year periods* .........      (7,238)     (3,674)   (3,564)
Deferral and other items...........      91,455      75,521    16,404
                                         ------      ------    ------
   Net pension expense.............    $  6,551      $6,545    $1,097
                                       ========      ======    ======

* PSCo is  amortizing  its net  transition  assets  over 17  years  and SPS is
amortizing its net transition assets over 15 years.

                                     1997          1996         1995  
                                     ----          ----         ----  

                                 PSCo  SPS**     PSCo  SPS*   PSCo  SPS
                                 ----  -----     ----  ----   ----  ---
Significant assumptions:
  Discount rate                  7.75% 7.5/8.0%  7.25% 8.0%   8.75% 8.0%
  Expected long-term increase
  in compensation level          4.25%  6.0/4.5% 4.00% 6.0%   5.00% 6.0%
  Expected weighted average
  long-term rate of return
   on assets                     9.75%  9.75%    9.75% 8.0%   9.75% 8.0%

*  The assumptions  used in 1996 for SPS were the same assumptions used for the
   SPS transition period.
** Assumptions used for January to April/May to December 1997 periods.

      Variances  between  actual  experience  and  assumptions  for  costs and
returns on assets are amortized  over the average  remaining  service lives of
employees in the plans.
                                      101

<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      A comparison of the actuarially  computed  benefit  obligations and plan
assets at December 31, 1997 and 1996,  is presented  in the  following  table.
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.

1997                                             NCE       PSCo       SPS   
----                                             ---       ----       ---   
                                                 (Thousands of Dollars)
Actuarial present value of benefit obligations:
   Vested..................................  $  853,533  $596,379  $257,154
   Nonvested...............................      14,924     6,155     8,769
                                                 ------     -----     -----
       ....................................     868,457   602,534   265,923
Effect of projected future salary increases     123,516    91,220    32,296
                                                -------    ------    ------
Projected benefit obligation...............     991,973   693,754   298,219

Plan assets at fair value..................  (1,131,270) (699,241) (432,029)
                                             ----------  --------  -------- 
Excess of plan assets over projected benefit
 obligation ...............................     139,297     5,487   133,810

Unrecognized net gain......................    (111,191)   (2,195) (108,996)
Prior service costs not yet recognized in net
 periodic pension cost ....................      26,476    25,455     1,021
Unrecognized net transition assets being
 recognized over 15-17 year periods .......     (38,108)  (18,369)  (19,739)
                                                -------   -------   ------- 
Prepaid pension asset......................  $   16,474  $ 10,378  $  6,096
                                             ==========  ========  ========


1996                                             NCE       PSCo       SPS   
----                                             ---       ----       ---   
                                                 (Thousands of Dollars)
Actuarial present value of benefit obligations:
   Vested..................................  $ 734,168   $514,762   $ 219,406
   Nonvested...............................     39,557     28,689      10,868
                                                ------     ------      ------
       ....................................    773,725    543,451     230,274
Effect of projected future salary increases    145,727     85,216      60,511
                                               -------     ------      ------
Projected benefit obligation...............    919,452    628,667     290,785

Plan assets at fair value..................   (996,085)  (634,967)   (361,118)
                                              --------   --------    -------- 
Excess of plan assets over projected benefit
 obligation ...............................     76,633      6,300      70,333

Unrecognized net loss (gain)...............    (57,154)     1,110     (58,264)
Prior service costs not yet recognized in net
 periodic pension cost ....................     28,897     27,758       1,139
Unrecognized net transition assets being
 recognized over 15-17 year periods .......    (41,798)   (22,042)    (19,756)
                                               -------    -------     ------- 
Prepaid pension asset......................  $   6,578   $ 13,126   $  (6,548)
                                             =========   ========   ========= 

                                              1997        1996  
                                              ----        ----  
                                          PSCo & SPS  PSCo   SPS
                                          ----------  ----   ---
Significant assumptions:
  Discount rate                              7.0%    7.75%   7.5%
  Expected long-term increase in
   compensation level                        4.0%    4.25%   6.0%

      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  for  both  1997  and  1996  totaled
approximately  $12 million.  The contribution for 1995 was  approximately  $11
million.

                                      102

<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Postretirement Benefits Other Than Pensions

      The Company and its subsidiaries provide certain  post-retirement health
care and life  insurance  benefits for  substantially  all employees who reach
retirement  age while working for the Company.  Historically,  the Company has
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.

      Effective  January 1, 1993,  PSCo  adopted  SFAS 106 based on a level of
expense  determined in accordance with the CPUC.  PSCo has been  transitioning
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  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.

      The net  periodic  postretirement  benefit  cost in 1997,  1996 and 1995
under SFAS 106 was comprised of:

                                               NCE       PSCo       SPS 
                                               ---       ----       --- 
1997                                          (Thousands of Dollars)

Service cost.............................   $  6,121    $ 4,999    $ 1,030
Interest cost............................     26,537     21,254      4,782
Return on plan assets....................     (9,240)    (6,376)    (2,572)
Curtailment expense......................      3,323          -      3,323
Amortization of net transition obligation
 over a 20 year amortization period and
 deferrals...............................     14,992     12,399      2,283
                                              ------     ------      -----
Net postretirement benefit cost required
 by SFAS 106.............................     41,733     32,276      8,846
OPEB expense recognized in accordance with
 current regulation......................    (36,351)   (26,730)    (9,010)
                                             -------    -------     ------ 
Increase (decrease) in regulatory asset
 (Note 1)................................      5,382      5,546       (164)
Regulatory asset at beginning of period..     57,641     54,449      3,192
                                              ------     ------      -----
Regulatory asset at end of period........   $ 63,023    $59,995    $ 3,028
                                            ========    =======    =======


                                                                         SPS
                                                                      Transition
                                             NCE      PSCo       SPS    Period
                                             ---      ----       ---    ------
1996                                               (Thousands of Dollars)

Service cost.............................  $ 8,191   $ 6,928   $ 1,266  $   419
Interest cost............................   27,998    22,982     5,109    1,608
Return on plan assets....................   (5,710)   (4,500)   (1,964)     100
Amortization of net transition obligation
 over a 20 year amortization period and 
 deferrals...............................   14,775    12,710     3,049       31
                                            ------    ------     -----       --
Net postretirement benefit cost required
 by SFAS 106 ............................   45,254    38,120     7,460    2,158
OPEB expense recognized in accordance with
 current regulation .....................  (37,981)  (31,271)   (6,715)  (2,230)
                                           -------   -------    ------   ------ 
Increase (decrease) in regulatory asset
 (Note 1)................................    7,273     6,849       745      (72)
Regulatory asset at beginning of period..   50,368    47,600     2,519    3,264
                                            ------    ------     -----    -----
Regulatory asset at end of period........  $57,641   $54,449   $ 3,264   $3,192
                                           =======   =======   =======   ======

                                      103

<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                                              NCE        PSCo     SPS   
                                              ---        ----     ---   
1995                                          (Thousands of Dollars)
Service cost..............................  $ 7,240   $ 6,027   $ 1,213
Interest cost.............................   29,604    24,761     4,843
Return on plan assets.....................   (3,301)   (2,578)     (723)
Amortization of net transition obligation 
 over a 20 year amortization period and
 deferrals................................   15,186    12,710     2,476
                                             ------    ------     -----
Net postretirement benefit cost required 
 by SFAS 106..............................   48,729    40,920     7,809
OPEB expense recognized in accordance with
 current regulation ......................  (37,933)  (30,893)   (7,040)
                                            -------   -------    ------ 
Increase in regulatory asset (Note 1).....   10,796    10,027       769
Regulatory asset at beginning of period...   39,323    37,573     1,750
                                             ------    ------     -----
Regulatory asset at end of period.........  $50,119   $47,600    $2,519
                                            =======   =======    ======

                                     1997             1996          1995   
                                     ----             ----          ----   
                                 PSCo     SPS**   PSCo    SPS*  PSCo     SPS
                                 ----     -----   ----    ----  ----     ---
Significant assumptions:
  Discount rate                  7.75%   7.5/8.0% 7.25%   8.0%   8.75%   8.0%
  Expected long-term increase 
   in compensation level         4.00%   6.0/4.5% 4.00%   6.0%   5.00%   6.0%
  Expected weighted average
   long-term rate of return
   on assets                     9.75%    9.75%    9.75%   8.0%   9.75%   8.0%

*  The assumptions  used in 1996 for SPS were the same assumptions used for the
   SPS transition period.
** Assumptions used for January to April/May to December 1997 periods.

      A comparison of the actuarially  computed  benefit  obligations and plan
assets for 1997 and 1996 is  presented  in the  following  table.  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.

                                                 NCE     PSCo     SPS   
                                                 ---     ----     ---   
1997                                          (Thousands of Dollars)
Accumulated postretirement benefit obligation:
   Retirees and eligible beneficiaries.      $ 163,730  $ 122,945  $ 37,066
   Other fully eligible plan participants      103,593    100,371       458
   Other active plan participants......        109,362     88,761    17,934
                                               -------     ------    ------
       Total...........................        376,685    312,077    55,458
Plan assets at fair value .............       (112,324)   (80,480)  (27,517)
                                              --------    -------   ------- 
Accumulated benefit obligation in excess
 of plan assets .......................        264,361    231,597    27,941
Unrecognized net gain..................         26,079     13,087    12,457
Unrecognized transition obligations over 
  a 20 year amortization period .......       (227,724)  (185,989)  (36,598)
                                              --------   --------   ------- 
Accrued postretirement benefit obligation   $   62,716  $  58,695  $  3,800
                                            ==========  =========  ========

                                                 NCE     PSCo       SPS   
                                                 ---     ----       ---   
1996                                          (Thousands of Dollars)
Accumulated postretirement benefit obligation:
   Retirees and eligible beneficiaries.      $148,460  $ 110,692  $ 37,768
   Other fully eligible plan participants      84,439     81,676     2,763
   Other active plan participants......       117,456     90,559    26,897
                                              -------     ------    ------
       Total...........................       350,355    282,927    67,428
Plan assets at fair value .............       (88,673)   (63,744)  (24,929)
                                              -------    -------   ------- 
Accumulated benefit obligation in excess
 of plan assets .......................       261,682    219,183    42,499
Unrecognized net gain .................        44,794     39,847     4,947
Unrecognized transition obligations over
 a 20 year amortization period ........      (247,925)  (203,353)  (44,572)
                                             --------   --------   ------- 
Accrued postretirement benefit obligation   $  58,551  $  55,677  $  2,874
                                            =========  =========  ========

                                            1997            1996  
                                            ----            ----  
                                          PSCo & SPS   PSCo       SPS
                                          ----------   ----       ---
Significant assumptions:
  Discount rate                              7.0%       7.75%     7.5%
  Expected long-term increase in
   compensation level                        4.0%        4.0%     6.0%


                                      104

<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      The assumed health care cost trend rate for 1998 is 8.5%,  decreasing to
4.5% in 2006 in 0.5% annual  increments.  A 1% increase in the assumed  health
care cost trend rate will increase the  estimated  total  accumulated  benefit
obligation  for PSCo by $37.0  million  and for SPS by $7.1  million,  and the
service and interest cost  components of net periodic  postretirement  benefit
costs for PSCo  by $5.0 million and SPS by $0.8 million.

Postemployment Benefits

      In 1994,  the Company and its regulated  subsidiaries  adopted SFAS 112,
which establishes the accounting  standards for employers who provide benefits
to former  or  inactive  employees  after  employment  but  before  retirement
(postemployment  benefits).  At December  31,  1997,  the Company has recorded
a $28.0 million liability on the consolidated  balance sheet, using an assumed
discount  rate of 7.0%.  These  costs have  historically  been  recorded  on a
pay-as-you-go  basis.  Regulatory  assets were  recorded  upon the adoption of
SFAS 112 in  anticipation  of  obtaining  future rate  recovery of these costs
recorded.  PSCo filed a FERC rate case in December  1995 and a retail gas rate
case in June  1996  which  included  requests  for  recovery  of all  electric
wholesale  and gas  retail  jurisdictional  SFAS  112  costs.  A  final  order
approving the FERC settlement  agreement,  which includes the recovery of SFAS
112 costs,  was  received  in June 1997.  In the 1996 PSCo gas rate case,  the
CPUC  denied  PSCo's  request  to  amortize  the  approximately  $8.9  million
regulatory asset (gas jurisdictional  portion) recognized upon the adoption of
SFAS  112.  PSCo has  appealed  to the  Denver  District  Court  the  decision
related to this issue and is  assessing  the  impact of this  decision  on the
future  recovery  of  PSCo's  electric  jurisdictional  portion  (see  Note 1.
Summary  of   Significant   Accounting   Policies  -  Regulatory   Assets  and
Liabilities).  Management  believes  it is  probable  that  the  Company  will
receive the other 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 SFAS 123.  Cash,  restricted  stock and  stock  option  awards  were made
under these plans during 1997, 1996 and 1995.

      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  $2.8 million in 1997,  which
would have reduced earnings per share by  approximately  $0.03. The net income
would have been reduced by an insignificant  amount with no impact on earnings
per share for 1996 and 1995.

