SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                  FORM 10-Q

       [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934
              For the quarterly period ended September 30, 1997

                                      OR

         [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
     For the transition period from ________________ to ________________
                        Commission file number 1-12927



                          NEW CENTURY ENERGIES, INC.
            (Exact name of registrant as specified in its charter)



              Delaware                                 84-1334327
   (State or other jurisdiction of                    (IRS Employer
   incorporation or organization)                  Identification No.)
 1225 17th Street, Denver, Colorado                       80202
(Address of principal executive offices)               (Zip Code)



Registrant's Telephone Number, including area code: (303) 571-7511





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

      On November 10, 1997,  104,616,824 shares of the Registrant's Common Stock
were  outstanding.  The  aggregate  market  value of this  common  stock held by
nonaffiliates  based on the  closing  price on the New York Stock  Exchange  was
approximately $4,433,137,197.





<PAGE>




                              Table of Contents

                        PART I - FINANCIAL INFORMATION

Item l.  Financial Statements .............................................  1

Item 2.  Management's Discussion and Analysis of Financial Condition
          and Results of Operations ....................................... 19


                          PART II - OTHER INFORMATION


Item 1.  Legal Proceedings................................................. 28

Item 6.  Exhibits and Reports on Form 8-K.................................. 28

SIGNATURE.................................................................. 29

EXHIBIT 15 ................................................................ 31





















   In addition  to the  historical  information  contained  herein,  this report
contains a number of  "forward-looking  statements",  within the  meaning of the
Securities  Exchange Act of 1934.  Such  statements  address  future  events and
conditions concerning capital expenditures,  earnings,  resolution and impact of
litigation,  regulatory matters, liquidity and capital resources, and accounting
matters.  Actual  results  in each  case  could  differ  materially  from  those
projected  in such  statements  due to a variety of factors  including,  without
limitation,  restructuring of the utility industry;  future economic conditions;
earnings   retention  and  dividend   payout   policies;   developments  in  the
legislative,  regulatory  and  competitive  environments  in which  the  Company
operates;  and other  circumstances that could affect  anticipated  revenues and
costs, such as compliance with laws and regulations. These and other factors are
discussed in the Company's filings with the Securities and Exchange  Commission,
including this report.


                                       i
<PAGE>


TERMS
The abbreviations or acronyms used in the text and notes are defined below:

Abbreviation or Acronym                                           Term
--------------------------------------------------------------------------------
AEP......................................................American Electric Power
CDPHE.......................Colorado Department of Public Health and Environment
Cheyenne..................................Cheyenne Light, Fuel and Power Company
Company or NCE........................................New Century Energies, Inc.
CPUC....................The Public Utilities Commission of the State of Colorado
Denver District Court..............................District Court in and for the
                                                       City and County of Denver
DOE.........................................................Department of Energy
DSM.......................................................Demand Side Management
DSMCA.....................................Demand Side Management Cost Adjustment
ECA.......................................................Energy Cost Adjustment
e prime...........................................e prime, inc. and subsidiaries
FERC........................................Federal Energy Regulatory Commission
Fort St. Vrain................Fort St. Vrain Nuclear Electric Generating Station
Fuelco..........Fuel Resources Development Co., a dissolved Colorado Corporation
GCA..........................................................Gas Cost Adjustment
ICA....................................................Incentive Cost Adjustment
Merger.............................the business combination between PSCo and SPS
Natural Fuels..........................................Natural Fuels Corporation
NCE...................................................New Century Energies, Inc.
NC Enterprises..............................................NC Enterprises, Inc.
NMPUC.......................................New Mexico Public Utility Commission
NOx...............................................................Nitrogen Oxide
PSCo..........................................Public Service Company of Colorado
PUHCA.................................Public Utility Holding Company Act of 1935
PSCCC.............................................PS Colorado Credit Corporation
PUCT..........................................Public Utility Commission of Texas
QF...........................................................Qualifying Facility
Quixx.........................................Quixx Corporation and Subsidiaries
SEC...........................................Securities and Exchange Commission
SO2...............................................................Sulfur Dioxide
SPS..........................................Southwestern Public Service Company
SFAS 71.....................Statement of Financial Accounting Standards No. 71 -
                     "Accounting for the Effects of Certain Types of Regulation"
SFAS 112...................Statement of Financial Accounting Standards No. 112 -
                             "Employers' Accounting for Postemployment Benefits"
SFAS 121...................Statement of Financial Accounting Standards No. 121 -
       "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
          to Be Disposed Of"
Thunder Basin.........................................Thunder Basin Coal Company
UE..............................Utility Engineering Corporation and subsidiaries
WGI.....................................................WestGas InterState, Inc.
Yorkshire Electricity............................Yorkshire Electricity Group plc
Yorkshire Power.......................................Yorkshire Power Group Ltd.


                                      ii

<PAGE>


 
                        PART I - FINANCIAL INFORMATION



Item 1.  Financial Statements

                 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                     CONSOLIDATED CONDENSED BALANCE SHEETS
                            (Thousands of Dollars)

                                    ASSETS

                                                     September 30,  December 31,
                                                         1997          1996
                                                         ----          ----
                                                     (Unaudited)
Property, plant and equipment, at cost:
   Electric .....................................      $6,589,738   $6,448,993
   Gas...........................................       1,105,777    1,035,394
   Steam and other...............................         117,902      115,766
   Common to all departments.....................         422,404      418,262
   Construction in progress......................         318,019      260,943
                                                          -------      -------
                                                        8,553,840    8,279,358
   Less: accumulated depreciation ...............       3,130,928    2,990,275
                                                        ---------    ---------
     Total property, plant and equipment.........       5,422,912    5,289,083
                                                        ---------    ---------



Investments, at cost:
   Investment in unconsolidated subsidiaries (Note 4).    302,862       29,672
   Other..............................................     41,768       51,324
                                                          -------       ------
    Total investments.................................    344,630       80,996
                                                          -------       ------


Current assets:
   Cash and temporary cash investments................     57,433       50,015
   Accounts receivable, less reserve for uncollectible
     accounts ($8,583 at September 30, 1997; $6,623 at
     December 31, 1996) ..............................    276,528      285,912
   Accrued unbilled revenues..........................     87,389      106,198
   Recoverable purchased gas and electric energy costs
     - net (Note 1) ..................................     91,124       47,003
   Materials and supplies, at average cost............     67,183       66,748
   Fuel inventory, at average cost....................     27,627       27,059
   Gas in underground storage, at cost (LIFO).........     53,774       42,826
   Regulatory assets recoverable within one year (Note 1)  60,545       52,110
   Prepaid expenses and other.........................     55,982       46,773
                                                           ------       ------
    Total current assets..............................    777,585      724,644
                                                          -------      -------


Deferred charges:
   Regulatory assets (Note 1).........................    380,759      414,001
   Unamortized debt expense ..........................     21,876       20,839
   Other..............................................    117,317       87,879
                                                          -------       ------
    Total deferred charges............................    519,952      522,719
                                                          -------      -------
                                                       $7,065,079   $6,617,442
                                                       ==========   ==========


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

                                       1
<PAGE>


                 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                    CONSOLIDATED CONDENSED BALANCE SHEETS
                            (Thousands of Dollars)

                           CAPITAL AND LIABILITIES

                                                     September 30,  December 31,
                                                         1997          1996
                                                         ----          ----
                                                     (Unaudited)

Common stock.......................................... $1,432,247   $1,396,849
Retained earnings.....................................    637,223      773,191
                                                          -------      -------
    Total common equity...............................  2,069,470    2,170,040

Preferred stock of subsidiaries:
   Not subject to mandatory redemption................    140,002      140,008
   Subject to mandatory redemption at par.............     39,254       39,913
SPS obligated mandatorily redeemable preferred
 securities of subsidiary trust holding solely
 subordinated debentures of SPS (Note 6) .............    100,000      100,000
Long-term debt of subsidiaries........................  1,989,177    1,879,928
                                                        ---------    ---------
                                                        4,337,903    4,329,889

Noncurrent liabilities:
  Employees' postretirement benefits other than pensions   62,308       58,551
   Employees' postemployment benefits.................     25,679       27,551
                                                           ------       ------
    Total noncurrent liabilities......................     87,987       86,102
                                                           ------       ------

Current liabilities:
   Notes payable and commercial paper.................    672,892      298,561
   Long-term debt due within one year.................    312,420      170,261
   Preferred stock subject to mandatory redemption 
     within one year                                        2,576        2,576
   Accounts payable...................................    229,757      317,260
   Dividends payable..................................     73,244       36,973
   Customers' deposits................................     27,879       27,283
   Accrued taxes......................................     70,221       78,989
   Accrued interest...................................     39,705       46,948
   Defueling and decommissioning liability............      2,399        8,665
   Current portion of accumulated deferred income taxes    31,260        8,143
   Other..............................................     76,012       97,799
                                                           ------       ------
    Total current liabilities.........................  1,538,365    1,093,458
                                                        ---------    ---------

Deferred credits:
   Customers' advances for construction...............     51,418       50,635
   Unamortized investment tax credits ................    107,704      111,647
   Accumulated deferred income taxes .................    905,057      906,354
   Other..............................................     36,645       39,357
                                                          -------       ------
    Total deferred credits............................  1,100,824    1,107,993

Commitments and contingencies (Notes 2 and 3).........
                                                       $7,065,079   $6,617,442
                                                       ==========   ==========


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


                                       2
<PAGE>


                   NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                   CONSOLIDATED CONDENSED STATEMENTS OF INCOME
                                   (Unaudited)
                  (Thousands of Dollars Except per Share Data)