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, 1997,
1996 and 1995 and changes during the years then ended is presented in the
table below:

                                      105

<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>

                                         NCE*                     PSCo                      SPS     
                                         ----                     ----                      ---     
                                            Weighted-                  Weighted-                  Weighted-
                                            Average                    Average                    Average
                                   Shares   Exercise Price  Shares     Exercise Price   Shares    Exercise Price
                                   ------   --------------  ------     --------------   ------    --------------
1997
<S>                                <C>         <C>           <C>         <C>             <C>         <C>
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                      $    -

1995
Outstanding at beginning of year    262,932    $29.52        195,744     $28.53           70,724     $30.79
Granted                             161,000     30.29        161,000      30.29                -          -
Exercised                             5,685     32.38            267      29.00            5,703      30.92
Forfeited                            11,130     29.93          8,546      29.17            2,720      30.81
                                     ------                    -----                       -----
Outstanding at year of year         407,117     29.78        347,931      29.33           62,301      30.78
                                    =======                  =======                      ======         
Exercisable at end of year          134,809     28.88        125,931      28.52            9,345      32.34
                                    =======                  =======                       =====

Weighted-average fair value
              of options granted               $ 5.39                    $ 5.39                      $    -

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                                                                     -
                                                                                             ---

* Amounts  reflect the  conversion  of SPS and PSCo stock options to NCE stock
options.
</TABLE>

     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:
                                                               1997     1996
                                                               ----     ----
Expected  option life..................................     10 years  10 years
Stock volatility.......................................        13.3%    11.95%
Risk-free interest rate................................        6.15%     6.21%
Dividend yield.........................................         5.4%      5.8%

Additionally, 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

                                      106

<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

accrued under the incentive programs totaled approximately $4.2 million in 1997,
$10.9 million in 1996 and $9.1 million in 1995.

     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,  1997,  1996 and 1995,  and for SPS for the years ended  December
31, 1997,  August 31, 1996 and 1995 and for the four months ended December 31,
1996 and 1995 consist of the following (in thousands):

            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
                                             ========     =======     =======

            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
                                             ========     =======     =======

                                      107

<PAGE>


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


            1995                                NCE          PSCo        SPS
                                                ---          ----        ---
Current income taxes:
   Federal..........................         $115,025     $58,728     $56,297
   State............................            4,691       2,807       1,884
                                                -----       -----       -----
     Total current income taxes.....          119,716      61,535      58,181
                                              -------      ------      ------
Deferred income taxes:
   Federal..........................           47,327      38,006       9,321
   State............................            1,560       1,164         396
                                                -----       -----         ---
   Total deferred income taxes......           48,887      39,170       9,717
                                               ------      ------       -----

Investment tax credits - net........           (5,598)     (5,348)       (250)
                                               ------      ------        ---- 

Total provision for income taxes....         $163,005     $95,357     $67,648
                                             ========     =======     =======

                                          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
                                          ========        =======

                                      108

<PAGE>


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

            1997
                                        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)         -      -
  Other-net....................      (6,271)  (1.4)    (5,680) (1.9)       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%
                                   ========   ====   ========  ====    =======   ==== 
            1995
                                        NCE           PSCo              SPS     
Tax computed at U.S. statutory 
  rate on pre-tax accounting
  income ......................    $161,469   35.0%  $ 95,975  35.0%   $65,494   35.0%
Increase (decrease) in tax from:
  Allowance for funds used
   during construction.........      (2,817)  (0.6)    (2,495) (0.9)      (322)  (0.2)
  Amortization of investment tax
   credits ....................      (5,598)  (1.2)    (5,348) (1.9)      (250)  (0.1)
  State income taxes, net of 
  Federal income tax benefit ..        3,806   0.8      2,581   0.9      1,225    0.7
  Cash surrender value of life
   insurance policies..........       (9,546) (2.1)    (9,546) (3.5)       (76)     -
  Amortization of prior flow-
   through amounts ............       10,509   2.3     10,509   3.8          -      -
  Merger related costs - 
   non-deductible .............        2,225   0.5      1,414   0.5        170    0.1
  Other-net....................        2,957   0.7      2,267   0.9      1,407    0.7
                                       -----   ---      -----   ---      -----    ---
   Total income taxes..........     $163,005  35.4%  $ 95,357  34.8%   $67,648   36.2%
                                    ========  ====   ========  ====    =======   ==== 
</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%
                                       =======  ====   =======   ==== 

                                      109

<PAGE>


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      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,
1997,  PSCo and SPS are fully  normalized  for FERC  jurisdictional  purposes.
For state  jurisdictional  purposes,  PSCo is fully normalized in Colorado and
Wyoming  and SPS is fully  normalized  in  Texas  and  Oklahoma.  SPS is fully
normalized to the extent  allowed by its  regulators in New Mexico and 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).

      The  tax  effects  of  significant  temporary  differences  representing
deferred  tax  liabilities  and assets as of December 31, 1997 and 1996 are as
follows (in thousands):

            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
                                             =========    ========    ========

            1996                                NCE           PSCo       SPS
                                                ---           ----       ---  
Deferred income tax liabilities:
  Accelerated depreciation and 
    amortization ...................         $ 685,244    $412,047    $273,197
  Plant basis differences (prior 
    flow-through) ..................           188,120     132,149      55,971
  Allowance for equity funds used 
    during construction ............            81,559      48,952      32,607
  Pensions..........................            40,075      38,790       1,285
  Other.............................            99,164      68,940      30,224
                                                ------      ------      ------
   Total............................         1,094,162     700,878     393,284
Deferred income tax assets:
  Investment tax credits............           68,484       65,278       3,206
  Contributions in aid of construction         65,489       63,317       2,172
  Other.............................           45,692       28,641      17,051
                                               ------       ------      ------
   Total............................          179,665      157,236      22,429
                                              -------      -------      ------
Net deferred income tax liability...         $914,497     $543,642    $370,855
                                             ========     ========    ========

      As of  December  31,  1997,  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.

                                      110

<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

14. Segments of Business (NCE and PSCo)

NCE
               1997                   Electric      Gas      Other       Total
                                      --------      ---      -----       -----
                                                 (Thousands of Dollars)

Operating revenues.................. $2,473,359  $ 816,596  $ 52,570 $3,342,525
                                     ----------  ---------  -------- ----------
Operating expenses, excluding 
  depreciation and amortization.....  1,740,338    705,984    23,900  2,470,222
Depreciation and amortization.......    193,970     42,760     6,348    243,078
                                        -------     ------     -----    -------
  Total operating expenses..........  1,934,308    748,744    30,248  2,713,300
                                      ---------    -------    ------  ---------
Operating income....................    539,051     67,852    22,322    629,225
                                        =======     ======    ======    =======
Plant construction expenditures*....    365,366    107,008     3,123    475,497
                                        =======    =======     =====    =======

Identifiable assets:
  Property, plant and equipment*....  4,585,582    872,056    75,738  5,533,376
  Materials and supplies............     61,950      5,129     1,332     68,411
  Fuel inventory....................     23,017          -       145     23,162
  Gas in underground storage........          -     47,394         -     47,394
  Other corporate assets............                                  1,637,938
                                                                      ---------
                                                                     $7,310,281
                                                                     ==========
                       1996               

Operating revenues.................. $2,416,539    $640,497 $ 39,998 $3,097,034
                                     ----------    -------- -------- ----------
Operating expenses, excluding
 depreciation and amortization......  1,651,960     549,223   35,403  2,236,586
Depreciation and amortization.......    182,665      35,735    6,465    224,865
                                        -------      ------    -----    -------
  Total operating expenses..........  1,834,625     584,958   41,868  2,461,451
                                      ---------     -------   ------  ---------
Operating income (loss).............    581,914      55,539   (1,870)   635,583
                                        =======      ======   ======    =======
Plant construction expenditures*....    356,464      96,842    1,662    454,968
                                        =======      ======    =====    =======

Identifiable assets:
  Property, plant and equipment*....  4,400,189     805,372   83,522  5,289,083
  Materials and supplies............     58,122       7,325    1,301     66,748
  Fuel inventory....................     26,914           -      145     27,059
  Gas in underground storage........          -      42,826        -     42,826
  Other corporate assets............                                  1,191,726
                                                                      ---------
                                                                     $6,617,442
                                                                     ==========

                1995    

Operating revenues.................. $2,283,179    $624,585  $54,444 $2,962,208
                                     ----------    --------  ------- ----------
Operating expenses, excluding 
 depreciation and amortization .....  1,548,581     538,620   52,479  2,139,680
Depreciation and amortization.......    170,566      29,901    5,117    205,584
                                        -------      ------    -----    -------
  Total operating expenses..........  1,719,147     568,521   57,596  2,345,264
                                      ---------     -------   ------  ---------
Operating income (loss).............    564,032      56,064   (3,152)   616,944
                                        =======      ======   ======    =======
Plant construction expenditures*....    289,701      86,482    4,224    380,407
                                        =======      ======    =====    =======

Identifiable assets:
 Property, plant and equipment*.....  4,188,491     777,420   89,597  5,055,508
  Materials and supplies............     65,700       8,886    1,241     75,827
  Fuel inventory....................     37,854           -      145     37,999
  Gas in underground storage........          -      44,900        -     44,900
  Other corporate assets............                                  1,046,560
                                                                      ---------
                                                                     $6,260,794
                                                                     ==========

* Net of accumulated  depreciation  and includes  allocation of common utility
   property.
                                      111

<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

14. Segments of Business (continued)

PSCo
               1997                   Electric      Gas      Other       Total
                                      --------      ---      -----       -----
                                                 (Thousands of Dollars)

Operating revenues.................. $1,485,196  $ 733,091  $ 11,356 $2,229,643
                                     ----------  ---------  -------- ----------
Operating expenses, excluding
 depreciation and amortization
  and income taxes..................  1,017,108    609,004     6,914  1,633,026
Depreciation and amortization.......    125,456     40,929     2,066    168,451
                                        -------     ------     -----    -------
  Total operating expenses*.........  1,142,564    649,933     8,980  1,801,477
                                      ---------    -------     -----  ---------
Operating income*...................    342,632     83,158     2,376    428,166
                                        =======     ======     =====    =======
Plant construction expenditures**...    246,072    104,876     1,325    352,273
                                        =======    =======     =====    =======
Identifiable assets:
  Property, plant and equipment**...  2,828,792    841,238    54,830  3,724,860
  Materials and supplies............     44,937      3,089         4     48,030
  Fuel inventory....................     20,717          -       145     20,862
  Gas in underground storage........          -     46,576         -     46,576
  Other corporate assets............                                  1,154,405
                                                                      ---------
                                                                     $4,994,733
                                                                     ==========
                       1996               

Operating revenues.................. $1,488,990   $640,497  $ 7,951  $2,137,438
                                     ----------   --------  -------  ----------
Operating expenses, excluding
 depreciation and amortization
  and income taxes..................  1,006,904    549,223     5,813  1,561,940
Depreciation and amortization.......    116,801     35,735     2,095    154,631
                                        -------     ------     -----    -------
  Total operating expenses*.........  1,123,705    584,958     7,908  1,716,571
                                      ---------    -------     -----  ---------
Operating income*...................    365,285     55,539        43    420,867
                                        =======     ======        ==    =======
Plant construction expenditures**...    223,395     96,842       925    321,162
                                        =======     ======       ===    =======

Identifiable assets:
  Property, plant and equipment**...  2,733,699    805,372    59,824  3,598,895
  Materials and supplies............     41,418      7,325       229     48,972
  Fuel inventory....................     24,594          -       145     24,739
  Gas in underground storage........          -     42,826         -     42,826
  Other corporate assets............                                    857,216
                                                                        -------
                                                                     $4,572,648
                                                                     ==========
                1995    

Operating revenues.................. $1,449,096   $624,585   $ 7,010 $2,080,691
                                     ----------   --------   ------- ----------
Operating expenses, excluding 
  depreciation and amortization
  and income tax....................  1,002,381    538,620     7,046  1,548,047
Depreciation and amortization.......    109,498     29,901     1,981    141,380
                                        -------     ------     -----    -------
  Total operating expenses*.........  1,111,879    568,521     9,027  1,689,427
                                      ---------    -------     -----  ---------
Operating income*...................    337,217     56,064    (2,017)   391,264
                                        =======     ======    ======    =======
Plant construction expenditures**...    198,341     86,482       693    285,516
                                        =======     ======       ===    =======

Identifiable assets:
 Property, plant and equipment**....  2,645,045    777,420    58,247  3,480,712
  Materials and supplies............     47,636      8,886         3     56,525
  Fuel inventory....................     35,509          -       145     35,654
  Gas in underground storage........          -     44,900         -     44,900
  Other corporate assets............                                    733,998
                                                                        -------
                                                                     $4,351,789
                                                                     ==========

*  Before income taxes.
** Net of accumulated  depreciation and includes  allocation of common utility
   property.
                                      112

<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.  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 (in thousands
of dollars).

                                  PSCo         SPS  
                                  ----         ---  
                                        1997

Operating expenses             $125,030     $40,149
Interest income                       -       3,618
Dividends paid to NCE            76,093      45,092
Interest expenses                   156         747

There were no significant related party transactions for the years ended
December 31, 1996 and 1995.

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

      The  following  summarized  quarterly  information  for 1997 and 1996 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).
<TABLE>
<CAPTION>

NCE                                                  Three Months ended        
                                                     ------------------        
                1997                     March 31   June 30   September 30  December 31
                ----                     --------   -------   ------------  -----------

<S>                                      <C>       <C>         <C>           <C>     
Operating revenues....................   $898,955  $784,658    $ 804,154     $854,758
Operating income .....................    139,289   124,750      130,135      235,051
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 (loss) .......................      $0.75     $0.32        $ 0.61       $0.82
  Extraordinary item..................          -         -         (1.06)          -
  Net income (loss)...................      $0.75     $0.32        $(0.45)      $0.82

                1996 
                ----
Operating revenues....................   $838,931  $733,121    $ 739,406     $819,524
Operating income .....................    135,289   114,772      135,251      130,566
Net income............................     76,218    59,452       76,547       60,124
Basic and diluted earnings per share of
 common stock outstanding:
  Net income..........................      $0.74     $0.58        $0.74        $0.58

PSCo                                                 Three Months ended        
                1997                     March 31   June 30   September 30  December 31
                ----                     --------   -------   ------------  -----------

Operating revenues....................   $677,660  $542,677    $ 477,264     $532,042
Operating income .....................    104,818    83,022       81,054       68,459
Net income (loss).....................     62,881    30,607      (73,085)      73,074

                1996
                ----
Operating revenues....................   $622,917  $484,787    $ 476,861     $586,821
Operating income......................    104,846    73,286       88,222       92,130
Net income............................     64,429    34,537       39,256       52,124
</TABLE>

                                      113

<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>

SPS                                                  Three Months ended        
                1997                     March 31   June 30   September 30  December 31
                ----                     --------   -------   ------------  -----------

<S>                                      <C>        <C>        <C>           <C>     
Operating revenues..................     $221,295   $243,221   $ 284,156     $230,611
Operating income ...................       34,471     39,656      53,051       32,103
Net income..........................       18,218      6,380 (2)  31,111       19,866

                                            Three                Month
                                         Months Ended            Ended
              1996 Transition Period       Nov. 30              Dec. 31
              ----------------------       -------              -------

Operating revenues..................      $214,381             $ 81,198
Operating income....................        34,711               12,481
Net income (loss)...................        21,470               (2,332)(3)

                                                     Three Months ended        
                1996                     Nov. 31, 95 Feb. 29, 96  May 31, 96  Aug. 31, 96
                ----                     ----------- -----------  ----------  -----------

Operating revenues..................     $200,957    $203,785     $225,029    $269,626
Operating income....................       33,238      28,801       31,980      56,647
Net income..........................       23,168      18,081       19,878      44,646 (4)

(1)  Includes the effect of the UK Windfall Tax recognized in the third quarter 1997.
(2)  Includes the write-off of Quixx's & UE's investment in the Carolina Energy Project.
(3)  Includes the write-off of Quixx's investment in the BCH Energy Project.
(4)  Includes the sale of water rights by Quixx.
</TABLE>

                                      114

<PAGE>


                                                                   SCHEDULE II
                          NEW CENTURY ENERGIES, INC.
                               AND SUBSIDIARIES

                VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                 Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                  Additions 
                                                  --------- 
                                  Balance at  Charged   Charged to   Deductions    Balance
                                   beginning     to       other        from         at end
                                   of period  income    accounts(1)  reserves(2)   of year
                                   ---------  ------    -----------  -----------   -------
NCE                                             (Thousands of Dollars)
<S>                                 <C>       <C>         <C>          <C>          <C>
Reserve deducted from related
 assets:
  Provision for uncollectible
   accounts:

   1997.......................      $6,623    $5,854      $  79        $ 7,201      $5,355
                                    ======    ======      =====        =======      ======

   1996.......................      $6,218    $7,283      $ 453        $ 7,331      $6,623
                                    ======    ======      =====        =======      ======

   1995 (3)...................      $5,381    $8,431      $ (40)       $ 7,648      $6,124
                                    ======    ======      =====        =======      ======


PSCo

Reserve deducted from related assets:
  Provision for uncollectible accounts:

   1997.......................      $4,049    $5,193      $(500)       $ 6,470      $2,272
                                    ======    ======      =====        =======      ======

   1996.......................      $3,630    $6,741      $ 477        $ 6,799      $4,049
                                    ======    ======      =====        =======      ======

   1995.......................      $3,173    $7,815      $   4        $ 7,362      $3,630
                                    ======    ======      =====        =======      ======


SPS

Reserve deducted from related assets:
  Provision for uncollectible accounts:

   1997.......................      $2,574    $  661      $ (62)       $   731      $2,442
                                    ======    ======      =====        =======      ======

   1996 (September 1996 through
         December 1996) ......      $2,669    $  223      $ (13)       $   305      $2,574
                                    ======    ======      =====        =======      ======

   1996 (4)...................      $2,494    $  535      $  (9)       $   351      $2,669
                                    ======    ======      =====        =======      ======

   1995 (4)...................      $2,208    $  616      $ (44)       $   286      $2,494
                                    ======    ======      =====        =======      ======

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

(1) Uncollectible accounts subsequently recovered, transfers from customers' deposits,
    etc., and the transfer of certain subsidiaries' balances of $571,620 for
    PSCo and $69,320 for SPS in 1997.
(2)  Uncollectible accounts written off or transferred to other parties.
(3)  Information for PSCo includes January 1995 through December 1995 and for SPS includes
     September 1994 through August 1995.
(4)  Information reflects fiscal years ended August 31, 1996 and 1995.

</TABLE>

                                      115
<PAGE>
                                                                 EXHIBIT 12(a)

                      PUBLIC SERVICE COMPANY OF COLORADO
                               AND SUBSIDIARIES

                 COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS
                         TO CONSOLIDATED FIXED CHARGES

           (not covered by Report of Independent Public Accountants)


<TABLE>
<CAPTION>
                                                 Year Ended December 31,      
                                                 -----------------------      
                                         1997       1996       1995       1994     1993                                 
                                         ----       ----       ----       ----     ----                                 
                                         (Thousands of Dollars, except ratios)

Fixed charges:
<S>                                     <C>       <C>         <C>       <C>       <C>
   Interest on long-term debt.......    $ 114,460 $  92,205   $ 85,832  $ 89,005  $ 98,089
   Interest on borrowings against
     COLI contracts ................       46,082    40,160     34,717    29,786    25,333
   Other interest...................       24,117    17,238     23,392    14,235     9,445
   Amortization of debt discount and
     expense less premium ..........        3,987     3,621      3,278     3,126     2,018
   Interest component of rental expense     9,012    10,649      6,729     6,888     6,824
                                            -----    ------      -----     -----     -----

     Total .........................    $ 197,658 $ 163,873   $153,948  $143,040  $141,709
                                        ========= =========   ========  ========  ========

Earnings (before fixed charges and 
  taxes on income):
   Net income.......................    $ 204,042 $   190,346 $178,856  $170,269  $157,360
   Fixed charges as above...........      197,658     163,873  153,948   143,040   141,709
   Provisions for Federal and state
    taxes on income, net of investment
    tax credit amortization ........       90,813      96,331   95,357    48,500    60,994
                                           ------      ------   ------    ------    ------

     Total..........................    $ 492,513 $   450,550 $428,161  $361,809  $360,063
                                        ========= =========== ========  ========  ========

Ratio of earnings to fixed charges..         2.49        2.75     2.78      2.53      2.54
                                             ====        ====     ====      ====      ====
</TABLE>
                                      116

<PAGE>


                                                                 EXHIBIT 12(b)

                      PUBLIC SERVICE COMPANY OF COLORADO
                               AND SUBSIDIARIES

                 COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS
     TO CONSOLIDATED COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

           (not covered by Report of Independent Public Accountants)

<TABLE>
<CAPTION>
                                                 Year Ended December 31,      
                                                 -----------------------      
                                         1997       1996       1995       1994     1993                                 
                                         ----       ----       ----       ----     ----                                 
                                        (Thousands of Dollars, except ratios)

Fixed charges and preferred stock dividends:

<S>                                     <C>       <C>         <C>       <C>       <C>
   Interest on long-term debt.......    $114,460  $ 92,205    $ 85,832   $ 89,005  $  98,089
   Interest on borrowings against 
    COLI contracts .................      46,082    40,160      34,717     29,786     25,333
   Other interest...................      24,117    17,238      23,392     14,235      9,445
   Amortization of debt discount and
    expense less premium ...........       3,987     3,621       3,278      3,126      2,018
   Interest component of rental expense    9,012    10,649       6,729      6,888      6,824
   Preferred stock dividend requirement   11,752    11,848      11,963     12,014     12,031
   Additional preferred stock dividend
    requirement ....................       5,231     5,995       6,377      3,422      4,662
                                           -----     -----       -----      -----      -----

     Total .........................    $214,641  $181,716    $172,288   $158,476   $158,402
                                        ========  ========    ========   ========   ========

Earnings (before fixed charges and 
 taxes on income):
   Net income.......................    $204,042  $190,346    $178,856   $170,269   $157,360
   Interest on long-term debt.......     114,460    92,205      85,832     89,005     98,089
   Interest on borrowings against 
     COLI contracts ................      46,082    40,160      34,717     29,786     25,333
   Other interest...................      24,117    17,238      23,392     14,235      9,445
   Amortization of debt discount and 
     expense less premium ..........       3,987     3,621       3,278      3,126      2,018
   Interest component of rental expense    9,012    10,649       6,729      6,888      6,824
   Provisions for Federal and state taxes
     on income, net of investment tax 
     credit amortization ............     90,813    96,331      95,357     48,500     60,994
                                          ------    ------      ------     ------     ------

     Total..........................    $492,513  $450,550    $428,161   $361,809   $360,063
                                        ========  ========    ========   ========   ========

Ratio of earnings to fixed charges
  and preferred stock dividends.....        2.29      2.48        2.49       2.28       2.27
                                            ====      ====        ====       ====       ====
</TABLE>

                                      117

<PAGE>

                                                                   EXHIBIT 12(c)

                            SOUTHWESTERN PUBLIC SERVICE COMPANY
                                     AND SUBSIDIARIES

                       COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS
                               TO CONSOLIDATED FIXED CHARGES

                 (not covered by Report of Independent Public Accountants)

<TABLE>
<CAPTION>

                                           Year        Trans-          Year-Ended
                                          Ended         ition          August 31,             
                                      Dec. 31, 1997    Period       1996       1995       1994       1993
                                      -------------    ------       ----       ----       ----       ----
                                             (Thousands of Dollars, except ratios)

Fixed charges:

<S>                                      <C>             <C>         <C>       <C>        <C>        <C>     
   Interest on long-term debt.......     $ 44,112        $ 15,556    $ 44,964  $ 40,645   $ 37,881   $ 38,992
   Dividends on SPS obligated 
     mandatorily redeemable
    preferred securities............        7,850           1,526           -         -          -          -
   Other interest...................        7,444           1,612       6,561     3,219      3,068      2,047
   Amortization of debt discount and
     expense less premium ..........        2,244             235         577       534        518        498
   Interest component of rental expense     1,425             415       1,245     1,292      1,184      1,094
                                            -----             ---       -----     -----      -----      -----

     Total .........................     $ 63,075        $ 19,344    $ 53,347  $ 45,690   $ 42,651   $ 42,631
                                         ========        ========    ========  ========   ========   ========

Earnings (before fixed charges and 
 taxes on income):
   Net income.......................     $ 75,575        $ 19,137    $105,773  $119,477   $102,168   $105,254    
   Fixed charges as above...........       63,075          19,344      53,347    45,690     42,651     42,631
   Provisions for Federal and state
    taxes on income, net of investment
    tax credit amortization ........       48,795          10,987      65,297    67,649     58,388     57,668
                                           ------          ------      ------    ------     ------     ------

     Total..........................     $187,445        $ 49,468    $224,417  $232,816   $203,207   $205,553
                                         ========        ========    ========  ========   ========   ========

Ratio of earnings to fixed charges..         2.97            2.56        4.21      5.10       4.76       4.82
                                             ====            ====        ====      ====       ====       ====
</TABLE>
                                      118
<PAGE>

                                                                   EXHIBIT 12(d)

                            SOUTHWESTERN PUBLIC SERVICE COMPANY
                                     AND SUBSIDIARIES

                       COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS
           TO CONSOLIDATED COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

                 (not covered by Report of Independent Public Accountants)


<TABLE>
<CAPTION>

                                           Year        Trans-          Year-Ended
                                          Ended         ition          August 31,             
                                      Dec. 31, 1997    Period       1996       1995       1994       1993
                                      -------------    ------       ----       ----       ----       ----
                                             (Thousands of Dollars, except ratios)

Fixed charges and preferred stock dividends:
<S>                                      <C>             <C>         <C>       <C>        <C>        <C>     