                                                            Three Months Ended
                                                              September 30,
                                                            1997         1996
                                                            ----         ----
Operating revenues:
   Electric..........................................    $670,787     $638,999
   Gas...............................................     109,396       81,364
   Other.............................................      23,971       19,043
                                                         --------     --------
                                                          804,154      739,406
Operating expenses:
   Fuel used in generation...........................     199,726      172,789
   Purchased power...................................     138,149      128,335
   Gas purchased for resale..........................      63,403       35,655
   Other operating expenses..........................     120,727      115,383
   Maintenance.......................................      23,514       21,500
   Depreciation and amortization.....................      61,359       56,383
   Taxes (other than income taxes)...................      33,426       33,686
   Income taxes......................................      33,715       40,422
                                                         --------      -------
                                                          674,019      604,153
                                                          -------      -------
Operating income.....................................     130,135      135,253

Other income and deductions:
   Merger expenses...................................     (18,584)     (10,017)
   Equity in earnings of unconsolidated subsidiaries
     (Note 4) .......................................      17,047         (859)
   Miscellaneous income and deductions - net.........         966        7,187
                                                         --------      -------
                                                             (571)      (3,689)
Interest charges and preferred dividends:
   Interest on long-term debt........................      40,302       36,458
   Amortization of debt discount and expense less
     premium ........................................       1,590        1,388
   Other interest....................................      22,314       15,084
   Allowance for borrowed funds used during
     construction ...................................      (2,874)        (879)
   Dividends on SPS obligated mandatorily redeemable
     preferred securities of subsidiary trust holding
     solely subordinated debentures of SPS ..........       1,963            -
   Dividend requirements on preferred stock of 
     subsidiaries ...................................       2,929        2,962
                                                            -----        -----
                                                           66,224       55,013
                                                           ------       ------

Income before extraordinary item.....................      63,340       76,551
Extraordinary item - U.K. windfall profits tax (Note 4)  (110,565)           -
                                                         --------      -------
Net income (loss)....................................    $(47,225)    $ 76,551
                                                         ========     ========

Weighted average common shares outstanding (thousands)    104,481      103,196
                                                          =======      =======

Earnings per weighted average share of common stock
 outstanding:
   Income before extraordinary item..................    $   0.61     $   0.74
   Extraordinary item ...............................       (1.06)           -
                                                         --------     --------
   Net income (loss).................................    $  (0.45)    $   0.74
                                                         ========     ========


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


                                       3
<PAGE>


                   NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                   CONSOLIDATED CONDENSED STATEMENTS OF INCOME
                                   (Unaudited)
                  (Thousands of Dollars Except per Share Data)

                                                             Nine Months Ended
                                                              September 30,
                                                            1997         1996
                                                            ----         ----

Operating revenues:
   Electric..........................................  $1,853,809   $1,815,660
   Gas...............................................     571,494      440,987
   Other.............................................      62,464       54,811
                                                         --------    ---------
                                                        2,487,767    2,311,458
Operating expenses:
   Fuel used in generation...........................     512,498      474,349
   Purchased power...................................     389,925      380,864
   Gas purchased for resale..........................     385,898      268,762
   Other operating expenses..........................     355,946      338,868
   Maintenance.......................................      71,811       70,555
   Depreciation and amortization.....................     182,843      166,419
   Taxes (other than income taxes)...................     100,007      100,200
   Income taxes......................................      94,665      126,129
                                                         --------      -------
                                                        2,093,593    1,926,146
                                                        ---------    ---------
Operating income.....................................     394,174      385,312

Other income and deductions:
   Merger expenses...................................     (33,040)     (17,992)
   Write-off of investment in Carolina Energy Project
     (Note 5) .......................................     (16,052)           -
   Equity in earnings of unconsolidated subsidiaries
     (Note 4) .......................................      21,319         (292)
   Miscellaneous income and deductions - net.........      (3,521)       5,778
                                                         --------      -------
                                                          (31,294)     (12,506)
Interest charges and preferred dividends:
   Interest on long-term debt........................     119,312      102,960
   Amortization of debt discount and expense less
     premium ........................................       4,657        4,277
   Other interest....................................      56,292       48,553
   Allowance for borrowed funds used during 
     construction ...................................      (7,624)      (4,227)
   Dividends on SPS obligated mandatorily redeemable
     preferred securities of subsidiary trust holding
     solely subordinated debentures of SPS ..........       5,888            -
   Dividend requirements on preferred stock of
     subsidiaries ...................................       8,814        9,026
                                                            -----        -----
                                                          187,339      160,589
                                                          -------      -------

Income before extraordinary item.....................     175,541      212,217
Extraordinary item - U.K. windfall profits tax (Note 4)  (110,565)           -
                                                         --------       ------
Net income...........................................    $ 64,976     $212,217
                                                         ========     ========

Weighted average common shares outstanding (thousands)    104,247      102,873
                                                          =======      =======

Earnings per weighted average share of common stock
      outstanding:
  Income before extraordinary item...................    $   1.68     $   2.06
  Extraordinary item ................................       (1.06)           -
                                                         --------     --------
  Net income.........................................    $   0.62     $   2.06
                                                         ========     ========


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


                                       4
<PAGE>


                   NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                             (Thousands of Dollars)

                                                              Nine Months Ended
                                                                September 30,
                                                               1997      1996
                                                               ----      ----

Operating activities:
   Net income........................................        $ 64,976  $212,217
   Adjustments to reconcile net income to net
   cash provided by operating activities:
    Extraordinary item - U.K. windfall profits tax
     (Note 4) .......................................         110,565         -
    Depreciation and amortization....................         188,969   173,466
    Amortization of investment tax credits...........          (3,943)   (3,909)
    Deferred income taxes............................          40,957    19,842
    Write-off of investment in Carolina Energy Project
     (Note 5) .......................................          16,052         -
    Equity in earnings of unconsolidated subsidiaries,
      net ...........................................         (20,099)      292
    Allowance for equity funds used during construction            (4)     (765)
    Change in accounts receivable....................           9,384   (16,627)
    Change in inventories............................         (11,951)   14,503
    Change in other current assets...................         (43,100)   24,513
    Change in accounts payable.......................         (87,503)   (1,697)
    Change in other current liabilities..............         (33,716)  (29,723)
    Change in deferred amounts.......................         (32,371)    4,892
    Change in noncurrent liabilities.................           1,885    (9,062)
    Other............................................             921     2,001
                                                              -------   -------
       Net cash provided by operating activities.....         201,022   389,943
                                                              -------   -------

Investing activities:
   Construction expenditures.........................        (307,338) (312,371)
   Allowance for equity funds used during construction              4       765
   Proceeds from disposition of property, 
     plant and equipment ............................           2,163    24,597
   Acquisition of Yorkshire Electricity (Note 4).....        (362,430)        -
   Payment for purchase of companies, net of cash
     acquired .......................................               -     3,649
   Purchase of other investments.....................         (26,283)   (7,524)
   Sale of other investments.........................          17,971     4,113
                                                              -------   -------
       Net cash used in investing activities.........        (675,913) (286,771)
                                                             --------  -------- 

Financing activities:
   Proceeds from sale of common stock................          25,027    22,295
   Proceeds from sale of long-term notes and bonds...         333,517   200,530
   Redemption of long-term notes and bonds...........         (85,468)  (87,323)
   Short-term borrowings - net.......................         374,331   (48,627)
   Retirement of preferred stock of subsidiaries.....            (666)   (1,636)
   Dividends on common stock.........................        (164,432) (166,990)
                                                             --------  -------- 
       Net cash provided by (used in) financing
       activities ...................................         482,309   (81,751)
                                                              -------   ------- 
       Net increase in cash and temporary cash
       investments ..................................           7,418    21,421
       Cash and temporary cash investments at
        beginning of period .........................          50,015    28,306
                                                               ------    ------
       Cash and temporary cash investments at end of
        period                                               $ 57,433  $ 49,727
                                                             ========  ========


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




                                       5
<PAGE>


                           NEW CENTURY ENERGIES, INC.
                                AND SUBSIDIARIES

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)

1.  Accounting Policies

Merger and Financial Statement Presentation

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

      The  consolidated  financial  statements  reflect the  accounting  for the
Merger as a pooling of  interests  and are  presented as if the  companies  were
combined as of the earliest period  presented.  The Company follows the practice
of consolidating the accounts of its majority owned and controlled subsidiaries.
The  Company  recognizes  equity in income from its  unconsolidated  investments
accounted for under the equity method of accounting.  All intercompany items and
transactions have been eliminated.

Business, Utility Operations and Regulation

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

      Regulatory Assets and Liabilities

      The Company's regulated subsidiaries prepare their financial statements in
accordance  with the provisions of SFAS 71, as amended.  SFAS 71 recognizes that
accounting for rate regulated  enterprises  should reflect the  relationship  of
costs and revenues introduced by rate regulation.  A regulated utility may defer
recognition  of a cost (a  regulatory  asset)  or  recognize  an  obligation  (a
regulatory  liability) if it is probable that,  through the ratemaking  process,
there will be a  corresponding  increase or decrease in  revenues.  During 1996,
NCE's  subsidiaries  adopted SFAS 121, which imposes  stricter  criteria for the
continued  recognition  of  regulatory  assets on the balance sheet by requiring
that such assets be probable of future  recovery at each balance sheet date. The
adoption  of this  statement  did not have a  material  impact on the  Company's
results of operations, financial position or cash flows.