   Interest on long-term debt.......     $ 44,112         $ 15,556   $ 44,964  $ 40,645   $ 37,881   $ 38,992
   Dividends on SPS obligated 
    mandatorily redeemable
    preferred securities............        7,850            1,526          -         -          -          -
   Other interest...................        7,444            1,612      6,561     3,219      3,068      2,047
   Amortization of debt discount and
     expense less premium ..........        2,244              235        577       534        518        498
   Interest component of rental expense     1,425              415      1,245     1,292      1,184      1,094
   Preferred stock dividend requirement         -                -      2,494     4,878      4,878      5,626
   Additional preferred stock
    dividend requirement ...........            -                -      1,522     2,715      2,742      3,037
                                              ---              ---      -----     -----      -----      -----

     Total .........................     $ 63,075         $ 19,344   $ 57,363  $ 53,283   $ 50,271   $ 51,294
                                         ========         ========   ========  ========   ========   ========

Earnings (before fixed charges and 
 taxes on income):
   Net income.......................     $ 75,575         $ 19,137   $105,773  $119,477   $102,168   $105,254
   Interest on long-term debt.......       44,112           15,556     44,964    40,645     37,881     38,992
   Dividends on SPS obligated 
    manditorily redeemable
    preferred securities............        7,850            1,526          -         -          -          -
   Other interest...................        7,444            1,612      6,561     3,219      3,068      2,047
   Amortization of debt discount and
    expense less premium ...........        2,244              235        577       534        518        498
   Interest component of rental expense     1,425              415      1,245     1,292      1,184      1,094
   Provisions for Federal and state 
     taxes on income, net of investment
     tax credit amortization .......       48,795           10,987     65,297    67,649     58,388     57,668
                                           ------           ------     ------    ------     ------     ------

     Total..........................     $187,445         $ 49,468   $224,417  $232,816   $203,207   $205,553
                                         ========         ========   ========  ========   ========   ========

Ratio of earnings to fixed charges
  and preferred stock dividends.....         2.97             2.56       3.91      4.37       4.04       4.01
                                             ====             ====       ====      ====       ====       ====
</TABLE>

                                      119


<PAGE>

Item 9.  Changes in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

      Does not apply.
                                   PART III

Item 10.  Directors  and  Executive  Officers of the  Registrant  (New Century
Energies,  Inc., Public Service Company of Colorado,  and Southwestern  Public
Service Company)

      Biographies   concerning  the  directors  of  NCE  are  contained  under
ELECTION OF DIRECTORS  in NCE's 1998 Proxy  Statement,  which is  incorporated
herein by  reference.  The  following  tables  set forth  certain  information
concerning the directors and executive  officers of each of the registrants as
of December 31, 1997.
<TABLE>
<CAPTION>
NEW CENTURY ENERGIES, INC.
 
Name                 Age      Occupation/Title                                       Period
----                ---       ----------------                                       ------
<S>                 <C>       <C>                                                    <C> 
Officers

Bill D. Helton      59        Chairman of the Board, CEO and Director                1997-Present
                              Chairman of the Board and Director                     1997-Present
                                Public Service Company of Colorado,
                                Cheyenne Light, Fuel and Power Company,
                                NC Enterprises, Inc., New Century 
                                Services, Inc., New Century-Cadence, Inc.,
                                and e prime, inc.
                              Director, Southwestern Public Service Company          1990-Present
                              CEO, Southwestern Public Service Company               1990-1997
                              Chairman of the Board, Southwestern Public Service,    1991-Present
                              Quixx Corporation and Utility Engineering
                                Corporation
                              Director, Natural Fuels Corporation                    1997-Present
                              Director, Quixx Corporation                            1990-Present
                              Chairman of the Board and Director, Quixx Power
                                Services, Inc.                                       1993-Present
                              Director, Utility Engineering Corporation              1989-Present
Wayne H. Brunetti (a)  55     Vice Chairman, President, COO, and Director            1997-Present
                              Vice Chairman and CEO, Public Service Company of       1997-Present   
                                Colorado and Cheyenne Light, Fuel and Power Company
                              President and Director, PSCo                           1994-Present
                              Vice Chairman, President, CEO, and Director,           1997-Present
                                NC Enterprises, Inc., New Century Services, Inc.
                                and New Century Cadence, Inc.
                              Chairman, 1480 Welton, Inc., Green and Clear Lakes     1997-Present
                                Company, PSR Investments, Inc., PS Colorado
                                Credit Corporation, and WestGas InterState, Inc.
                              President and Director, 1480 Welton, Inc. and
                                Natural Fuels Corporation                            1996-Present
                              Vice Chairman, CEO, and Director, Southwestern Public
                                Service Company                                      1997-Present
                              Director, Cheyenne Light, Fuel and Power Co., Green    1994-Present 
                               and Clear Lakes Company, PSR Investments, Inc., PS
                               Colorado Credit  Corporation and WestGas  InterState,
                               Inc.
                              Director, Young Gas Storage Company and e prime, inc.  1995-Present
                              President and Director, Fuel Resources Development Co. 1995-Present
                              President, Green and Clear Lakes Company and WestGas   1995-Present
                                InterState Inc.
</TABLE>
                                      120
<PAGE>
<TABLE>
<S>                 <C>       <C>                                                    <C> 
                              President and Director, New Century International, Inc.  1997-Present
                              President, PSR Investments, Inc., PS Colorado Credit   1996-Present
                                Corporation
                              Director, Yorkshire Power Group Limited                1997-Present
                              Chairman of the Board, Cheyenne Light, Fuel and Power  1997-1997
                                Company and e prime, inc.
                              Vice Chairman and Director, Quixx Corporation,         1997-Present
                                Yorkshire Holdings plc
                              Vice Chairman, Yorkshire Electricity Group plc and     1997-Present
                                e prime, inc.
Richard C. Kelly       51     Executive Vice President and Chief Financial Officer   1997-Present
                              President, Treasurer, and Director                     1995-1997
                              Executive Vice President, CFO, and Director, Public    1997-Present
                               Service Company of Colorado and Southwestern Public
                               Service Company
                              Senior Vice President, PSCo                            1990-1997
                              Treasurer, PSCo                                        1986-1997
                              Executive Vice President and Director, NC              1997-Present
                                Enterprises, Inc. and New Century Service, Inc.
                              Treasurer, 1480 Welton, Inc., Cheyenne Light, Fuel and 1994-Present
                                Power Company, Fuel Resources Development Co., Green
                                and Clear Lakes Company, WestGas InterState, Inc.
                              Director, Texas-Ohio Gas, Inc., Texas-Ohio Pipeline,   1996-Present
                                Inc., e prime Networks, Inc., and e prime Telecom, Inc.
                              Director, Quixx Corporation, Utility Engineering,      1997-Present
                                Yorkshire Electricity Group plc, Yorkshire Holdings
                                plc, Yorkshire Power Group Limited, e prime 
                                operating, inc., e prime projects international, inc.
                              Director, 1480 Welton, Inc.                            1989-Present
                              Director, Cheyenne Light, Fuel and Power Company       1990-Present
                              Vice President, Fuel Resources Development Co.         1990-Present
                              Director, Fuel Resources Development Co.               1991-Present
                              Director, Green and Clear Lakes Company, and Natural   1990-Present
                                Fuels Corporation
                              Director and Secretary, New Century International, Inc.1997-Present
                              Director and Treasurer, New Century-Cadence, Inc.      1997-Present
                              Vice President and Director, PSR Investments, Inc.     1986-Present
                              Vice President and Director, PS Colorado Credit        1987-Present
                                Corporation 
                              Director, WestGas InterState, Inc.                     1993-Present
                              Vice President, Treasurer and Director, Young Gas      1995-Present
                                Storage Company
                              Secretary, Treasurer and Director, e prime Energy      1997-Present
                                Marketing, Inc.
                              Director, e prime inc.                                 1995-Present
                              President and CEO, e prime inc.                        1997-Present
                              Vice President and Treasurer, e prime, inc.            1995-1997
Paul J. Bonavia (b)    46     Senior Vice President and General Counsel              1997-Present
Brian P. Jackson (c)   39     Senior Vice President Finance and Administrative
                                Services                                             1997-Present
Teresa S. Madden (d)   41     Controller and Secretary                               1997-Present
                              Controller and Secretary, Public Service Company       1997-Present
                                of Colorado and New Century Services, Inc.
                              Controller and Assistant Secretary, Southwestern       1997-Present
                                Public Service Company
</TABLE>

                                      121
<PAGE>
<TABLE>
<S>                    <C>    <C>                                                    <C> 

                              Director, Yorkshire Power Group Limited, Yorkshire     1997-Present
                                Holdings plc and Yorkshire Electricity Group plc
                              Secretary, NC Enterprises, WestGas InterState,         1997-Present
                                e prime, inc. Cheyenne Light, Fuel and Power 
                                Company and New Century-Cadence, Inc., Texas-Ohio
                                Pipeline,  Inc., Texas-Ohio Gas, Inc., Fuel 
                                Resources Development Co.
                              Manager of Corporate Accounting, Public Service        1990-1997
                                Company of Colorado                                
                              Assistant Secretary, PSCo and e prime, inc.            1995-1997
                              Assistant Secretary, 1480 Welton, Inc., PSR            1991-Present
                                Investments, Inc., PS Colorado Credit Corporation,
                              Assistant Secretary, Cheyenne Light, Fuel and Power    1991-1997
                                Company and Fuel Resources Development Co.
James D. Steinhilper   48     Treasurer,                                             1997-Present
                              Assistant Treasurer, Cheyenne Light, Fuel and Power    1997-1997
                                Company, New Century-Cadence, Inc. and WestGas
                                InterState, Inc.
                              Treasurer, NC Enterprises, Inc., Public Service        1997-Present
                                Company of Colorado, Southwestern Public Service
                                Company and e prime, inc.
                              Director Finance and Treasurer, New Century            1997-Present
                                Services, Inc.
                              Group Manager, Finance, Southwestern Public Service    1989-1997
                                Company

PUBLIC SERVICE COMPANY OF COLORADO

Directors

Wayne H. Brunetti             See information under NCE Officers Section above.
Doyle R. Bunch II      51     Senior Vice President, New Century Services, Inc.      1997-Present
                              Director, e prime, inc., NC Enterprises, Inc., PSCo    1997-Present
                              Chairman of the Board, Secretary, and Director New     1995-1997
                                Century Energies, Inc.
                              Director, Quixx Corporation                            1985-1997
                              Executive Vice President, Southwestern Public Service  1992-1997
                                Company
Henry H. Hamilton      59     Executive Vice President and Director, Southwestern    1997-Present
                                Public Service Company, Public Service Company of
                                Colorado and New Century Services, Inc.
                              Director, Quixx Power Services, Inc.                   1993-Present
                              Vice President, Southwestern Public Service Company    1987-1997
Bill D. Helton                See information under NCE Officers Section above.
Richard C. Kelly              See information under NCE Officers Section above.
David M. Wilks         51     Executive Vice President and Director, Public Service  1997-Present
                                Company of Colorado, New Century Services, Inc.
                                and New Century-Cadence, Inc.
                              Director, Cheyenne Light Fuel and Power Company,       1997-Present
                              Director, Southwestern Public Service Company, Quixx   1995-Present
                                Power Services and Utility Engineering Corporation
                                Quixx Corporation
                              President and Chief Operating Officer, Southwestern    1995-Present
                                Public Service Company
                              Senior Vice President, Southwestern Public Service     1991-1995
                                Company 
</TABLE>
                                      122
<PAGE>
<TABLE>
<S>                    <C>    <C>                                                    <C> 

Officers

Bill D. Helton                See information under NCE Officers Section above.
Wayne H. Brunetti             See information under NCE Officers Section above.
Henry H. Hamilton             See information under PSCo Directors Section above.
Richard C. Kelly              See information under NCE Officers Section above.
David M. Wilks                See information under PSCo Directors Section above.
Teresa S. Madden              See information under NCE Officers Section above.

SOUTHWESTERN PUBLIC SERVICE COMPANY

Directors

Bill D. Helton               See information under NCE Officers Section above.
Wayne H. Brunetti            See information under NCE Officers Section above.
David M. Wilks               See information under NCE Officers Section above.
Henry H. Hamilton            See information under PSCo Directors Section above.
Richard C. Kelly             See information under NCE Officers Section above.

Officers

Bill D. Helton               See information under NCE Officers Section above.
Wayne H. Brunetti            See information under NCE Officers Section above.
David M. Wilks               See information under NCE Officers Section above.
Henry H. Hamilton            See information under PSCo Directors Section above.
Richard C. Kelly             See information under NCE Officers Section above.
Teresa S. Madden             See information under NCE Officers Section above.
Mary Pullum            55    Secretary, SPS, Utility Engineering Corporation,        1997-Present
                               Quixx Corporation
                             Assistant Secretary, New Century Energies, Inc.         1997-Present
                               New Century Services, Inc., KES Montego, Inc.,
                               Quixx Borger Cogen,Inc.,Quixx Jamaica Power, Inc.,
                               Quixx Mustang Station, Inc., and Quixxlinn Corporation
                             Manager, Compliance/Document Services, New Century    1997-Present
                                Services, Inc.,
                             Assistant Secretary, Quixx Jamaica, Inc. and Quixx      1996-Present
                                WPP94
                             Assistant Secretary, Quixx Carolina, Inc.               1995-Present
                             Assistant Secretary, Quixx Power Services, Inc.         1993-Present
                             Assistant Secretary, Utility Engineering Corporation    1989-1997
                               and Quixx Corporation
                             Assistant Secretary, Southwestern Public Service        1981-1997
                               Company
</TABLE>

      There  are  no  family  relationships   between  executive  officers  or
directors of the  registrants.  There are no  arrangements  or  understandings
between  the  executive  officers  individually  and  any  other  person  with
reference  to  their  being  selected  as  officers  of each  registrant.  All
executive  officers of each registrant are elected  annually by the respective
Board of Directors.