                                       6
<PAGE>


             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                 (Continued)

The following  regulatory  assets are  reflected in the  Company's  consolidated
condensed balance sheets:


                                             September 30,   December 31,
                                                 1997           1996
                                               (Thousands of Dollars)

Nuclear decommissioning costs, net........     $ 78,383       $ 89,731
Income taxes .............................      167,276        179,757
Employees' postretirement benefits
  other than pensions.....................       61,670         57,641
Early retirement costs....................       10,314         15,505
Employees' postemployment benefits........       24,507         24,797
Demand-side management costs..............       43,619         41,462
Unamortized debt reacquisition costs......       37,122         39,794
Thunder Basin judgment....................        7,626              -
Other.....................................       10,787         17,424
                                                -------         ------
  Total...................................      441,304        466,111
Classified as current.....................       60,545         52,110
                                                -------        -------
Classified as noncurrent..................     $380,759       $414,001
                                               ========       ========

      The  regulatory  assets  of the  Company's  regulated  subsidiaries  as of
September  30, 1997 are  reflected in rates  charged to  customers  over periods
ranging  from two to thirty  years  (see  discussion  below  regarding  recovery
periods).  The Company  believes its utility  subsidiaries  will  continue to be
subject to rate regulation to the extent  necessary to recover these assets.  In
the event that a portion of the Company's operations is no longer subject to the
provisions  of SFAS 71 as a result of a change in  regulation  or the effects of
competition,  the Company's  subsidiaries could be required to write-off related
regulatory  assets,  determine  any  impairment to other assets  resulting  from
deregulation  and write-down any impaired  assets to their  estimated fair value
which  could  have a  material  adverse  effect  on  the  Company's  results  of
operations, financial position or cash flows.

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

      On January  27,  1997,  the CPUC  issued its order on PSCo's 1996 gas rate
case. The CPUC allowed recovery of postemployment  benefit costs associated with
its gas operations on an accrual basis under SFAS 112 and denied amortization of
the approximately  $8.7 million regulatory asset recognized upon the adoption of
SFAS 112. On June 9, 1997, PSCo filed its appeal in Denver District Court.  PSCo
is assessing the impact of this decision on the future  recovery of the electric
jurisdictional  portion of postemployment  benefit costs totaling  approximately
$13.8 million. If the appeal to the Denver District Court is unsuccessful,  PSCo
will appeal this issue to the  Colorado  Supreme  Court.  PSCo  believes it will
ultimately be successful in its appeals. If appeals are unsuccessful,  including
pursuing the establishment of an alternative form of regulatory recovery,  these
amounts will be written off.

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

                                       7
<PAGE>
             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                 (Continued)

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

      In early 1997, SPS recorded an approximate $22.3 million  regulatory asset
associated  with the Thunder Basin judgment  pending  authorization  of recovery
from  state  regulators  (see  Note 2.  Regulatory  Matters  -  Thunder  Basin).
Management  believes that the judgment amount paid is recoverable from customers
and that the ultimate  resolution will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.

      Recovered/Recoverable Purchased Gas and Electric Energy Costs -Net

      The Company's  utility  subsidiaries  have adjustment  mechanisms in place
which allow for the recovery of certain  purchased gas and electric energy costs
in excess of the level of such costs  included in base rates.  Currently,  these
cost  adjustment  tariffs  are  revised  periodically,   as  prescribed  by  the
appropriate  regulatory  agencies,  for any difference  between the total amount
collected  under the clauses and the  recoverable  costs  incurred  (see Note 2.
Regulatory Matters - Electric and Gas Cost Adjustments).

      Other Property

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

Non-utility Subsidiaries and Foreign Investments

      The  Company's  non-utility   subsidiaries  are  principally  involved  in
engineering, design and construction management,  non-regulated energy services,
including  gas and power  marketing,  the  management of real estate and certain
life insurance policies, the financing of certain current assets of PSCo and the
investment in cogeneration  facilities,  foreign utility  investments,  electric
wholesale   generators  and  other   non-utility   investments.   The  Company's
international  investments  are subject to  regulation in the countries in which
such investments are made.

Statements of Cash Flows - Non-cash Transactions

      Prior to the Merger,  shares of PSCo's  common stock  (250,058 in 1997 and
274,934  in  1996),  valued  at  the  market  price  on  the  date  of  issuance
(approximately  $10 million in each year), were issued to the Employees' Savings
and Stock Ownership Plan of Public Service Company of Colorado and Participating
Subsidiary  Companies.  The estimated  issuance  values were recognized in other
operating expenses during the respective preceding years. Shares of common stock
valued at the market  price on the date of  issuance  ($0.6  million in 1997 and
$0.2  million  in 1996),  were  issued to  certain  executives  pursuant  to the
applicable provisions of the executive compensation plans. These stock issuances
were non-cash  financing  activities  and are not reflected in the  consolidated
condensed statements of cash flows.

General

      See Note 1. of the Notes to Supplemental Consolidated Financial Statements
in NCE's  August 1, 1997 Form 8-K for a  summary  of the  Company's  significant
accounting  policies.  Certain  prior year  amounts  have been  reclassified  to
conform  to the  current  year's  presentation.  Additional  description  of the
businesses  of PSCo and

                                       8

<PAGE>

             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                 (Continued)

SPS   are  contained  in  their  reports  under  Section  13 or  15(d)  of   the
Securities Exchange Act of 1934,  including their respective Form 10-Q's for the
quarter ended September 30, 1997.

2.  Regulatory Matters

Merger Rate Filings

      The discussion below summarizes the significant  state utility  regulatory
matters in Colorado, Texas, New Mexico, Wyoming, Oklahoma, Kansas and the FERC.

PSCo

      The CPUC decision approving the Merger establishes a five year performance
based  regulatory  plan  and  acknowledges  that  the  Merger  is in the  public
interest. The major provisions of the decision include:

     -    a $6 million electric rate reduction,  which was instituted October 1,
          1996,  followed by an additional  $12 million  electric rate reduction
          effective  with the  implementation  of new gas rates on  February  1,
          1997;
     -    an  annual  electric  department  earnings  test with the  sharing  of
          earnings in excess of an 11% return on equity for the  calendar  years
          1997-2001.   PSCo  has   established  an  estimated   customer  refund
          obligation  of  approximately  $7.4  million  in  connection  with the
          electric  department  sharing of  earnings  in excess of 11% return on
          equity for the results of operations through September 30, 1997. It is
          expected,  at a minimum,  that a similar  amount will be recognized in
          the fourth quarter of 1997;
     -    a freeze in base electric  rates for the period  through  December 31,
          2001  with  the  flexibility  to  make  certain  other  rate  changes,
          including  those  necessary  to allow for the  recovery of DSM, QF and
          decommissioning  costs.  The  freeze in base  electric  rates does not
          prohibit the Company from filing a general rate case or deny any other
          party the opportunity to initiate a complaint or rate proceeding;
     -    a replacement  of the Company's ECA with an ICA to allow for a 50%/50%
          sharing of certain fuel and energy cost  increases or decreases  among
          customers and  shareholders;
     -    and the  implementation  of a Quality of Service  Plan  ("QSP")  which
          provides  for bill  credits  totaling up to $5 million in year one and
          increasing  to $11  million  in year  five,  if the  Company  does not
          achieve  certain  performance  measures  relating to electric  service
          reliability,  customer complaints and telephone response to inquiries.
          On  October  15,  1997,  the  CPUC  issued  an  order  addressing  the
          implementation  of a reward  mechanism in the QSP which provides up to
          $3  million  of  annual  rewards  if  the  Company   achieves  certain
          performance  measures  relating  to  electric  reliability.  Based  on
          performance  measurements through September 30, 1997, the QSP will not
          have a material  adverse  effect on the Company's financial  position,
          results of operations, or cash flows.

      In  November  1997,  in  connection  with the annual  electric  department
earnings test discussed above, the CPUC held a hearing to review the prudence of
merger  costs,  allocation  methodologies  of merger costs,  and the  ratemaking
treatment  of a  transmission  agreement  with a  wholesale  customer.  A  final
decision on these issues is expected in early 1998.

SPS

      Under the various state regulatory  approvals,  SPS is required to provide
credits  to retail  customers  over  five  years for  one-half  of the  measured
non-fuel operation and maintenance  expense savings associated with the business
combination.  SPS will provide a guaranteed minimum annual savings of $3 million
in Texas,  $1.2  million in New  Mexico,  $100,000  in  Oklahoma  and $10,000 in
Kansas.

                                       9
<PAGE>

             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                 (Continued)

Rate Cases

PSCo

      On June 5, 1996, PSCo filed a retail rate case with the CPUC requesting an
annual increase in its jurisdictional  gas department  revenues of approximately
$34  million.   In  early  1997,  the  CPUC  approved  an  overall  increase  of
approximately $18 million with an 11.25% return on equity, effective February 1,
1997 and as modified on May 15, 1997. PSCo has appealed the CPUC's decision with
the  Denver   District   Court,   which   disallowed  the  recovery  of  certain
postemployment  benefit  costs  under SFAS 112 and  imputed  anticipated  merger
related  cost  savings  related  to the gas  business  (see  Note 1.  Accounting
Policies - Regulatory Assets and Liabilities).

SPS

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

Cheyenne

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

Electric and Gas Cost Adjustment Mechanisms

PSCo

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

                                       10
<PAGE>

             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                 (Continued)

SPS

      A PUCT  substantive rule requires  periodic  examination of SPS's fuel and
purchased  power costs,  the  efficiency  of the use of such fuel and  purchased
power, fuel acquisition and management  policies and purchase power commitments.
On May 1, 1995, SPS filed with the PUCT a petition for a fuel reconciliation for
the months of January 1992 through  December  1994.  The PUCT issued an order in
January 1996 requiring SPS to make a $3.9 million fuel refund consisting of $2.1
million of  overrecovered  fuel costs and $1.8 million of disallowed  fuel costs
for the  period.  This refund was made in April  1996.  Additionally,  the order
required  SPS to flow  through  to  customers  100%  of  margins  from  non-firm
off-system  opportunity sales as of January 1995. Prior PUCT rulings had allowed
SPS to retain 25% of these  margins.  The 100% flow  through is required by PUCT
rules,  absent rule  waiver.  A motion for  rehearing  on the fuel  disallowance
(which was adjusted to $1.9 million) was subsequently denied by the PUCT and SPS
was ordered to flow through 100% of the margin  effective with the first billing
cycle  after the date of the  order.  Upon  appeal by SPS to the  Travis  County
District Court in May 1996, the PUCT's decision on the disallowed fuel costs was
upheld. The Travis County District Court decision has been appealed to the Texas
Court of  Appeals  which has not yet ruled in the  matter.  Management  does not
believe that the ultimate outcome of this matter will have a significant  impact
on the Company's  financial  position,  results of operations or cash flows.  At
September 30, 1997, SPS had approximately  $18.1 million in underrecovered  fuel
costs in Texas and has  requested to surcharge  Texas retail  customers  for the
underrecovery.

Thunder Basin

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

      Management  believes  that the judgment  amount paid is  recoverable  from
customers and as such recognized a regulatory asset,  although any such recovery
would be subject to review by various  regulatory  agencies.  On  September  17,
1996,  the FERC  issued an order  granting  SPS  approval  to  collect  the FERC
jurisdictional portion of the judgment from wholesale customers.  On October 24,
1997,  the NMPUC  issued an order  granting  recovery  of the New Mexico  retail
jurisdictional  portion  of Thunder  Basin  costs.  On May 1, 1997,  SPS filed a
request  with the PUCT to surcharge  under-collected  fuel and  purchased  power
expenses, which included $9.1 million of the Thunder Basin judgment. On November
4, 1997,  an  administrative  law judge  ("ALJ")  issued a proposal for decision
which  denied  recovery  of  the  judgment  through  the  surcharge.  SPS  filed
exceptions  to this ALJ  recommendation  and on November  19, 1997 the PUCT will
consider  this matter.  Management  believes  that recovery of the Thunder Basin
costs in the Texas retail jurisdiction will be approved either in this surcharge
request or through a fuel reconciliation proceeding in 1998.

3. Commitments and Contingencies

Environmental Issues

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


                                       11
<PAGE>

             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                 (Continued)

Environmental Site Cleanup

      As  described  below,  the Company and its  subsidiaries  have been or are
currently  involved with the clean-up of certain  hazardous  substances.  In all
situations,  the Company is pursuing or intends to pursue  insurance  claims and
believes it will  recover  some  portion of these  costs  through  such  claims.
Additionally,  where  applicable,  the Company  intends to pursue  recovery from
other Potentially Responsible Parties ("PRPs"). To the extent such costs are not
recovered,  the Company and its  subsidiaries  believe it is probable  that such
costs will be recovered through the rate regulatory  process.  To the extent any
costs are not recovered  through the options listed above,  the Company would be
required to recognize an expense for such unrecoverable amounts.

      Under the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), the U.S. Environmental Protection Agency ("EPA") identified, and
a  Phase  II   environmental   assessment   revealed,   low  level,   widespread
contamination from hazardous  substances at the Barter Metals Company ("Barter")
properties located in central Denver. For an estimated 30 years, PSCo sold scrap
metal and electrical  equipment to Barter for  reprocessing.  PSCo has completed
the cleanup of this site at a cost of  approximately $9 million and has received
responses from CDPHE  indicating  that no further action is required  related to
these properties. On January 3, 1996, in a lawsuit by PSCo against its insurance
providers,  the Denver District Court entered final judgment in favor of PSCo in
the amount of $5.6 million for certain cleanup costs at Barter.  Several appeals
and cross appeals have been filed by one of the insurance  providers and PSCo in
the Colorado  Court of Appeals.  The insurance  provider has posted  supersedeas
bonds in the amount of $9.7 million  ($7.7  million  attributable  to the Barter
judgment).  On July 10,  1997,  the  Colorado  Court of Appeals  overturned  the
previously awarded $7.7 million judgment on the basis that the jury had not been
properly  instructed by the Judge regarding a narrow issue  associated with some
of the policies.  A retrial is expected.  Previously,  PSCo had received certain
insurance  settlement  proceeds  from other  insurance  providers for Barter and
other contaminated sites and a portion of those funds remains to be allocated to
this site by the trial court. PSCo plans to appeal the Colorado Court of Appeals
decision to the Colorado  Supreme  Court.  In  addition,  PSCo expects to recoup
additional expenditures beyond insurance proceeds through the sale of the Barter
property and from other PRPs. In August 1996,  PSCo filed a lawsuit against four
PRPs seeking recovery of certain Barter related costs.

      Polychlorinated  biphenyl  ("PCB") presence was identified in the basement
of an  historic  office  building  located in downtown  Denver.  The Company was
negotiating the future cleanup with the current owners;  however,  on October 5,
1993, the owners filed a civil action against PSCo in the Denver District Court.
The  action  alleged  that  PSCo  was  responsible  for  the  PCB  releases  and
additionally  claimed other damages in unspecified  amounts.  On August 8, 1994,
the Denver  District Court entered a judgment  approving a $5.3 million offer of
settlement  between  PSCo and the  building  owners  resolving  all  claims.  In
December 1995,  complaints  were filed by PSCo against all applicable  insurance
carriers in the Denver  District  Court.  On June 30,  1997,  the Court ruled in
favor of the carriers on summary  judgment  motions  addressing  late notice and
other issues.  PSCo is pursuing  recovery from one carrier.  On August 27, 1997,
PSCo filed an appeal of the decision with the Colorado Court of Appeals.

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

Environmental Matters Related to Air Quality

      Under the Clean Air Act  Amendments of 1990  ("CAAA"),  coal burning power
plants are required to reduce SO2 and NOx emissions to specified  levels through
a phased  approach.  PSCo's and SPS's  facilities  must comply with the Phase II
requirements,  which  will be  effective  in the  year  2000.  Currently,  these
regulations permit compliance with sulfur dioxide emission  limitations by using
SO2  allowances  allocated to plants by the EPA, using  allowances  generated by

                                       12
<PAGE>
             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                 (Continued)

reducing  emissions at existing  plants and by using  allowances  purchased from
other  companies.  The Company  expects to meet the Phase II emission  standards
placed on SO2  through the  combination  of: a) use of low sulfur  coal,  b) the
operation of air quality control equipment on certain generation facilities, and
c) allowances  issued by the EPA. The Company will be required to modify certain
boilers by the year 2000 to reduce  the NOx  emissions  in order to comply  with
Phase  II   requirements.   The  estimated  Phase  II  costs  for  future  plant
modifications to meet NOx requirements is approximately $13 million. The Company
is  studying  its  options to reduce NOx and SO2  emissions.  PSCo has  recently
announced  its intention to spend  approximately  $211 million on its Denver and
Boulder Metro area coal-fired power plants to further reduce such emissions.

Craig Steam Electric Generating Station

      On October 9, 1996, a conservation  organization  filed a complaint in the
U.S.  District  Court  pursuant to  provisions of the Federal Clean Air Act (the
"Act") against the joint owners of the Craig Steam Electric  Generating Station.
Tri-State Generation and Transmission  Association,  Inc. is the operator of the
Craig  station and PSCo owns an undivided  interest  (acquired in April 1992) in
each of two units at the station  totaling  approximately  9.7%.  The  plaintiff
alleged that: 1) the station  exceeded the 20% opacity  limitations in excess of
14,000 six minute  intervals  during the period extending from the first quarter
of 1991 through the second  quarter of 1996, and 2) the owners failed to operate
the station in a manner  consistent with good air pollution  control  practices.
The complaint seeks, among other things, civil monetary penalties and injunctive
relief.  The Act provides for penalties of up to $25,000 per day per  violation,
but the level of penalties imposed in any particular  instance is discretionary.
A pre-trial conference has been scheduled for December 1997. Management does not
believe that this potential liability or the future impact of this litigation on
plant operations will have a material adverse impact on the Company's  financial
position,  results of  operations,  or cash  flows.  The  issues  raised in this
litigation are similar to the Hayden Station complaint which was settled in 1996
and disclosed in PSCo's 1996 Annual Report on Form 10-K.

Fort St. Vrain

      In 1989, PSCo announced its decision to end nuclear operations at Fort St.
Vrain and to proceed  with the  defueling  and  decommissioning  of the reactor.
While the  defueling  of the  reactor  to the  Independent  Spent  Fuel  Storage
Facility  ("ISFSI") was completed in June 1992,  several  issues  related to the
ultimate  storage/disposal  of Fort St.  Vrain's  spent  nuclear  fuel  remained
unresolved.

      On February 9, 1996, PSCo and the DOE entered into an agreement  resolving
all the  defueling  issues.  As part of this  agreement,  PSCo has agreed to the
following:  1) the DOE assumed title to the fuel currently  stored in the ISFSI,
2) the DOE will assume title to the ISFSI and will be responsible for the future
defueling and decommissioning of the facility, 3) the DOE agreed to pay PSCo $16
million  for the  settlement  of  claims  associated  with the  ISFSI,  4) ISFSI
operating and maintenance costs,  including  licensing fees and other regulatory
costs, will be the  responsibility of the DOE, and 5) PSCo provided to the DOE a
full and complete  release of claims  against the DOE resolving all  contractual
disputes  related to  storage/disposal  of Fort St. Vrain spent nuclear fuel. On
December  17,  1996,  the DOE  submitted  a request  to the  Nuclear  Regulatory
Commission  ("NRC") to transfer  the title of the ISFSI.  This  request is being
reviewed by the NRC and PSCo anticipates approval no earlier than mid-1998.