(a) Mr.Brunetti was President and Chief Executive Officer of Management Systems
    International from June 1991 through July 1994 and Executive Vice
    President of Florida Power & Light Company from 1987 through May 1991.
(b) Mr. Bonavia was Of Counsel at LeBoeuf, Lamb, Greene & MacRae, LLP from March
   1997 through December 1997 and Senior Vice President at Dominion
   Resources, Inc. from 1991 through February 1997.

                                      123

<PAGE>

(c) Mr. Jackson was employed by Arthur Andersen LLP from 1980 through November
    1997.  He was a partner with the firm from 1994 through 1997.  Effective
    February 17, 1998, Mr. Jackson was elected Chief Financial Officer of
    Public Service Company of Colorado and Southwestern Public Service Company.
(d) Ms. Madden is a member of the audit committee and finance committee for
    Yorkshire Electricity Group plc.  Mr. Kelly is Chairman of the audit
    committee and a member of the finance committee of Yorkshire Electricity
    Group plc.

Item 11.  Executive Compensation

      Information  concerning  executive  compensation  for  NCE is  contained
under  Compensation Of Executive  Officers And Directors in the NCE 1998 Proxy
Statement,   which   information   is   incorporated   herein  by   reference.
Information  concerning  executive  compensation  for  SPS  has  been  omitted
pursuant to General  Instruction  I(2)(c).  Information  concerning  executive
compensation for PSCo is presented herein.

      The  following  tables  set  forth  information   concerning  the  total
compensation  paid or awarded in 1997 to PSCo's  Chief  Executive  Officer and
each of the four most highly compensated  officers serving as such on December
31, 1997, and one additional  executive  officer who was among the most highly
compensated  officers in 1997,  but who had  resigned  her  position  prior to
December 31, 1997  (collective  the PSCo Named Executive  Officers).  In 1997,
in connection with the Merger,  the salaries of these  executives were paid by
NCS and a portion of their  compensation  has been  allocated  and  charged to
PSCo.  Information  for  calendar  years  1996 and 1995 is  presented  for the
executive officers who were executive officers of PSCo prior to the Merger.
<TABLE>
<CAPTION>
========================================================================================
                          Summary Compensation Table
========================================================================================
                              Annual Compensation       Long-Term Compensation (c)         All Other
  Name and Principal                                                                        Compen-
       Position                                                                             sation
                                                                                          ($)(d)(e)
                                         -----------------------------------------------
                        Year                                     Awards          Payouts
                                                         -------------------------------
                              Salary   Bonus   Other     Restricted  Securities    LTIP
                               ($)      ($)    Annual       Stock    Underlying  Payouts
                                        (a)    Compen-     Awards    Options/      ($)
                                               sation($)     ($)       SAR's(#)
                                                (b)            
===================================================================================================
<S>                     <C>   <C>       <C>     <C>              <C>   <C>             <C>   <C>   
Bill D. Helton          1997  455,833   78,363  271,092          0     300,000         0     27,524
Chairman of the Board
===================================================================================================
Wayne H. Brunetti       1997  435,853  104,994    3,750          0     314,400   231,722     27,304
Vice Chairman and       1996  400,018  256,820                   0      16,800    30,129     20,001
Chief Executive         1995  330,838  150,448              74,992      14,700         0      6,917
Officer
===================================================================================================
Richard C. Kelly        1997  254,382   48,997    3,750          0     107,100   120,484     16,089
Executive Vice          1996  227,503  100,457                   0      10,950    29,388     11,917
President               1995  215,005   49,970              49,983       9,600    15,619     11,375
and Chief Financial
Officer
===================================================================================================
Patricia T. Smith       1997  216,559   39,723    2,250           0      6,700    84,593  2,394,914
Sr. V.P. and General    1996  225,842   94,944                    0      9,300         0     11,292
Counsel                 1995  220,018   49,782               24,658      8,150         0          0
===================================================================================================
Henry H. Hamilton       1997  174,583   35,673   49,125           0     66,000         0     11,139
Executive Vice
President
===================================================================================================
David M. Wilks          1997  238,958   41,285   24,809           0     87,000         0      9,618
Executive Vice
President
===================================================================================================
</TABLE>

(a) The amounts  shown in the "Bonus"  column for 1997 are related to payments
made to the Named  Executives  Officers by PSCo or SPS in connection  with the
Merger.  The amounts paid to Messrs.  Helton,  Wilks,  and Hamilton were based
on the average of their two highest  bonuses paid by SPS in fiscal years 1993,
1994 and 1995, in accordance  with their  employment  agreements.  The amounts
paid to Messrs.  Brunetti and Kelly and Ms. Smith

                                      124
<PAGE>

represent 7/12 of the target award earned under the PSCo Omnibus  Incentive Plan
which were paid in accordance with their Change in Control agreements.

(b)    The  amounts  shown  in this  column  include  relocation  benefits  of
$238,125 for Mr. Helton and the  reimbursement of certain taxes related to the
exercise  of SPS stock  options of  $24,639,  $16,042  and $41,785 for Messrs.
Helton,  Wilks and  Hamilton,  respectively.  Also,  the amounts shown in this
column for Messrs. Helton,  Brunetti,  Kelly, Wilks and Hamilton and Ms. Smith
include flexible perquisite or automobile allowance benefits ($8,328,  $3,750,
$3,750, $8,767, $7,340 and $2,250, respectively).

(c) There  were no  restricted  stock  awards  granted  in  1997 and no  Named
Executive  Officer  held  any  restricted  stock  at  December  31,  1997.  In
accordance with the terms of the PSCo Omnibus  Incentive  Plan, Mr.  Brunetti,
Mr. Kelly and Ms. Smith received  certain stock option awards  (14,400,  7,100
and 6,700 options,  respectively) and dividend equivalents payments ($231,726,
$120,484  and  $84,593,  respectively)  which  vested in  connection  with the
Merger.

(d) The amounts  represented in the "All Other  Compensation"  column,  except
for the  additional  compensation  to Ms. Smith as disclosed in footnote  (e),
reflect  the  total of  matching  contributions  made  under  the PSCo and SPS
employee  savings  plans,  the PSCo and SPS  non-qualified  savings plans (the
"Executive  Savings  Plan"  and  the  "Non-Qualified  Salary  Deferral  Plan",
respectively)  and insurance  premiums paid by PSCo and SPS. These amounts are
summarized below:

--------------------------------------------------------------------------------
         Name        Contributions to    Contributions to       Insurance
                     Employee Savings    the Non-Qualified    Premiums ($)
                         Plan ($)        Savings Plans ($)
--------------------------------------------------------------------------------
  Bill D. Helton                9,330              17,069             1,125
--------------------------------------------------------------------------------
  Wayne H.Brunetti              7,150              15,767             4,387
--------------------------------------------------------------------------------
  Richard C. Kelly              7,150               6,204             2,735
--------------------------------------------------------------------------------
  Patricia T. Smith             7,150               1,554             1,939
--------------------------------------------------------------------------------
  Henry H. Hamilton             5,655               4,909               575
--------------------------------------------------------------------------------
  David M. Wilks                4,773               4,235               610
--------------------------------------------------------------------------------

(e)    Ms. Smith resigned and was paid  $2,384,271 on October 31, 1997.  Under
the terms of the severance and employment  agreements in effect,  she received
a severance  benefit equal to three years  compensation  including base salary
and  annual  incentive  paid  at  target,   reimbursement  of  certain  taxes,
immediate  vesting  of all  outstanding  incentive  awards  and  the  economic
equivalent  of any  long-term  awards  she  would  have  received  during  the
upcoming three year term.  Also, Ms. Smith  received  additional  credit under
the  then  existing  PSCo  Supplemental  Employment  Retirement  Plan  for the
upcoming  three  year  term,  additional  contributions  under  the  Executive
Savings Plan that she would have  received  during the  upcoming  three years,
continued  welfare benefits for three years and a payment equal to the present
value of the benefits Ms. Smith would have  received  under all then  existing
qualified  retirement plans had she received credit for three additional years
of service.
                                      125

<PAGE>

=============================================================================
                   Option/SAR Grants in Last Fiscal Year
=============================================================================
       Name                     Individual Grants
                   ----------------------------------------------------------
                   Number
                   of
                   Securities  % of Total
                   Underlying Options/SARs  Exercise
                   Options/   Granted to    or Base               Grant Date
                     SARs     Employees in    Price   Expiration  Present Value
                   Granted      Fiscal     ($/Share)   Date          ($)(c)
                    (#)(a)      year(b)
--------------------------------------------------------------------------------
Bill D. Helton       300,000        18.45%    41.625    8/3/07     1,068,000
--------------------------------------------------------------------------------
Wayne H. Brunetti    300,000        18.45%    41.625    8/3/07     1,068,000
                      14,400        23.19%    39.000   2/18/07        61,344
--------------------------------------------------------------------------------
Richard C. Kelly     100,000         6.15%    41.625    8/3/07       356,000
                       7,100        11.43%    39.000   2/18/07        30,246
--------------------------------------------------------------------------------
David M. Wilks        87,000         5.35%    41.625    8/3/07       309,720
--------------------------------------------------------------------------------
Patricia T. Smith      6,700        10.79%    39.000  10/31/00        22,378
--------------------------------------------------------------------------------
Henry H. Hamilton     66,000         4.06%    41.625    8/3/07       234,960
--------------------------------------------------------------------------------

(a) The options  with an  exercise  price of $39.00 were grants of PSCo common
stock granted by the Compensation  Committee of the PSCo Board on February 18,
1997.  The  options  were  intended  to vest  and be  exercisable  only to the
extent of 33 1/3% on the first  anniversary  date of the grant and to the same
extent  on the  second  anniversary  and  third  anniversary.  All  rights  to
exercise  were  intended to be  cumulative  to the extent not  exercised.  All
options  expire 10 years  from the date of grant.  Effective  August 1,  1997,
with the completion of the Merger,  all PSCo options  converted to NCE options
based  on the  one for one  conversion  ratio  used  in the  Merger  and  were
immediately  vested and  exercisable  with the  $39.00  price and 10 year term
carried  forward,  except for Ms. Smith.  In accordance  with the terms of Ms.
Smith's PSCo  Severance  Agreement,  her options will expire three years after
her date of  resignation.  The $39.00  exercise  price  equals the Fair Market
Value of PSCo Common Stock on February 18, 1997.

      The options  with an exercise  price of $41.625  were granted by the NCE
Compensation  Committee  with an exercise  price  equal to the  opening  trade
price on the New York Stock  Exchange  (NYSE) of NCE Common Stock on August 4,
1997. The options vest and may be fully  exercisable on the first  anniversary
date of the grant.  All options expire 10 years from the date of the grant.

(b) % of Total  Options/SARs  Granted  to  Employees  in Fiscal  Year apply to
shares of PSCo common  stock  granted  prior to the  completion  of the Merger
with respect to all $39.00  options and to shares of NCE Common Stock  granted
following the completion of the Merger with respect to all $41.625 options.

(c) These  amounts  represent a  theoretical  present  valuation  based on the
Black-Scholes  Option Pricing Model as adjusted for  dividends.  The values in
the column are  estimates  based upon an option  value of $4.26 for the $39.00
options  granted  to  Messrs.  Brunetti  and Kelly  and $3.34 for the  options
granted to Ms. Smith.  The options  granted at the $41.625  exercise price are
estimate  based  upon an  option  price of  $3.56.  The  option  values  were
derived using the following assumptions:
     1. the time to exercise is the option life of ten years  (except for Ms.
        Smith option life is 3.7 years);
     2. the risk free rate is 6.45% for the $39.00 PSCo  options  granted to
        Messrs.  Brunetti and Kelly;  5.89% for the options  granted to Ms.
        Smith and 6.38% for the $41.625  NCE  options.  These rates  represent

                                      126
<PAGE>

        the interest rate on 10-year,  4-year and 10-year  treasury  strips as
        quoted in the Federal Reserve  Statistical  Release for February 1997,
        February 1997 and August 1997, respectively;
     3. the option  strike  prices are  $39.00 for the PSCo  options  and
        $41.625 for the NCE options;
     4. the stock  prices at grant date were $39.00 for the PSCo  options
        and $41.625 for the NCE options;
     5. the standard  deviation of PSCo and NCE common stock,  which is a
        measure of the volatility of the stock,  is 14.15% for the $39.00 PSCo
        options and 9.16% for the $41.625 NCE options and
     6. a  dividend  yield for the $39.00  PSCo  options is 5.94% and for
        the $41.625 NCE options is 5.57%.