      On March 22, 1996, PSCo and the decommissioning contractors announced that
the physical  decommissioning  activities  at the facility  were  completed.  On
August 5,  1997,  the NRC  approved  PSCo's  request  to  terminate  the Part 50
operating  license.  This  concludes  the  decommissioning  activities  and  the
facilities and site are suitable to be released for unrestricted  use. Under the
Price-Anderson  Act,  PSCo remains  subject to potential  assessments  levied in
response to any nuclear  incidents  prior to early 1994,  as disclosed in PSCo's
1996 Annual Report on Form 10-K. At September 30, 1997, a remaining $2.4 million
defueling  and  decommissioning  liability  was  reflected  on the  consolidated
condensed  balance sheet.  Management  believes this  remaining  decommissioning
liability is adequate to finalize the payment of all related obligations.

                                       13
<PAGE>
             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                 (Continued)


      As a result  of the DOE  settlement,  coupled  with a  complete  review of
expected  remaining  decommissioning  costs and establishment of the anticipated
refund to  customers,  pre-tax  earnings  for 1996 were  positively  impacted by
approximately $16 million.  In accordance with the 1991 CPUC approval to recover
certain  decommissioning costs, 50% of any cash amounts received from the DOE as
part of a settlement, net of costs incurred by PSCo, including legal fees, is to
be refunded or credited to  customers.  PSCo  established  an $8 million  refund
liability.  In early 1997,  such  obligation  was reduced by $1.1 million  after
amounts to be refunded were finally  determined  and approved by the CPUC.  Such
amounts are being refunded over a three year period.

Employee Matters

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

4. Yorkshire Electricity and U.K. Windfall Profits Tax

      On April 1, 1997,  Yorkshire  Power (a 50/50 joint venture between AEP and
PSCo) effectively  acquired all of the outstanding  ordinary shares of Yorkshire
Electricity, a United Kingdom regional electricity company. The Company accounts
for its investment in Yorkshire Power using the equity method. Yorkshire Power's
results of  operations  includes 100% of Yorkshire  Electricity's  results since
April 1, 1997. The Company's equity earnings in Yorkshire Power is 50%, the same
as its ownership share.

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

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


                                       14
<PAGE>
             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                 (Continued)



      Summarized income statement information for the period April 1, 1997 (date
of acquisition) to September 30, 1997 is presented below (in millions):

   Yorkshire Power:
      Operating revenues.......................    $  917.6
      Operating income.........................       124.1
      Income from continuing operations before
      extraordinary item ......................        42.8
      Extraordinary item - U.K. windfall
       profits tax ............................      (221.1)
                                                   --------
      Net loss.................................    $ (178.3)
                                                   ========

    Company's equity in the earnings (losses):
      Extraordinary item -  U.K. windfall 
       profits tax ............................    $ (110.6)
      Equity in earnings of Yorkshire Power (1)        21.4
                                                       ----
                                                   $  (89.2)
                                                   ======== 

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

      The pro forma  financial  information  presented  below  assumes  that the
acquisition of Yorkshire  Power was acquired on the first day of each respective
period. The pro forma adjustments include recognition of equity in the estimated
earnings  of  Yorkshire  Power,  an  adjustment  for  interest  expense  on debt
associated  with PSCo's  investment in Yorkshire Power and related income taxes.
The estimated earnings of Yorkshire Power was based on prior historical earnings
of Yorkshire Electricity,  prior to its acquisition by Yorkshire Power, adjusted
for the estimated effects of purchase accounting  (including the amortization of
goodwill), conversion to United States generally accepted accounting principles,
interest  expense  on  debt  issued  by  Yorkshire  Power  associated  with  the
acquisition  and related  income  taxes.  Sales of  electricity  are affected by
seasonal   weather   patterns   and,   therefore,   the  results  of   Yorkshire
Power/Yorkshire  Electricity  will not be  distributed  evenly  during the year.
Equity in earnings of Yorkshire Power has been converted at the average exchange
rates for the nine months  ended  September  30, 1997 and  September  30,  1996,
$1.6318/pound and $1.5367/pound, respectively.

                               Nine Months Ended         Nine Months Ended
                              September 30, 1997         September 30, 1996
                             Earnings                  Earnings
                           available for   Earnings    available for  Earnings
                           common stock  per share(1)  common stock per share(1)
                           ------------  ------------  ------------ ------------
                           (in millions)               (in millions)
NCE's income before
 before extraordinary
  item.................      $ 175.5       $  1.68     $  212.2      $  2.06

Pro forma adjustments:

  Equity in earnings of
   Yorkshire Power, net
   of U.S. tax benefits (2)    (10.1)                      19.6

  Interest expense, net
   of tax ..............        (3.5)                     (10.4)
                               -----                     ------

Pro forma result........     $ 161.9       $  1.55     $  221.4      $  2.15
                             =======                   ========

  (1)Based on the weighted  average number of common shares  outstanding for the
     period.
  (2)The nine months ended  September  30, 1997 amounts  include  $24.0  million
     ($17.9 million  after-tax) of nonrecurring  write-offs of certain  computer
     development  costs,   acquisition  expenses  and  costs  incurred  for  the
     preparation for deregulation.

                                       15
<PAGE>
             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                 (Continued)

5.  Acquisitions and Divestitures

Acquisition of Texas-Ohio Gas, Inc. and Texas-Ohio Pipeline, Inc.

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

Quixx Underground Water Rights

   During August 1996, Quixx sold a portion of its underground  water rights for
approximately  $14 million.  Quixx  recognized an after-tax  gain on the sale of
these water rights of approximately $7.7 million.

BCH Energy Limited Partnership Investment

   As discussed in the SPS's 1996 Transition  Report on Form 10-K as of December
31,  1996 under  BUSINESS.  Nonutility  Businesses,  Quixx  holds a 49%  limited
partnership  interest in BCH Energy Limited  Partnership  ("BCH"),  which owns a
waste-to-energy cogeneration facility located near Fayetteville, North Carolina.
Limited commercial operation of the BCH project began in June 1996; however, the
facility did not achieve the expected  performance  level. An effort was made to
restructure  the  project  but it was  not  possible  to  achieve  the  required
improvements on economically  viable terms;  therefore,  in December 1996, Quixx
wrote off its investment of approximately $16 million.

Carolina Energy Limited Partnership Investment

   The Carolina  Energy  Project is similar to the BCH project,  but with design
modifications.  Construction  was originally  scheduled to be completed later in
1997 but was halted pending an independent analysis of the project's engineering
and financial viability. Additionally, the banks providing debt financing to the
project  withheld  funds for  continued  construction.  Quixx,  UE, other equity
owners,  senior  creditors and the  construction  contractor have been unable to
restructure the project on mutually agreeable terms. The construction contractor
is  demobilizing  and the creditors have initiated  remedies  provided under the
credit  agreement.  Accordingly,  management  has  determined it is unlikely the
project will be completed  under the present  ownership,  if at all, and Quixx's
and UE's net  investments  in the  Carolina  Energy  Project are  unlikely to be
recovered.

   As  a  consequence,   in  June  1997,   Quixx  wrote-off  its  investment  of
approximately  $13.64  million  in  the  Carolina  Energy  Limited  Partnership.
Additionally,  UE wrote-off its net investment of approximately $2.42 million in
this same partnership. Quixx held a one-third ownership interest, including a 1%
general  partnership  interest,  in the partnership.  UE's net investment in the
partnership was comprised of subordinated debt, the related interest receivable,
as  well  as  engineering   services.   This  combined   investment   represents
approximately $16.1 million.


                                       16
<PAGE>

             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                 (Continued)

6.  SPS Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trust Holding Solely Subordinated Debentures of SPS

   In October 1996, Southwestern Public Service Capital I, a wholly-owned trust,
issued  in  a  public  offering  $100  million  of  its  7.85%  Trust  Preferred
Securities,  Series  A. The sole  asset of the trust is $103  million  principal
amount of SPS's 7.85% Deferrable Interest Subordinated Debentures,  Series A due
September 1, 2036.

7.  Management's Representations

   In the  opinion  of the  Company,  the  accompanying  unaudited  consolidated
condensed  financial  statements include all adjustments  necessary for the fair
presentation  of the financial  position of the Company and its  subsidiaries at
September 30, 1997 and December 31, 1996 and the results of  operations  for the
three and nine months ended  September  30, 1997 and 1996 and cash flows for the
nine months  ended  September  30,  1997 and 1996.  The  consolidated  condensed
financial  information and notes thereto should be read in conjunction  with the
supplemental  consolidated  financial  statements  and  notes  included  in  the
Company's Form 8-K, dated August 1, 1997.

   Because  of  seasonal  and  other  factors,   including  the   reorganization
associated  with the Merger,  the results of operations for the three months and
nine months ended  September  30, 1997 should not be taken as an  indication  of
earnings for all or any part of the balance of the year.


                                       17
<PAGE>




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO NEW CENTURY ENERGIES, INC.

We have reviewed the accompanying  consolidated  condensed  balance sheet of New
Century Energies, Inc. (a Delaware corporation) and subsidiaries as of September
30, 1997, and the related  consolidated  condensed  statements of income for the
three and nine month  periods  ended  September  30,  1997 and the  consolidated
condensed statements of cash flows for the nine month period ended September 30,
1997.  These  financial  statements  are  the  responsibility  of the  Company's
management.

We conducted our review in accordance with standards established by the American
Institute  of  Certified  Public  Accountants.  A review  of  interim  financial
information consists principally of applying analytical  procedures to financial
data and making  inquiries of persons  responsible  for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with  generally  accepted  auditing  standards,  the  objective  of which is the
expression of an opinion  regarding the financial  statements  taken as a whole.
Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material  modifications that should
be  made  to the  financial  statements  referred  to  above  for  them to be in
conformity with generally accepted accounting principles.

We have  previously  audited,  in accordance  with generally  accepted  auditing
standards,  the  consolidated  balance sheet of New Century  Energies,  Inc. and
subsidiaries as of December 31, 1996 (not presented  herein),  and in our report
dated August 1, 1997,  based on our audit and the report of other  auditors,  we
expressed  an  unqualified  opinion  on  that  statement.  In our  opinion,  the
information set forth in the accompanying  consolidated  condensed balance sheet
as of December 31, 1996 is fairly stated, in all material respects,  in relation
to the balance sheets from which it has been derived.

The  consolidated  condensed  statements  of income for the three and nine month
periods ended September 30, 1996, and the  consolidated  condensed  statement of
cash flows for the nine month period ended  September  30, 1996,  of New Century
Energies, Inc. and subsidiaries were not reviewed by us and, accordingly,  we do
not express an opinion on them.


                                                        ARTHUR ANDERSEN LLP
Denver, Colorado,
November 10, 1997



                                       18
<PAGE>


Item 2.  Management's  Discussion  and  Analysis of  Financial  Condition  and
         Results of Operations

Overview

      Effective  August 1, 1997,  following  receipt of all  required  state and
Federal  regulatory  approvals,  PSCo and SPS  merged in a  tax-free  "merger of
equals"  transaction  and became  wholly-owned  subsidiaries  of NCE, which is a
registered holding company under the Public Utility Holding Company Act of 1935.
This  transaction  was accounted  for as a pooling of interests  for  accounting
purposes  and the  Consolidated  Financial  Statements  are  presented as if the
Merger were  consummated as of the beginning of the earliest  period  presented.
However, the Consolidated Financial Statements are not necessarily indicative of
the  results of  operations,  financial  position  or cash flows that would have
occurred had the Merger been  consummated  for the periods for which it is given
effect,  nor is it  necessarily  indicative  of future  results  of  operations,
financial position or cash flows.

      References to the Company are to NCE on a consolidated basis;  however, in
certain  circumstances,  the separate subsidiaries are separately referred to in
order to distinguish between the different business activities of the companies.

Three  Months  Ended  September  30, 1997  Compared to the Three  Months Ended
September 30, 1996

Earnings

      The Company recognized a net loss of $0.45 per share for the third quarter
of 1997 as  compared  to  earnings  per  share of $0.74  per share for the third
quarter of 1996. The net loss was primarily  attributable  to the recognition of
an  extraordinary  item related to the  one-time  U.K.  windfall  profits tax of
approximately  $110.6 million, or $1.06 per share, by Yorkshire  Electricity,  a
50%  owned  investment  (see Note 4.  Yorkshire  Electricity  and U.K.  Windfall
Profits Tax in Item 1. FINANCIAL  STATEMENTS).  Income before this extraordinary
charge,  decreased  approximately  $13.2  million  or $0.13 per  share  from the
previous year. An increase in merger and business  integration  costs  resulting
from  the  August  1,  1997  closing  of the  Merger,  electric  rate  decreases
instituted  in October 1996 and February 1997 and the  recognition  in 1996 of a
gain from the sale of water rights  contributed to the lower  earnings.  Ongoing
operations of Yorkshire  Electricity  positively impacted the Company's earnings
by approximately $14.1 million net of borrowing costs and income taxes, or $0.14
per share.

Electric Operations

      The following table details the change in electric  operating revenues and
energy  costs for the third  quarter of 1997 as  compared  to the same period in
1996.
                                                      Increase (Decrease)
                                                      -------------------
                                                    (Thousands of Dollars)
Electric operating revenues:
 Retail...............................................     $ 3,533
 Wholesale............................................      25,186
 Non-regulated power marketing........................       2,817
 Other (including unbilled revenues)..................         252
                                                           -------
  Total revenues......................................      31,788
Fuel used in generation...............................      26,937
Purchased power.......................................       9,814
                                                           -------
  Net decrease in electric margin.....................     $(4,963)
                                                           =======


                                       19
<PAGE>


      The following table compares  electric Kwh sales by major customer classes
for the third quarter of 1997 and 1996.
                                              Millions of Kwh Sales
                                              ---------------------
                                                 1997      1996     %Change *
                                                 ----      ----     ---------
Residential ...............................     2,634     2,557      3.0%
Commercial and Industrial  ................     7,334     7,122      3.0
Public Authority ..........................       219       209      4.6
                                                -----     -----
  Total Retail.............................     10,187    9,888      3.0
Wholesale..................................     3,516     2,762     27.3
Non-regulated power marketing..............       205       101      **
                                                -----     -----
Total......................................     13,908    12,751     9.1
                                                ======    ======

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

      Electric  margin  decreased in the third quarter of 1997, when compared to
the  third  quarter  of  1996,  primarily  due to PSCo  retail  rate  reductions
(approximately  $4.8 million)  implemented in October 1996 and February 1997 and
the   recognition   at  PSCo  of  an  estimated   customer   refund   obligation
(approximately  $7.4 million) in connection with the earnings  sharing in excess
of 11%  return  on equity  which  resulted  from the  settlement  of the  Merger
proceedings  in Colorado (see Note 2.  Regulatory  Matters in Item 1.  FINANCIAL
STATEMENTS).  Electric margin was also negatively impacted by the recognition at
SPS of an estimated  customer  refund  obligation  (approximately  $0.7 million)
related  to the  guaranteed  merger  savings,  as  well as  interruptible  rates
available  to  certain  classes of retail and  wholesale  customers.  An overall
increase  of  approximately  3.0% in  electric  Kwh  sales to  retail  customers
minimized the impact of these rate reductions.  Higher wholesale  electric sales
and power marketing activities by non-regulated subsidiaries also contributed to
increased operating revenues, however, the margin on such sales is minimal.

      The Company's regulated subsidiaries have cost adjustment mechanisms which
recognize the majority of the effects of changes in fuel used in generation  and
purchased  power costs and allow recovery of such costs on a timely basis.  As a
result,  the changes in revenues  associated  with these  mechanisms  during the
third quarters of 1997 and 1996 had little impact on net income. However, in its
decision  on the Merger,  the CPUC  replaced  PSCo's ECA with an ICA,  effective
October 1, 1996,  which allows for a 50%/50%  sharing of certain fuel and energy
cost  increases and decreases  among  customers  and  shareholders  (see Note 2.
Regulatory Matters in Item 1.FINANCIAL STATEMENTS).

      Fuel used in generation expense increased  approximately  15.6% during the
third quarter of 1997, as compared to the same quarter in 1996, primarily due to
increased  generation levels at PSCo and SPS power plants and higher natural gas
costs at SPS.

      Purchased  power expense  increased 7.6% during the third quarter of 1997,
as compared to the same  quarter in 1996.  This  increase is  primarily  due the
amount of power purchased by PSCo to meet increased  wholesale  requirements and
other customer  demands,  as well as an increase in power marketing  activities,
which were initiated in the third quarter of 1996.

Gas Operations

      The following  table details the change in revenues from gas sales and gas
purchased  for resale  for the third  quarter  of 1997 as  compared  to the same
period in 1996.

                                       20
<PAGE>

                                                     Increase (Decrease)
                                                     -------------------
                                                   (Thousands of Dollars)

Revenues from gas sales (including unbilled revenues).     $27,372
Gas purchased for resale..............................      27,748
                                                           -------
 Net decrease in gas sales margin.....................     $  (376)
                                                           =======

      The  following  table  compares gas  dekatherm  (Dth)  deliveries by major
customer classes for the third quarter of 1997 and 1996.

                                      Millions of Dth Deliveries
                                      --------------------------
                                                1997  1996    % Change *
                                                ----  ----    ----------
Residential................................      6.2   6.4      (2.1)%
Commercial.................................      4.0   5.3     (11.5)
Non-regulated gas marketing................     13.7   4.3      **
                                               ----- -----
  Total Sales..............................     23.9  16.0      49.7
Gathering and Processing...................      -     0.4      **
Transportation.............................     22.3  20.6       8.2
                                               ----- -----
  Total....................................     46.2  37.0      25.2
                                               ===== =====

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

      Gas sales  margin was  relatively  flat during the third  quarter of 1997,
when  compared to the third  quarter of 1996,  as the effect of lower sales from
utility  operations  was offset,  in part, by higher rates from PSCo's 1996 rate
case and an increase in margin from non-regulated gas marketing activities.

      Gas  transportation,  gathering,  processing and other revenues  increased
$0.7  million  during the third  quarter  of 1997,  when  compared  to the third
quarter  of  1996,  primarily  due  to an  increase  in  deliveries  and  higher
transportation rates effective February 1, 1997, resulting from PSCo's 1996 rate
case.

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

Non-Fuel Operating Expenses

      Other operating and maintenance expenses increased $7.4 million during the
third  quarter of 1997,  as compared to the same period in 1996,  primarily  due
higher  operating  costs from  non-regulated  operations and higher  advertising
costs,  offset, in part, by lower labor and employee benefit costs  attributable
to the Company's overall cost containment efforts.

      Depreciation and amortization  expense increased $5.0 million in the third
quarter of 1997,  as compared to the same period in 1996,  primarily  due to the
depreciation  of  property  additions  and the higher  amortization  of software
costs.

      The $6.7 million  decrease in income taxes for the third  quarter of 1997,
as compared to the same period in 1996, is primarily due to lower pretax income.
Additional  income tax expense was  recognized in the current  period due to the
recognition of certain non-deductible merger and executive severance costs.

                                       21
<PAGE>

      Other income and deductions  increased  $3.1 million  primarily due to the
recognition  of equity  earnings in Yorkshire  Power ($17.3  million),  of which
approximately $10 million is related to the change in the U.K.  corporate income
tax rate from 33% to 31%. See Note 4. Yorkshire  Electricity  and U.K.  Windfall
Profits Tax in Item 1. FINANCIAL STATEMENTS.  This increase was offset, in part,
by increased merger and business integration costs (approximately $8.6 million),
including  executive  severance costs,  resulting from the closing of the Merger
effective August 1, 1997 and the gain recognized in 1996 on the sale by Quixx of
certain water rights ($11.8  million).  While costs  associated with the Merger,
transition  planning and implementation have negatively impacted earnings during
1997 and 1996, management anticipates that future operating results will benefit
from synergies resulting from the Merger.