Executives may not sell or assign these options,  which have value only to the
extent of the future  stock price  appreciation.  These  amounts or any of the
assumptions  should not be used to  predict  future  performance  of the stock
price or dividends.

================================================================================
             Aggregated Option/SAR Exercises in Last Fiscal Year
                        and FY-End Option/SAR Values
================================================================================
                                                    Number of     Value of
                                                    Securities   Unexercised
                                                    Underlying   In-the-Money
                                                   Unexercised   Options/SARs
                                                   Options/SARs   at FY-End
                                                    at FY-End      ($) (a)
                                                       (#)
                                                   ------------- -------------
          Name             Shares        Value     Exercisable/  Exercisable/
                          Acquired     Realized    Unexercisable Unexercisable
                             on           ($)
                          Exercise
                             (#)
 ---------------------  ------------ ------------ ------------- -------------

 Bill D. Helton                  890        7,512            0/           0/
                                                        303,561    1,948,957
--------------------------------------------------------------------------------
 Wayne H. Brunetti                 0            0       52,334/     758,843/
                                                        300,000    1,893,750
--------------------------------------------------------------------------------
 Richard C. Kelly                  0            0       41,050/     631,866/
                                                        100,000      631,250
--------------------------------------------------------------------------------
 Patricia T. Smith                 0            0       24,150/     323,191/
                                                              0            0
--------------------------------------------------------------------------------
 Henry H. Hamilton               454        3,832           77/       1,194/
                                                         67,817      444,794
--------------------------------------------------------------------------------
 David M. Wilks                  409        3,452           67/       1,039/
                                                         88,905      578,721
================================================================================

(a) Option  values were  calculated  based on a $47.9375  closing price of NCE
Common Stock, as listed on the NYSE at December 31, 1997.

                                      127
<PAGE>

================================================================================
            Long-Term Incentive Plans - Awards in Last Fiscal Year
================================================================================
          Name           Number    Performance Estimated Future Payouts Under
                         of        or Other     Non-Stock Price-Based Plans
                         Shares,   Period
                         Units     Until
                         or        Maturation
                         Other     or Payout
                         Rights
                          (a)(#)
                                              ---------- ----------- ----------

                                              Threshold    Target     Maximum
                                               ($ or #)   ($ or #)    ($ or #)
--------------------------------------------------------------------------------
 Bill D. Helton            N/A        N/A
--------------------------------------------------------------------------------
 Wayne H. Brunetti        47,480    1/1/97
                                     thru                  99,708     
                                   12/31/99
--------------------------------------------------------------------------------
 Richard C. Kelly         17,600    1/1/97
                                     thru                  36,960     
                                   12/31/99
--------------------------------------------------------------------------------
 Patricia T. Smith        15,616    1/1/97
                                     thru                  32,794     
                                   12/31/99
--------------------------------------------------------------------------------
 Henry H. Hamilton         N/A        N/A
--------------------------------------------------------------------------------
 David M. Wilks            N/A        N/A
--------------------------------------------------------------------------------

(a) Dividend  equivalents  are granted under the PSCo Omnibus  Incentive Plan.
   Dividend  equivalents  entitle the  recipient to a cash amount equal to the
   average  of the  dividends  paid  over  the  performance  cycle at the then
   current  dividend rate multiplied by the number of units granted.  Dividend
   equivalents are earned,  if at all, at the end of a three-year  performance
   period  depending upon the achievement of Earnings Per Share goals over the
   performance  period.  The  Target  represents  the  amount to be awarded if
   100%  of the  goal is  achieved.  Threshold  represents  the  amount  to be
   awarded if 90% of the goal is achieved,  and Maximum  represents the amount
   to be  awarded  if  110%  of the  goal  is  achieved.  Additional  dividend
   equivalents  may be granted  each year by the  Compensation  Committee.  In
   accordance  with the terms of the PSCo  Omnibus  Incentive  Plan,  dividend
   equivalents  for all open  performance  periods  vested at the target level
   immediately  upon  the  effective  date  of the  Merger  and,  accordingly,
   Threshold and Maximum award amounts for 1997 were not established.

                                      128
<PAGE>


      The following table shows estimated  aggregate  pension benefits payable
to a covered  participant from the qualified  defined benefit plans maintained
by NCE and its  subsidiaries  and the NCE  Supplemental  Executive  Retirement
Plan (the "SERP").

================================================================================
                         Pension Plan Table
================================================================================
   Remuneration                   Years of Service
                             15                 20   25 or more years
--------------------------------------------------------------------------------
       $150,000       $  61,875          $  82,500          $  82,500
        175,000          72,188             96,250             96,250
        200,000          82,500            110,000            110,000
        225,000          92,813            123,750            123,750
        250,000         103,125            137,500            137,500
        300,000         123,750            165,000            165,000
        350,000         144,375            192,500            192,500
        400,000         165,000            220,000            220,000
        450,000         185,625            247,500            247,500
        500,000         206,250            275,000            275,000
        600,000         247,500            330,000            330,000
        700,000         288,750            385,000            385,000
================================================================================

      The  benefits  listed in the  Pension  Plan Table are not subject to any
deduction  or offset.  The  compensation  used to calculate  SERP  benefits is
base  salary  plus  short-term   incentive.   Such  covered   compensation  is
reflected in the Salary and Bonus  columns of the Summary  Compensation  Table
for  1997.   Current  annual  covered   compensation  for  Mr.  Helton  equals
$635,000.

      The SERP  benefit  accrues  over 20 years and is equal to (a) 55% of the
highest  three  years  covered   compensation  of  the  five  years  preceding
retirement  or  termination  minus (b) the qualified  plan  benefit.  The SERP
benefit is payable as an annuity for 20 years,  or as a single lump-sum amount
equal  to the  actuarial  equivalent  present  value  of the 20 year  annuity.
Benefits  are  payable  at age 62, or as early as age 55  reduced  5% for each
year that the benefit commencement date proceeds age 62.

      The  estimated  credited  years of service under the SERP as of December
31, 1997 were as follows:

               Mr. Helton         33
               Mr. Brunetti       10
               Mr. Kelly          30
               Mr. Wilks          20
               Mr. Hamilton       34


                                      129

<PAGE>


      The  Company  has granted  additional  credited  years of service to Mr.
Brunetti  for  purposes of SERP  accrual.  The  additional  credited  years of
service  (approximately seven) are included in the above table.  Additionally,
the Company has agreed to grant full accrual of SERP benefits to Mr.  Brunetti
at age 62 in the event he continues  to be employed by the Company  until such
age.

      The Board of Directors of NCE  approved the SERP in December  1997.  The
above  Named  Executive  Officers  are  all  participants  of  the  SERP,  and
participate  in qualified  defined  benefit plans  sponsored by the Company or
its subsidiaries.

      Prior to the Merger,  PSCo and SPS, each  sponsored one defined  benefit
plan covering  substantially all represented and non-represented  employees of
the  respective   company.   Employees  who  participated  in  the  Employees'
Retirement  Plan of Public  Service  Company  of  Colorado  and  Participating
Subsidiary  Companies (the "Public Service Company  retirement plan") prior to
the Merger  continue to participate in this plan.  Employees who  participated
in the Retirement  Plan for Employees of  Southwestern  Public Service Company
(the  "Southwestern  Public  Service  Company  retirement  plan") prior to the
Merger  continue to  participate  in this plan.  Effective  July 1, 1998,  the
assets  and  liabilities   associated  with  the   non-represented   employees
participating  in the Public Service  Company  retirement  plan and the assets
and liabilities  associated with the non-represented  employees  participating
in the  Southwestern  Public Service Company  retirement plan will be spun-off
from  the  respective  plans  and  merged  to form  the New  Century  Energies
retirement plan for non-represented employees.

      Mr.  Brunetti and Mr. Kelly  participate  in the  Employees'  Retirement
Plan of Public  Service  Company  of  Colorado  and  Participating  Subsidiary
Companies.  Messrs.  Helton,  Hamilton and Wilks participate in the Retirement
Plan for Employees of Southwestern  Public Service Company.  Effective July 1,
1998, all such  executives  will  participate  in the NCE retirement  plan for
non-represented employees.

      Ms. Smith resigned  effective  October 31, 1997,  prior to the effective
date of the SERP benefits  illustrated  above.  Pension  benefits were paid to
Ms. Smith under the terms of the plans and  employment  agreement in effect at
her date of termination.

                        Compensation of Directors

      All  Directors of PSCo are  employees of NCS. They receive no additional
compensation  for their  role as  members  of the Board of  Directors.  Former
directors of PSCo and SPS receive and are paid  retirement  and other  certain
benefits,  as  defined  by the  terms  of  the  agreements/policies  of  these
subsidiaries, in effect prior to the Merger.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

      Information  concerning  the  security  ownership of the  directors  and
officers of NCE is contained  under  Election Of Directors in NCE's 1998 Proxy
Statement,   which   information   is   incorporated   herein  by   reference.
Information  concerning  the security  ownership of the directors and officers
of SPS  is  omitted  pursuant  to  General  Instruction  I(2)(c).  Information
concerning  the security  ownership of the  directors  and officers of PSCo is
presented herein.

      All 100 shares of PSCo Common  Stock,  $5 par value,  are  directly  and
beneficially  held by NCE.  Holders of the PSCo  Cumulative  Preferred  Stock,
$100 par value and $25 par value generally have no voting rights,  except with
respect to certain  corporate  actions and in the event of certain defaults in
the payment of dividends on such shares.

      The table  below  shows the  number of shares of NCE  Common  Stock that
were beneficially  owned directly or indirectly as of January 29, 1998 by each
director  of PSCo  and each of the  executive  officers  of PSCo  named in the
summary  compensation  table,  and by all directors and executive  officers of
PSCo as a group.  No such  person  owns any  shares of any  series of the PSCo
Cumulative Preferred Stock.

                                      130

<PAGE>

Security Ownership of Management and Directors
as of January 29, 1998 (a)

--------------------------------------------------------------------------------
 Title of Class   Name of Beneficial Owner      Amount and      % of
       (b)                                       nature of       Class
                                                beneficial        (d)
                                               ownership (c)
--------------------------------------------------------------------------------
 Common Stock     Bill D. Helton (1)                24,158 (e)
--------------------------------------------------------------------------------
 Common Stock     Wayne H. Brunetti                 71,097 (e)
--------------------------------------------------------------------------------
 Common Stock     Richard C. Kelly (2)              46,321 (e)
--------------------------------------------------------------------------------
 Common Stock     Henry H. Hamilton                 14,442 (e)
--------------------------------------------------------------------------------
 Common Stock     David M. Wilks                    12,451 (e)
--------------------------------------------------------------------------------
 Common Stock     All the above and other          183,466 (e)
                  Executive Officers as a
                  Group (7 persons)
================================================================================

Notes

(a)  As of January  29,  1998,  the  Company is not aware of any  persons  who
     beneficially own more than 5% of the Company's Common Stock.

(b)  Common Stock listed in the table represents NCE Common Stock, $1 par value.
 
(c)  The common shares  represented  above include those shares,  if any, held
     under the PSCo  Employees'  Savings and Stock Ownership Plan (the "ESOP")
     and the SPS Employee Investment Plan (the "EIP").

(d)  As of January 29, 1998,  the percentage of shares  beneficially  owned by
     any  Director  or  named  Executive  Officer,  or by  all  Directors  and
     Executive  Officers as a group,  does not exceed one percent of the class
     of securities described above.

(e)  The number of shares  includes  those which the following  have the right
     to  acquire  as of January  29,  1998,  through  the  exercise  of vested
     options granted under the NCE Omnibus  Incentive Plan and the predecessor
     PSCo Omnibus  Incentive  Plan and the SPS 1989  Incentive Plan (the "1989
     Plan"):  Mr.  Brunetti,  52,334 shares;  Mr. Kelly,  41,050  shares;  Mr.
     Hamilton,  77 shares; Mr. Wilks, 67 shares; and all Executive Officers as
     a group, 2,717 shares.

    Unless otherwise specified,  each Director and named Executive Officer has
    sole  voting  and  sole  investment  power  with  respect  to  the  shares
    indicated.

(1)  Includes  716  shares  held in trusts  for the  benefit  of Mr.  Helton's
     grandchildren.  Mr.  Helton's wife retains the right to the corpus of the
     trusts  upon  their   termination.   Mr.  Helton   disclaims   beneficial
     ownership of the shares held in the trusts.

(2)  Mr.  Kelly's  wife  owns  263  of  these  shares;   Mr.  Kelly  disclaims
     beneficial ownership of those shares.

         Section 16(a) Beneficial Ownership Reporting Compliance

     Based   solely   upon  a  review  of  Forms  3,  4  and  5  and   written
representations  furnished  to PSCo  prior to the Merger  effective  August 1,
1997,  PSCo believes that all Directors and Officers  filed in a timely manner
their reports  required under Section 16(a) of the Securities  Exchange Act of
1934, as amended.

                                      131

<PAGE>

Item 13.  Certain Relationships and Related Transactions

      Information  concerning  relationships  and related  transactions of the
directors  and officers of NCE is contained  under Certain  Relationships  And
Related  Transactions  in NCE's 1998 Proxy  Statement,  which  information  is
incorporated   herein  by  reference.   PSCo  and  SPS  have  no   information
concerning relationships and related transactions required to be disclosed.

                                   PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)   Financial Statements, Financial Statement Schedules, and Exhibits:

   (1)Financial  Statements and Reports of Independent  Public  Accountants on
      the financial statements for NCE, PSCo and SPS are listed under Item 8 
      herein.

   (2)Financial Statement Schedules.
      Reports of Independent  Public Accountants as to Schedules for NCE, PSCo
      and SPS are included in the Reports of  Independent  Public  Accountants
      for each registrant.

   (3)Exhibits.
      Exhibits for NCE, PSCo and SPS are listed in Index to Exhibits below.

(b)   Reports on Form 8-K:

      NCE,  PSCo and SPS:  No reports  were filed on Form 8-K during the quarter
      ended December 31, 1997.


                                      132


<PAGE>

                                   EXPERTS

      The consolidated  balance sheets of New Century  Energies,  Inc. and its
subsidiaries  as of  December  31,  1997 and 1996,  the  related  consolidated
statements  of  income,  shareholders'  equity  and cash flows for each of the
three years in the period ended December 31, 1997,  and the related  financial
statement  schedule,  appearing in this Annual Report on Form 10-K,  have been
audited by Arthur Andersen LLP,  independent public accountants,  as set forth
in  their  report  appearing  elsewhere  herein.  The  consolidated  financial
statements and the related financial  statement  schedule,  which are included
in this Annual Report on Form 10-K,  are included  herein in reliance upon the
authority  of said firm as experts in  accounting  and auditing in giving said
report.

      The  consolidated  balance  sheets and statements of  capitalization  of
Public Service  Company of Colorado.  and its  subsidiaries as of December 31,
1997 and 1996, the related  consolidated  statements of income,  shareholder's
equity  and  cash  flows  for each of the  three  years  in the  period  ended
December 31, 1997, and the related financial statement schedule,  appearing in
this Annual  Report on Form 10-K,  have been audited by Arthur  Andersen  LLP,
independent  public  accountants,  as set  forth  in  their  report  appearing
elsewhere  herein.  The  consolidated  financial  statements  and the  related
financial  statement  schedule,  which are  included in this Annual  Report on
Form 10-K, are included  herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said report.

      The  balance  sheet and  statement  of  capitalization  of  Southwestern
Public  Service  Company as of December  31,  1997,  the related  statement of
income,  shareholder's  equity and cash flows for the year ended  December 31,
1997, and the related financial statement  schedule,  appearing in this Annual
Report on Form 10-K,  have been audited by Arthur  Andersen  LLP,  independent
public  accountants,  as set forth in their report appearing elsewhere herein.
The financial  statements and the related financial statement schedule,  which
are  included  in this  Annual  Report on Form 10-K,  are  included  herein in
reliance  upon  the  authority  of said  firm as  experts  in  accounting  and
auditing in giving said report.


                                      133

<PAGE>

                                                                EXHIBIT 23 (a)

                  CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

      As   independent   public   accountants,   we  hereby   consent  to  the
incorporation  by reference of our report included in this Form 10-K, into New
Century Energies,  Inc.' 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 and New Century
Energies,  Inc.'s  Registration  Statement  (Form  S-3,  File  No.  333-40361)
pertaining to the  registration  of NCE Common Stock and to all  references to
our Firm included in this Form 10-K.

      As   independent   public   accountants,   we  hereby   consent  to  the
incorporation  by  reference  of our report  included in this Form 10-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 Form 10-K.

      As   independent   public   accountants,   we  hereby   consent  to  the
incorporation  by  reference  of our report  included in this Form 10-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  Southwestern  Public  Service  Company's  Non-Qualified
Salary  Deferral Plan and to all  references to our Firm included in this Form
10-K.


                                                         ARTHUR ANDERSEN LLP

Denver, Colorado
February 26, 1998



                                      134

<PAGE>

                                                                EXHIBIT 23 (b)
                  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  Statement
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
the Annual  Report on Form 10-K of New  Century  Energies,  Inc.  for the year
ended December 31, 1997.


                                                DELOITTE & TOUCHE  LLP
 Dallas, Texas
February 26, 1998










                                                                   EXHIBIT 24
                               POWER OF ATTORNEY

     Each director and/or officer of New Century Energies, Inc., whose signature
appears  herein hereby  appoints B. D. Helton and R. C. Kelly,  and each of them
severally,  and each  director  and/or  officer  of Public  Service  Company of
Colorado and Southwestern Public Service Company, whose signature appears herein
hereby appoints W. H. Brunetti and B. P. Jackson, and each of them severally, as
his or her  attorney-in-fact  to sign in his or her name and behalf,  in any and
all  capacities  stated  herein,  and to file with the  Securities  and Exchange
Commission, any and all amendments to this Annual Report on Form 10-K.


                                      135

<PAGE>


                          NEW CENTURY ENERGIES, INC.
                                  SIGNATURES

      Pursuant to the  requirements  of Section 13 or 15(d) of the  Securities
Exchange Act of 1934, New Century  Energies,  Inc. has duly caused this report
to be signed on its behalf by the  undersigned,  thereunto duly  authorized on
the 24th day of February, 1998.

                                          NEW CENTURY ENERGIES, INC.

                                          By     /s/R. C. Kelly
                                          _________________________________
                                                   R. C. KELLY
                                          Executive Vice President, and
                                             Chief Financial Officer


      Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,
this report has been signed  below by the  following  persons on behalf of New
Century Energies, Inc. and in the capacities and on the date indicated.


   Signature                      Title                          Date
________________________________________________________________________________


/s/B. D. Helton
_____________________________  Principal Executive            February 24, 1998
B. D. Helton                   Officer and Director
Chairman of the Board and
Chief Executive Officer


/s/R. C. Kelly
_____________________________  Principal Financial Officer    February 24, 1998
R. C. Kelly
Executive Vice President,
Chief Financial Officer


/s/Teresa S. Madden
_____________________________  Principal Accounting Officer   February 24, 1998
Teresa S. Madden
Controller and Secretary


                                      136

<PAGE>


   Signature                            Title                    Date
_______________________________________________________________________________

/s/Bill D. Helton
__________________________________  Chairman of the Board      February 24, 1998
Bill D. Helton                      and Director

/s/ W. H. Brunetti
__________________________________  Vice Chairman and
W. H. Brunetti                      Director                   February 24, 1998

/s/C. Coney Burgess
__________________________________  Director                   February 24, 1998
C. Coney Burgess

/s/ Danny H. Conklin
__________________________________  Director                   February 24, 1998
Danny H. Conklin

/s/Giles M. Forbess
__________________________________  Director                   February 24, 1998
Giles M. Forbess

/s/Gayle L. Greer
__________________________________  Director                   February 24, 1998
Gayle L. Greer

/s/R. R. Hemminghaus
__________________________________  Director                   February 24, 1998
R. R. Hemminghaus

/s/A. Barry Hirschfeld
__________________________________  Director                   February 24, 1998
A. Barry Hirschfeld

/s/ J. Howard Mock
__________________________________  Director                   February 24, 1998
J. Howard Mock

/s/ Will F. Nicholson, Jr.
__________________________________  Director                   February 24, 1998
Will F. Nicholson, Jr.

/s/J. Michael Powers
__________________________________  Director                   February 24, 1998
J. Michael Powers

/s/Rodney E. Slifer
__________________________________  Director                   February 24, 1998
Rodney E. Slifer

                                      137


<PAGE>



   Signature                            Title                    Date
________________________________________________________________________________

/s/W. Thomas Stephens
__________________________________  Director                   February 24, 1998
W. Thomas Stephens

/s/Robert G. Tointon
__________________________________  Director                   February 24, 1998
Robert G. Tointon


                                      138

<PAGE>

                         PUBLIC SERVICE COMPANY OF COLORADO
                                     SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934,  Public  Service  Company of Colorado has duly caused this
report to be signed on its behalf by the undersigned,  thereunto duly authorized
on the 24th day of February, 1998.

                                          PUBLIC SERVICE COMPANY OF COLORADO

                                          By   /s/Brian P. Jackson
                                          _________________________________
                                                Brian P. Jackson
                                          Senior Vice President, Finance and
                                             Administrative Services


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has been  signed  below by the  following  persons  on  behalf of Public
Service Company of Colorado and in the capacities and on the date indicated.


   Signature                      Title                          Date
________________________________________________________________________________


/s/Wayne H. Brunetti
___________________________    Principal Executive            February 24, 1998
Wayne H. Brunetti              Officer and Director
Vice Chairman, President and
Chief Executive Officer


/s/Brian P. Jackson
___________________________    Principal Financial Officer    February 24, 1998
Brian P. Jackson               and Director
Senior Vice President, Finance
and Administrative Services


/s/Teresa S. Madden
___________________________    Principal Accounting Officer   February 24, 1998
Teresa S. Madden
Controller and Corporate Secretary

                                      139

<PAGE>


   Signature                            Title                    Date
________________________________________________________________________________

/s/ Bill. D. Helton
____________________________      Director                   February 24, 1998
Bill. D. Helton

/s/Doyle R. Bunch II
____________________________      Director                   February 24, 1998
Doyle R. Bunch II

/s/Henry H. Hamilton
____________________________      Director                   February 24, 1998
Henry H. Hamilton

/s/ Richard C. Kelly
_____________________________      Director                  February 24, 1998
Richard C. Kelly

/s/David M. Wilks
_____________________________      Director                   February 24, 1998
David M. Wilks


                                      140

<PAGE>

                        SOUTHWESTERN PUBLIC SERVICE COMPANY
                                     SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934,  Southwestern  Public Service Company has duly caused this
report to be signed on its behalf by the undersigned,  thereunto duly authorized
on the 24th day of February, 1998.

                                          SOUTHWESTERN PUBLIC SERVICE COMPANY

                                          By   /s/Brian P. Jackson
                                          _________________________________
                                                Brian P. Jackson
                                          Senior Vice President, Finance and
                                             Administrative Services


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the following  persons on behalf of Southwestern
Public Service Company and in the capacities and on the date indicated.


   Signature                      Title                          Date
________________________________________________________________________________


/s/Wayne H. Brunetti
__________________________     Principal Executive          February 24, 1998
Wayne H. Brunetti              Officer and Director
Vice Chairman and
Chief Executive Officer


/s/Brian P. Jackson
__________________________     Principal Financial Officer   February 24, 1998
Brian P. Jackson
Senior Vice President, Finance
and Administrative Services


/s/Teresa S. Madden
__________________________     Principal Accounting Officer  February 24, 1998
Teresa S. Madden
Controller and Corporate
 Secretary

                                      141

<PAGE>


   Signature                            Title                    Date
________________________________________________________________________________

/s/Bill. D. Helton
__________________________________  Director                   February 24, 1998
Bill. D. Helton

/s/Henry H. Hamilton
__________________________________  Director                   February 24, 1998
Henry H. Hamilton

/s/ Richard C. Kelly
__________________________________  Director                   February 24, 1998
Richard C. Kelly

/s/David M. Wilks
__________________________________  Director                   February 24, 1998
David M. Wilks


                                      142

<PAGE>

                                 EXHIBIT INDEX

2   Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
NCE
2(a) 1* Merger  Agreement  and Plan of  Reorganization  dated  August 22, 1995
        (Form S-4, Annex I, File No. 33-64951).
PSCo
2(b) 1* Merger  Agreement  and Plan of  Reorganization  dated  August 22, 1995
       (Form 8-K, dated August 22, 1995, File No. 1-3280 - Exhibit 2).
SPS
2(c) 1* Agreement and Plan of Reorganization dated August 22,  1995  (Form 8-K,
        Exhibit 2, dated August 22, 1995).

3 (i)  Articles of Incorporation
NCE
3(a) 1* Restated Articles of Incorporation date December 8, 1995 (Form S-4, 
         Exhibit 3(a)).

PSCo
3(a) 1  Amended and Restated Articles of Incorporation dated September 19, 1997

SPS
3(a) 2  Amended and Restated Articles of Incorporation dated September 30, 1997.

3 (ii)  By-Laws
NCE
3(b) 1* Restated Bylaws of New Century Energies, Inc. (Form S-4, Exhibit 3(b)).

PSCo
3(b) 1  By-laws dated November 20, 1997.

SPS
3(b) 2  By-laws dated September 29, 1997.

4  Instruments Defining the Rights of Security Holders, Including Indentures
NCE
4(a)1*  Rights Agreement, dated as of August 1, 1997, between New Century 
        Energies, Inc.  and the Bank of New  York,  as  Rights Agent (Form  8-K,
        August  1, 1997-Exhibit 1).

PSCo
4(a) 1* Indenture, dated as of December 1, 1939, providing for the  issuance of
        First Mortgage Bonds (Form 10 for 1946- Exhibit (B-1)).