      Interest  charges and preferred  dividends  increased $11.2 million during
the third quarter of 1997, when compared to the same quarter in 1996,  primarily
due to interest on borrowings  utilized to finance capital  expenditures and the
April 1997  acquisition  of Yorkshire  Electricity.  These  borrowings  included
PSCo's issuance of $75 million and $250 million of medium-term  notes in January
and  March  1997,  respectively.   Additionally,   dividends  on  SPS  obligated
mandatorily redeemable preferred securities of subsidiary trust increased due to
the  October  1996  issuance  of  $100  million  of  SPS  Obligated  Mandatorily
Redeemable Preferred Securities of a Subsidiary Trust.

Nine  Months  Ended  September  30, 1997  Compared  to the Nine  Months  Ended
September 30, 1996

Earnings

      Earnings  per  share  were  $0.62  for the  first  nine  months of 1997 as
compared  to $2.06 per share  during the same  period in 1996.  The  significant
decrease was primarily  attributable to the recognition of an extraordinary item
related to the  one-time  U.K.  windfall  profits  tax of  approximately  $110.6
million,  or $1.06 per share, by Yorkshire  Electricity,  a 50% owned investment
(see Note 4.  Yorkshire  Electricity  and U.K.  Windfall  Profits Tax in Item 1.
FINANCIAL  STATEMENTS).  Earnings per share on income before this  extraordinary
item decreased  $0.38 per share for the nine months ended in 1997 as compared to
the same period in 1996. This decline was  attributable to the favorable  impact
in 1996 of the February 9, 1996 settlement  agreement with the DOE resolving all
spent  nuclear fuel  storage and disposal  issues at Fort St. Vrain (see Note 3.
Commitments and Contingencies - Fort St. Vrain in Item 1. FINANCIAL STATEMENTS),
the  write-off  in June 1997 of Quixx and UE's net  investment  in the  Carolina
Energy Limited Partnership and higher merger and business  integration costs, as
electric and gas margins on a combined basis, as discussed below were relatively
flat.

Electric Operations

      The following table details the change in electric  operating revenues and
energy costs for the first nine months of 1997 as compared to the same period in
1996.
                                                      Increase (Decrease)
                                                      -------------------
                                                    (Thousands of Dollars)
Electric operating revenues:
 Retail...............................................     $ 4,746
 Wholesale............................................      23,045
 Non-regulated power marketing........................      11,550
 Other (including unbilled revenues)..................      (1,192)
                                                           --------
  Total revenues......................................      38,149
Fuel used in generation...............................      38,149
Purchased power.......................................       9,061
                                                           -------
  Net decrease in electric margin.....................     $(9,061)
                                                           =======


                                       22
<PAGE>


      The following table compares  electric Kwh sales by major customer classes
for the first nine months of 1997 and 1996.
                                              Millions of Kwh Sales
                                              ---------------------
                                                 1997       1996    %Change *
                                                 ----       ----    ---------
Residential ...............................      7,370     7,284      1.2%
Commercial and Industrial  ................     20,370    20,027      1.7
Public Authority ..........................        578       590     (2.0)
                                                 -----    ------
  Total Retail.............................     28,318    27,901      1.5
Wholesale..................................      8,478     7,529     12.6
Non -regulated power marketing.............        783       100      **
                                                 -----    ------
Total......................................     37,579    35,530      5.8
                                                ======    ======

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

      Electric margin  decreased in the first nine months of 1997, when compared
to the first nine months of 1996. The decrease in electric  margin was primarily
attributable  to PSCo retail rate  reductions  implemented  in October  1996 and
February 1997 (approximately  $12.1 million) and the recognition of an estimated
customer refund obligation  (approximately  $7.4 million) in connection with the
earnings  sharing  in excess of 11%  return on equity  which  resulted  from the
settlement of the Merger proceedings in Colorado (see Note 2. Regulatory Matters
in Item 1. FINANCIAL  STATEMENTS).  Electric margin was also negatively impacted
by lower SPS sales  during  the second  quarter of 1997  because of wet and mild
weather,  the  recognition  at SPS of an estimated  customer  refund  obligation
(approximately  $0.7 million) related to the guaranteed merger savings,  as well
as interruptible  rates available to certain classes of SPS retail and wholesale
customers.  The impact of these  reductions  was offset,  in part, by an overall
increase of approximately 1.5% in electric Kwh sales to retail customers. Higher
wholesale  electric  sales  and  power  marketing  activities  by  non-regulated
subsidiaries  also contributed to increased  operating  revenues,  however,  the
margin on such sales is minimal.

      The Company's regulated subsidiaries have cost adjustment mechanisms which
recognize the majority of the effects of changes in fuel used in generation  and
purchased  power costs and allow recovery of such costs on a timely basis.  As a
result,  the changes in revenues  associated  with these  mechanisms  during the
first nine months of 1997 and 1996 had little impact on net income.  However, in
its decision on the Merger,  the CPUC replaced PSCo's ECA with an ICA, effective
October 1, 1996,  which allows for a 50%/50%  sharing of certain fuel and energy
cost increases and decreases among customers and shareholders.

      Fuel used in generation  expense increased  approximately  8.0% during the
first nine months of 1997, as compared to the same period in 1996, primarily due
to the effects of the Thunder  Basin  judgment on SPS fuel costs  ($19.9million;
see  Note  2.  Regulatory  Matters  -  Coal  Litigation  in  Item  1.  FINANCIAL
STATEMENTS), increased generation levels at PSCo and SPS power plants and higher
natural gas costs at SPS.

      Purchased  power  expense  increased  2.4% during the first nine months of
1997, as compared to the same period in 1996. This increase is primarily due the
amount of power purchased by PSCo to meet increased  wholesale  requirements and
other customer  demands,  as well as an increase in power marketing  activities,
which were initiated in the third quarter of 1996.


                                       23
<PAGE>

Gas Operations

      The following  table details the change in revenues from gas sales and gas
purchased  for resale for the first nine  months of 1997 as compared to the same
period in 1996.
                                                     Increase (Decrease)
                                                     -------------------
                                                   (Thousands of Dollars)

Revenues from gas sales (including unbilled revenues).     $128,177
Gas purchased for resale..............................      117,136
                                                            -------
 Net increase in gas sales margin.....................     $ 11,041
                                                           ========

      The following table compares gas Dth deliveries by major customer  classes
for the first nine months of 1997 and 1996.

                                      Millions of Dth Deliveries
                                      --------------------------
                                                1997  1996    % Change *
                                                ----  ----    ----------
Residential................................     64.3  63.9       0.6%
Commercial and resale......................     35.1  39.1     (10.2)
Non-regulated gas marketing................     44.4   5.7       **
                                               ----- -----
  Total Sales..............................    143.8 108.7      32.3
Gathering and Processing...................      0.1   1.0       **
Transportation.............................     69.8  67.6       3.1
                                               ----- -----
  Total....................................    213.7 177.3      20.5
                                               ===== =====

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

      Gas sales margin increased in the first nine months of 1997, when compared
to the first nine  months of 1996,  primarily  due to an  increase  in PSCo base
revenues associated with the higher rates effective February 1, 1997,  resulting
from the Company's 1996 rate case and an increase in gas marketing activities by
non-regulated  subsidiaries.  Gas costs were higher during the first nine months
of 1997,  as  compared  to the same  period of 1996,  as a result of higher  gas
prices incurred through the 1996/97 winter heating season.

      Gas  transportation,  gathering,  processing and other revenues  increased
$2.3 million  during the first nine months of 1997,  when  compared to the first
nine  months of 1996,  primarily  due to an  increase  in  transportation  rates
effective  February 1, 1997,  resulting  from the Company's 1996 rate case and a
3.1% increase in transportation deliveries. The higher transportation deliveries
are  attributable to the shifting of various  commercial sales customers to firm
transportation customers.  Historically,  this shifting has not had an impact on
gas margin and is not expected to have an impact in the future.

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

Non-Fuel Operating Expenses

      Other  operating and maintenance  expenses  increased $18.3 million during
the nine months ended  September  30, 1997,  when compared to the same period in
1996,  primarily due to the favorable impact on 1996 earnings of the February 9,
1996 settlement  agreement with the DOE resolving all spent nuclear fuel storage
and disposal issues at Fort St. Vrain (approximately $16 million).  In addition,
higher costs of  non-regulated

                                       24

<PAGE>

subsidiary operations have contributed to the increase in consolidated operating
expenses.   However,  lower  employee  benefit  costs  and  other  general  cost
reductions  resulting  from the Company's  cost  containment  efforts  favorably
impacted current year expenses.

      Depreciation and amortization expense increased $16.4 million in the first
nine months of 1997,  as compared to the same period in 1996,  primarily  due to
the depreciation of property additions.

      The $31.5  million  decrease in income  taxes for the first nine months of
1997,  as compared to the same period in 1996, is primarily due to lower pre-tax
income.

      Other income and  deductions  decreased  $18.8  million  primarily due the
write-off in June 1997 of Quixx and UE's net  investment in the Carolina  Energy
Limited  Partnership  (see Note 5. Acquisition and Divestiture of Investments in
Item 1.  FINANCIAL  STATEMENTS  ). In  addition,  increased  merger and business
integration  costs,  including  executive  severance  costs,  resulting from the
closing of the Merger effective August 1, 1997 served to reduce other income and
deductions.  While costs  associated  with the Merger,  transition  planning and
implementation   have  negatively   impacted  earnings  during  1997  and  1996,
management anticipates that future operating results will benefit from synergies
resulting  from the  Merger.  These  decreases  were  offset,  in  part,  by the
recognition of equity  earnings in Yorkshire  Electricity  ($21.4  million),  of
which  approximately $10 million is related to the change in the U.K.  corporate
income  tax  rate  from  33%  to 31%  (see  Note  3.  Acquisition  of  Yorkshire
Electricity and U.K. Windfall Profits Tax in Item 1.FINANCIAL STATEMENTS).