4(a) 2* Indentures supplemental to Indenture dated as of December 1, 1939:
<TABLE>
<CAPTION>

                   Previous Filing:                      Previous Filing:
                   Form; Date or    Exhibit               Form; Date or    Exhibit
     Dated as of   File No.         No.    Dated as of    File No.           No.
     -----------   --------         ---    -----------    --------           ---

<S>                <C>              <C>    <C>              <C>               <C>
    Mar. 14, 1941  10, 1946         B-2    Apr. 21, 1970    8-K, Apr. 1970    1
    May 14, 1941   10, 1946         B-3    Sept. 1, 1970    8-K, Sept. 1970   2
    Apr. 28, 1942  10, 1946         B-4    Feb. 1, 1971     8-K, Feb. 1971    2
    Apr. 14, 1943  10, 1946         B-5    Aug. 1, 1972     8-K, Aug. 1972    2
    Apr. 27, 1944  10, 1946         B-6    June 1, 1973     8-K, June 1973    1
    Apr. 18, 1945  10, 1946         B-7    Mar. 1, 1974     8-K, Apr. 1974    2
</TABLE>

                                      143
<PAGE>
<TABLE>
<S>                <C>              <C>     <C>             <C>                  <C>
    Apr. 23, 1946  10-K, 1946       B-8     Dec. 1, 1974    8-K, Dec. 1974       1
    Apr. 9, 1947   10-K, 1946       B-9     Oct. 1, 1975    S-7, (2-60082)       2(b)(3)
    June 1, 1947   S-1, (2-7075)    7(b)    Apr. 28, 1976   S-7, (2-60082)       2(b)(4)
    Apr. 1, 1948   S-1, (2-7671)    7(b)(1) Apr. 28, 1977   S-7, (2-60082)       2(b)(5)
    May 20, 1948   S-1, (2-7671)    7(b)(2) Nov. 1, 1977    S-7, (2-62415)       2(b)(3)
    Oct. 1, 1948   10-K, 1948       4       Apr. 28, 1978   S-7, (2-62415)       2(b)(4)
    Apr. 20, 1949  10-K, 1949       1       Oct. 1, 1978    10-K, 1978           D(1)
    Apr. 24, 1950  8-K, Apr. 1950   1       Oct. 1, 1979    S-7, (2-66484)       2(b)(3)
    Apr. 18, 1951  8-K, Apr. 1951   1       Mar. 1, 1980    10-K, 1980           4(c)
    Oct. 1, 1951   8-K, Nov. 1951   1       Apr. 28, 1981   S-16, (2-74923)      4(c)
    Apr. 21, 1952  8-K, Apr. 1952   1       Nov. 1, 1981    S-16, (2-74923)      4(d)
    Dec. 1, 1952   S-9, (2-11120)   2(b)(9) Dec. 1, 1981    10-K, 1981           4(c)
    Apr. 15, 1953  8-K, Apr. 1953   2       Apr. 29, 1982   10-K, 1982           4(c)
    Apr. 19, 1954  8-K, Apr. 1954   1       May 1, 1983     10-K, 1983           4(c)
    Oct. 1, 1954   8-K, Oct. 1954   1       Apr. 30, 1984   S-3, (2-95814)       4(c)
    Apr. 18, 1955  8-K, Apr. 1955   1       Mar. 1, 1985    10-K, 1985           4(c)
    Apr. 24, 1956  10-K, 1956       1       Nov. 1, 1986    10-K, 1986           4(c)
    May 1, 1957    S-9, (2-13260)  2(b)(15) May 1, 1987     10-K, 1987           4(c)
    Apr. 10, 1958  8-K, Apr. 1958   1       July 1, 1990    S-3, (33-37431)      4(c)
    May 1, 1959    8-K, May 1959    2       Dec. 1, 1990    10-K, 1990           4(c)
    Apr. 18, 1960  8-K, Apr. 1960   1       Mar. 1, 1992    10-K, 1992           4(d)
    Apr. 19, 1961  8-K, Apr. 1961   1       Apr. 1, 1993    10-Q, June 30, 1993  4(a)
    Oct. 1, 1961   8-K, Oct. 1961   2       June 1, 1993    10-Q, June 30, 1993  4(b)
    Mar. 1, 1962   8-K, Mar. 1962  3(a)     Nov. 1, 1993    S-3, (33-51167)      4(a)(3)
    June 1, 1964   8-K, June 1964   1       Jan. 1, 1994    10-K, 1993           4(a)(3)
    May 1, 1966    8-K, May 1966    2       Sept. 2, 1994   8-K, Sept. 1994      4(a)
    July 1, 1967   8-K, July 1967   2       May 1, 1996     10Q, June 30, 1996   4(a)
    July 1, 1968   8-K, July 1968   2       Nov. 1, 1996    10-K, 1996           4(a)(3)
    Apr. 25, 1969  8-K, Apr. 1969   1       Feb. 1, 1997    10-Q, Mar. 31, 1997  4(a)
</TABLE>

4(b) 1*  Indenture, dated as of October 1, 1993, providing for the issuance of
         First Collateral Trust Bonds (Form 10-Q, September 30, 1993 - 
         Exhibit 4(a)).

4(b) 2*  Indentures supplemental to Indenture dated as of October 1, 1993:

                          Previous Filing:
                           Form; Date or            Exhibit
         Dated as of         File No.                  No.
         -----------         --------                  ---

         November 1, 1993     S-3, (33-51167)       4(b)(2)
         January 1, 1994      10-K, 1993            4(b)(3)
         September 2, 1994    8-K, Sept. 1994       4(b)
         May 1, 1996          10-Q, June 30, 1996   4(b)
         November 1, 1996     10-K, 1996            4(b)(3)
         February 1, 1997     10-Q, Mar. 31, 1997   4(b)

SPS
4(a) 1*  Indenture, dated as of August 1, 1946, providing for the issuance of 
         First Mortgage Bonds (Registration No. 2-6910, Exhibit 7-A).

                                      144

<PAGE>

4(b) 1*  Indentures supplemental to Indenture dated as of August 1, 1946:

                              Previous Filing:
                               Form; Date or            Exhibit
         Dated as of             File No.                  No.
         -----------             --------                  ---

         February 1, 1967         2-25983                 2-S
         October 1, 1970          2-38566                 2-T
         February 9, 1977         2-58209                 2-Y
         March 1, 1979            2-64022                 b(28)
         April 1, 1983 (two)      10-Q, May 1983          4(a)
         February 1, 1985         10-K, Aug. 1985         4(c)
         July 15, 1992 (two)      10-K, Aug. 1992         4(a)
         December 1, 1992 (two)   10-Q, Feb. 1993         4
         February 15, 1995        10-Q, May 1995          4
         March 1, 1996            333-05199               4(c)

4(c) 1* Standby Credit Agreement with Union Bank of Switzerland (Houston Agency)
        dated July 1, 1991 (Form 10-K, August 31, 1991 - Exhibit 4(a)).

4(d) 1* Red River  Authority for Texas  Indenture of Trust dated July 1, 1991 
        (Form 10-K, August 31, 1991 - Exhibit 4(b)).

4(e) 1* Indenture dated October 21, 1996, between SPS and  Wilmington  Trust
        Company, (Form 10-Q, November 30, 1996 - Exhibit 4(a)).

4(f) 1* Supplemental Indenture dated October 21,1996, between SPS and Wilmington
        Trust Company, (Form 10-Q, November 30, 1996 - Exhibit 4(b)).

4(g) 1* Guarantee Agreement dated October 21, 1996, between SPS and  Wilmington
        Trust Company, (Form 10-Q, November 30, 1996 - Exhibit 4(c)).

4(h) 1*  Amended and Restated  Trust  Agreement  dated October 21, 1996,  among 
         SPS, David M. Wilks, as initial depositor, Wilmington Trust Company and
         the administrative trustees named therein (Form 10-Q, November 30, 1996
          -  Exhibit 4(d)).

4(i) 1* Agreement as to Expenses dated October  21,  1996,   between  SPS  and
        Southwestern Public Service Capital I,(Form 10-K, December 31, 1996
        - Exhibit F).

Material Contracts
NCE
10(a) 1  Form of Key Executive Change in Control Agreement.

10(b) 2*+ Employment Agreement,  effective August 1, 1997, between the Company 
         and Mr. Bill D. Helton (Form S-4, Annex I, File No. 33-64951).

10(b) 3*+ Employment Agreement,  effective August 1, 1997, between the Company 
          and Mr. Wayne H. Brunetti (Form S-4, Annex I, File No. 33-64951).

PSCo
10(a) 1* Settlement  Agreement  dated  February 9, 1996  between the Company and
         the United States Department of Energy (Form 10-K, December 31, 1995
         - Exhibit 10(a)(1)).

                                      145
<PAGE>

10(a) 2* Settlement Agreement  dated  June 27,  1979  between  the  Registrant  
         and General Atomic Company(Form S-7, File No. 2-66484-Exhibit 5(a)(1)).

10(a) 3* Services Agreement executed June 27, 1979 and effective as of January 
         1, 1979 between the  Registrant and General Atomic Company (Form S-7, 
         File No. 2-66484 - Exhibit 5(a)(3)).

10(c)1* Amended and Restated Coal Supply Agreement  entered into October 1, 1984
        but made effective as of January 1, 1976 between the Registrant and Amax
        Inc. on behalf of its division, Amax Coal Company (Form 10-K, December
        31, 1984 - Exhibit 10(c)(1)).

10(c)2* First  Amendment to Amended and Restated Coal Supply  Agreement  entered
        into May 27, 1988 but made effective January 1, 1988 between the 
        Registrant and Amax Coal Company (Form 10-K, December 31, 1988 -Exhibit
        10(c)(2).**

10(e)1*+ Supplemental  Executive  Retirement Plan for Key Management  Employees,
         as amended and  restated  March 26, 1991 (Form  10-K,  December 31, 
         1991 - Exhibit 10(e)(2)).

10(e)3*+  Executive  Savings  Plan  (Form  10-K,  December  31,  1991 -  Exhibit
          10(e)(5)).

10(e) 4*+ Form of Key Executive Severance Agreement, as amended on August 22,
          and November 27, 1995. (Form 10-K, December 31, 1995 - Exhibit 10(3)
          (4)).

SPS
10(a) 1* Coal Supply Agreement (Harrington Station) between SPS and TUCO, dated 
         May 1, 1979 (Form 8-K, May 14, 1979 - Exhibit 3).

10(b) 1* Master Coal Service Agreement between Swindell-Dressler  Energy  Supply
         Company and TUCO, dated July 1, 1978 (Form 8-K, May 14, 1979 - Exhibit
         5(A)).

10(c) 1* Guaranty of Master Coal Service Agreement between  Swindell-Dressler
         Energy Supply Company and TUCO (Form 8-K, May 14, 1979 - Exhibit 5(B)).

10(d) 1* Coal Supply Agreement (Tolk Station) between SPS and TUCO dated April 
         30, 1979, as amended November 1, 1979 and December 30, 1981 (Form 10-Q,
         February 28, 1982 - Exhibit 10(b)).

10(e) 1*+Master Coal Service Agreement  between  Wheelabrator  Coal Services Co.
         and TUCO dated December 30, 1981, as amended  November 1, 1979 and 
         December 30, 1981 (Form 10-Q, February 28, 1982 - Exhibit 10(c)).

10(f) 1*+Incentive Compensation Plan (an Executive  Management Plan) as amended
         July 23, 1996 (Form 10-K, August 31, 1996 - Exhibit 10(a)).

10(g) 1*+ 1989 Stock Incentive Plan as amended April 23, 1996 (Form 10-K, August
          31, 1996 - Exhibit 10(b)).

10(h) 1*+ Director's Deferred Compensation Plan as amended January 10, 1990 
          (Form 10-K, August 31, 1996 - Exhibit 10(c)).

10(i) 1*+ Supplemental Retirement Income Plan as  amended  July 23,  1991 (Form
          10-K, August 31, 1996 - Exhibit 10(e)).

10(j) 1*+ EPS Performance Unit Plan dated October 27, 1992 (Form 10-K, 
          August 31, 1996 - Exhibit 10(a)).

                                      146

<PAGE>

12  Statement Re Computation of Ratios

12(a)  PSCo Computation of Ratio of Consolidated Earnings to Consolidated  Fixed
       Charges is set forth at page 116 herein.

12(b)  PSCo Computation of Ratio of Consolidated Earnings to Consolidated
       Combined Fixed Charges and Preferred Stock Dividends is set forth at page
       117 herein.

12(c)  SPS Computation of Ratio of Consolidated Earnings to Consolidated Fixed
       Charges is set forth at page 118 herein.

12(d)  SPS Computation of Ratio of Consolidated Earnings to ConsolidatedCombined
       Fixed Charges and Preferred  Stock  Dividends  is set  forth at page 119
       herein.

21     Subsidiaries of the Registrant

23(a)  Consent of Arthur Andersen LLP is set forth at page 134 herein.

23(b)  Consent of Deloitte & Touche LLP is set forth at page 135 herein.

24     Power of Attorney is set forth at page 135 herein.

27  Financial Data Schedule UT
27 (a)   Financial Data Schedule for NCE as of December 31, 1997

27 (b)   Financial Data Schedule for PSCo as of December 31, 1997

27 (c)   Financial Data Schedule for SPS as of December 31, 1997

--------------
*   Previously filed as indicated and incorporated herein by reference.
+   Management contracts of compensatory plans or arrangements.


                                      147