      Interest  charges and preferred  dividends  increased $26.8 million during
the nine months ended  September  30, 1997,  when compared to the same period in
1996,  primarily  due to interest  on  borrowings  utilized  to finance  capital
expenditures  and the April 1997  acquisition  of Yorkshire  Electricity.  These
borrowings  included  PSCo's  issuance  of  $75  million  and  $250  million  of
medium-term  notes  in  January  and  March  1997,  respectively.  Additionally,
dividends  on SPS  obligated  mandatorily  redeemable  preferred  securities  of
subsidiary  trust  increased due to the October 1996 issuance of $100 million of
SPS Obligated Mandatorily Redeemable Preferred Securities of a Subsidiary Trust.

Commitments and Contingencies

      Issues relating to regulatory and  environmental  matters are discussed in
Notes 2 and 3 in Item 1.  FINANCIAL  STATEMENTS.  These  matters  and the future
resolution  thereof  may  impact the  Company's  future  results of  operations,
financial position or cash flows.

     Based on a  preliminary  analysis,  the  Company  expects to incur costs of
approximately  $50-65  million  over the next two years to modify  its  computer
software,  hardware  and other  automated  systems used in  operatings  enabling
proper  data  processing  relating  to the year  2000 and  beyond.  The  Company
continues to evaluate  appropriate  courses of corrective action,  including the
replacement  of certain  systems.  A  significant  portion  of these  costs will
represent  the  redeployment  of  existing  information   technology  resources.
Management does not anticipate  these  activities  will have a material  adverse
impact on the Company's financial position, results of operations or cash flows.

Common Stock Dividend

      During  the third  quarter,  the Board of  Directors  approved a $0.58 per
share dividend  payable to shareholders of the Company on November 15, 1997. The
Company's common stock dividend level is dependent upon the Company's results of
operations,  financial  position,  cash  flows and other  factors.  The Board of
Directors of the Company will continue to evaluate the common stock  dividend on
a quarterly basis.


                                       25
<PAGE>


Liquidity and Capital Resources

Cash Flows - Nine Months Ended September 30
                                                         1997   1996    Decrease
                                                         ----   ----    --------
Net cash provided by operating activities (in millions) $201.0 $389.9   $(188.9)

      Cash provided by operating  activities  decreased in the first nine months
of 1997,  when  compared  to the same period in 1996,  primarily  due to the SPS
payment in April 1997 of the Thunder Basin  judgment and an increase in payments
to gas  suppliers  resulting  from the  higher  gas costs in late 1996 and early
1997. A portion of these higher gas costs have been deferred  through PSCo's GCA
and will be recovered from customers in the future.

                                                        1997     1996   Increase
                                                        ----     ----   --------
Net cash used in investing activities (in millions)   $(675.9) $(286.8)  $389.1

      Cash used in investing  activities  increased during the nine months ended
September 30, 1997,  when compared to the same period in 1996,  primarily due to
the acquisition of an equity interest in Yorkshire Electricity for approximately
$362 million and the 1996 sale by Quixx of certain water rights.

                                                        1997     1996   Increase
                                                        ----     ----   --------
Net cash provided by (used in) financing 
 activities (in millions)                             $482.3   $(81.8)   $564.1

      Cash provided by financing  activities  increased  (indicating  that there
were more  borrowings)  in the first nine months of 1997,  when  compared to the
same period in 1996,  primarily  due to PSCo's  issuance of $75 million and $250
million of medium  term  notes in  January  and March  1997,  respectively.  The
proceeds from the $75 million  financing  were used to fund PSCo's  construction
program.  The proceeds  from the $250 million  medium term notes,  together with
additional  borrowings of approximately  $110 million on its short-term lines of
credit, were used to fund the acquisition of Yorkshire  Electricity (see Note 4.
Yorkshire  Electricity  and  U.K.  Windfall  Profits  Tax in Item  1.  FINANCIAL
STATEMENTS).  As a result  of the  increase  in  recoverable  purchased  gas and
electric  energy  costs and reduced  cash flows  resulting  from lower  electric
rates,  coupled with increased merger and business  integration  costs, PSCo has
utilized the proceeds from additional  short-term  borrowings to finance ongoing
construction expenditures.  With the consummation of the Merger effective August
1, 1997,  management  anticipates that future operating results and related cash
flows will benefit from synergies resulting from the Merger.

Short-Term Borrowing Arrangements

      On August 11, 1997, NCE entered into a $225 million  credit  facility with
several  banks.  The  credit  facility  provides  for  $100  million  of  direct
borrowings by NCE until the  outstanding  common stock of PSCCC,  a wholly-owned
subsidiary of PSCo, is  transferred  to NCE.  After the transfer,  NCE will have
access to $225 million of direct  borrowings under the credit facility.  The $30
million bridge loan facility which provided funds necessary for the repayment of
certain pre-merger PSCo subsidiary  short-term borrowings to permit the transfer
of such  subsidiaries  to NCE on the effective date of the Merger was terminated
on August 11, 1997.

NCE Common Stock

  NCE  intends to file a shelf  registration  statement  with the SEC during the
fourth  quarter of 1997 covering the offering and sale of up to 9 million shares
of Common Stock ($1 par value).  The Company  intends to use the net proceeds to
retire short-term debt and for general corporate purposes.

                                       26
<PAGE>

Electric Utility Industry

      Electric  utilities  have  historically  operated  in a  highly  regulated
environment  in which they have an  obligation  to provide  electric  service to
their  customers  in return for an  exclusive  franchise  within  their  service
territory  with  an  opportunity  to  earn a  regulated  rate  of  return.  This
regulatory  environment  is  changing.  The  generation  sector has  experienced
competition  from  non-utility   power  producers  and  the  FERC  is  requiring
utilities,  including the Company, to provide wholesale  transmission service to
others and may order electric utilities to enlarge their transmission systems to
facilitate transmission services without impairing reliability. State regulatory
authorities  are in the process of changing  utility  regulations in response to
federal  and  state   statutory   changes  and   evolving   markets,   including
consideration of providing open access to retail customers. All of the Company's
jurisdictions   continue  to  evaluate  utility   regulations  with  respect  to
competition.  The Company is unable to predict what  financial  impact or effect
the adoption of these proposals would have on its operations. The Merger between
PSCo and SPS was, in part, in response to these changing conditions.


                                       27
<PAGE>



                         PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

      Part 1.  See Note 3.  Commitments and Contingencies in Item 1, Part 1.

Item 6.  Exhibits and Reports on Form 8-K

(a)   Exhibits

     10   Form of Key Executive Change in Control Agreement, effective August 1,
          1997.

     15   Letter  from  Arthur   Andersen  LLP   regarding   unaudited   interim
          information is set forth at page 31 herein. 

     27   Financial Data Schedule UT

(b)    Reports on Form 8-K

    - A report dated August 1, 1997,  was filed on August 1, 1997 which included
   Item 2. Acquisition or Disposition of Assets and Item 7.
   Financial Statements and Exhibits.

      Exhibits included:

      Exhibit No.       Description
      -----------       -----------

      99-1  News Release of New Century Energies, Inc., dated August 1, 1997

      99-2  Supplemental  Consolidated  Financial  Statements  for the following
            periods were included:

           -supplemental consolidated balance sheets as of December 31, 1996 and
            1995 and the related supplemental consolidated statements of income,
            shareholders' equity and cash flows for the years ended December 31,
            1996, 1995, and 1994.

      99-3 Supplemental Consolidated Condensed Quarterly Financial Statements

           -supplemental  consolidated  condensed  balance sheet as of March 31,
            1997 and the related supplemental  consolidated condensed statements
            of income and cash flows for the three  months  ended March 31, 1997
            and March 31, 1996.

   - A report  dated  August 1,  1997,  was filed on  August  4,  1997,  which
   included  Item 5.  Other  Events  and  Item  7.  Financial  Statements  and
   Exhibits.

   - A report  dated  July 2,  1997 was filed on  September  26,  1997,  which
   included Item 5. Other Events.




                                       28
<PAGE>



                                  SIGNATURE

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          NEW CENTURY ENERGIES, INC.

                                          By     /s/R. C. Kelly
                                          ---------------------------------
                                                   R. C. KELLY
                                          Executive Vice President and
                                             Chief Financial Officer


Dated:  November 14, 1997


                                       29
<PAGE>



                                EXHIBIT INDEX

10    Form of Key Executive Change in Control Agreement, effective August 1,
      1997.

15    Letter from Arthur Andersen LLP regarding unaudited interim information is
      set forth at page 31 herein.

27    Financial Data Schedule UT.


                                       30
<PAGE>



                                                                    EXHIBIT 15

November 10, 1997


New Century Energies, Inc.:

     We are aware that New Century Energies,  Inc. has incorporated by reference
in its Registration  Statement (Form S-8, File No. 333-28639)  pertaining to the
Omnibus Incentive Plan and the Company's  Registration Statement (Form S-3, File
No.  333-28637)  pertaining to the Dividend  Reinvestment and Cash Payment Plan,
its Form 10-Q for the quarter  ended  September  30,  1997,  which  includes our
report dated November 10, 1997,  covering the unaudited  consolidated  condensed
financial  statements  contained  therein.  Pursuant  to  Regulation  C  of  the
Securities Act of 1933, that report is not considered a part of the registration
statement prepared or certified by our Firm or a report prepared or certified by
our Firm within the meaning of Sections 7 and 11 of the Act.

                                                Very truly yours,



                                                ARTHUR ANDERSEN LLP


                                       31